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3.1-3.3_Worksheet_10_elasticities

(Syllabus 2.5-2.6)

Elasticities measures how r___________(sensitive) one economic variable is to a change in another

variable.

There are different types of elasticities that we have to learn.

1. Price elasticity of Demand (read 3.1 of textbook)

Measures how a change in the price of the product would affect the change in the quantity
___________ of the product.

Formulae:

2. Price elasticity of supply (read 3.2 of textbook)

Measures how a change in the __________ of the product would affect the _________ in the
quantity ______________ of the product.

Formulae:

Table 1

Price Qd PED Qs PES Income Expenditure on the YED

$ good (no change in P)
10 0 12 1000 400
8 4 18 1200 440
6 8 24 1500 550
4 12 30 2000 1000
2 16 36 3000 800
Calculate

PED when P falls from $8 to $6

PED when P falls from $6 to $4

PED when P falls from $4 to $2

PED = 0 no change in Qd with any change in P  perfectly inelastic demand

PED = 1 meaning % change in P = % change in Qd  unitary elastic demand

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Implication on Total revenue = PxQ (with PED = 1, no change in TR when there is a small change in P
around that point)

PED > 1 meaning % change in P % change in Qd  elastic demand

TR will increase when there is a fall in the price

PED < 1 % change in P % change in Qd  inelastic demand

TR will __________ when there is a fall in the price

Diagram showing the change in TR along a linear demand curve.

Price Qd PED TR
$
10 0
8 4
6 8
4 12
2 16

Draw the demand curves with constant elasticity along the curves.

Perfectly elastic Perfectly inelastic Unitary elastic

Comparing PED at the intersection of 2 demand curves.

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Price elasticity of supply (read 3.3 of textbook)

Refer to the table 1, Calculate

PES when P increases from $2 to $4

PES when P increases from $4 to $6

PES when P increases from $6 to $8

PES = 1 meaning % change in P = % change in Qs  unitary elastic supply

PES > 1 meaning % change in P % change in Qs  elastic supply (Qs is responsive to change in
P)

PES < 1 meaning % change in P % change in Qs  inelastic supply (not responsive)

Draw the perfectly inelastic and elastic supply curve

Comparing PES at the intersection point of two supply curves.

3. Income elasticity of demand (read 3.2 of textbook)

Measures the responsiveness of a change in ___________ to change in ___________.

(how a change in __________ would affect the change in ________________)

Formulae:

When YED < 0 what is the meaning?

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When YED > 0 what is the meaning?

When 0 < YED < 1 what is the meaning?

Necessity good such as salt, water they are income inelastic

When YED > 1 what is the meaning?

Luxury good such as perfume, diamond they are income elastic

Engel curve relates the quantity demanded (expenditure of a product) and the income

Find the YED at

AB

BC

The Engel curve shows a continuum:

At very low incomes a good (eg. staple crops) may be a l_______; as income increases it becomes a
n___________ and finally at high income levels it becomes i________.

HL: Is slope the same as elasticities for PED and PES?

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Using slope to prove: (HL)

PED varies along the demand curve

PES equals 1 along the supply curve that passes through the origin
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Factors affecting PED and PES

PED PES Demand shift Supply shift

Time needed for Time needed for No of consumers No of firms
change of preference production (short run: at
least one fixed factor vs
long run: all factors are
variables)
Proportion of income Flexibility in the Income Production cost
spent on the good production method
Demand for car is more
elastic for poor as
compared with the rich
No of substitutes and Availability of Taste and Technology
closeness of substitutes stocks/inventories preference
(uniqueness of the
good) eg. Food vs fruits
vs apple
Degree of necessity Spare capacity Prices of related Prices of related
goods: joint goods: production
demand and substitutes and
competitive complements
demand
Degree of addiction Mobility of factors of Expectation Expectation
production
Demand shock Supply shock
Govt policies:
indirect taxes and
subsidies
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Importance of PED, PES and YED

PED PES YED (HL)

Firms When to increase or Business planning what
decrease price in order to to produce during
increase total revenue times of rising income
or falling income in the
economy; how fast can
the industry/business
expands over time
Government How effective is an
imposition of indirect tax
is effective in reducing
consumption of a specific
product?

HL Understanding why PED Understanding why PES For explaining sectoral

for primary commodities for primary commodities changes (change in
(raw materials) is lower is lower than PES for production or
than PED for manufactured products economic structure) of
manufactured products? an economy
What are primary Food: income inelastic
commodities?
How are they different Food with fats vs food
from manufacturing with high protein :
products? which one is more
Examples of both types of income elastic? Ie
goods. higher a greater
Degree of necessity increase in demand
No. of substitutes over time

Which product is
having higher income
elasticity?
Health care vs
furniture?

Diagram showing how PED and PES affect price fluctuations for commodities and manufacturing
products
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3.3_Read Real world focus 3.2 : Income elasticity of demand and growth in demand for food
products

According to the World Bank, there is a fall in the average growth rate (per year) of demand for
agricultural commodities between the period 2010-2016 and 2017-2018 from 2.8% to 1.8%, why?

YED of food > = < YED of steak (circle the correct answer)

The historical experience of both more and less developed countries that with economic growth,
the primary sector becomes ______ important and has been replaced by s___________ sector and
t__________ sectors. In the developed world today, among the industries experiencing the fastest
growth are services, including e___________, h_________, tourism and f_________ services.

A decreasing share of output of primary sector does not mean that the primary sector output is
falling. It could be the rise of primary sector output is ________ than the total output.