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Economics Lecture 3

Economics Lecture 3

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mo khaled
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6 views

Economics Lecture 3

Economics Lecture 3

Uploaded by

mo khaled
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture 3 - Friday, December 22, 2017

Tuesday, December 26, 2017 8:53 PM

Elasticity
Elasticity in Economics means Order and Response

Independent Variable ---> Dependent Variable

Order Response

Price Elasticity of Demand


Unit Price ---> Quantity Demanded
P ---> QD

PED =
"The change in quantity demanded referred to (as a result of -- in
response to) the change in unit price in percentage."
*The independent variable (Price) lies always in the denominator*

Types of PED
Case#1

% P 20% ---> % D 80%


Order ---> Response Elastic Demand curve
tends to be horizontal
~~ Elastic Demand ~~
➢ Measured (determined) by the rate of response
➢ Very dangerous product to handle in the market
Ex:
PED = Elastic Demand (4 times response)
Always negative due to the
negative relation between
price and demand

*In Marketing, it is very important to measure the elasticity of


products*
-------------------------------------------------------------------------------
Case#2
Inelastic demand curve
% P 40% ---> % D 20% tends to be vertical
Order ---> Response
~~Not very Elastic Demand~~
PED = Inelastic Demand
-------------------------------------------------------------------------------
Case#3

% P 40% ---> % D 40%


Order ---> Response
~~Unit Elastic Demand~~
PED = Unit Elastic Demand

Inelastic 1>PED>1 Elastic as a value

Priniciples of Managerial Economics Page 1


PED = Unit Elastic Demand

Inelastic 1>PED>1 Elastic as a value


-------------------------------------------------------------------------------
Case#4

% P 40% ---> % D 0%, i.e. no change


Order ---> Response
~~Perfectly Inelastic Demand~~
PED = Perfectly Inelastic demand
-------------------------------------------------------------------------------
Case#5

% P 10% ---> % D
Order ---> Response
~~Perfectly Elastic Demand~~
~~Perfectly Competition Market~~
PED = Perfectly Elastic demand
-------------------------------------------------------------------------------------------------------------------
p

q
How to actually measure the PED, and any change in prices and
Demands?

Any change occurs, let's say from one point to another, can be
measured by the subtracting the old point from the new point, i.e.
New point - Old point

1 2

= New (2) - Old (1)


How can I determine whether that change is relatively strong or
weak (the strength of change)?
➢ By referring the change back to its original point.
= --> % = *100%

Keep in mind
1. PED is not affected by the units of price, pounds, piaster etc or
the units of quantity since it deals with percentages of change
in price and quantity.
2. PED is not Slope of the line

Examples:
Unit price 4--> 6
Quantity demanded 120-->80

PED = <1 Inelastic Demand

Priniciples of Managerial Economics Page 2


PED = <1 Inelastic Demand

Unit price 6--> 4


Quantity demanded 80-->120

PED = >1 . Elastic Demand

For the same product, how comes that its demand was elastic when
its price decreased, and was inelastic when its price increased?
Economists have come to realize that using that method wasn't
exactly accurate, so they came to think of using the "Mid-Point
Method"

Mid-Point Method
In the same PED equation, instead of referring back to the old
point, the reference will be the mid-point between the old and new
point, i.e. in the middle

For the same example

PED = . Unit Elastic Demand

PED = . Unit Elastic Demand

➢ Therefore using the Mid-point Method is more accurate for


measuring the Price Elasticity Demand
-------------------------------------------------------------------------------
Determinants of PED

Priniciples of Managerial Economics Page 3


Summary
1. Elastic demand means the %change in quantity> %change in
price, i.e. PED>1
2. Inelastic demand means the %change in quantity< %change in
price, i.e. PED<1
3. PED is not measured as the slope of the line
4. Mid-point method is used directly to measure the PED
5. To avoid confusion in calculating PED using mid-point
method, always use (New-old)/mid-point

Priniciples of Managerial Economics Page 4

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