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D2-Elasticity

Elasticity measures the responsiveness of one variable to changes in another, particularly in economics regarding quantity demanded or supplied. Price elasticity of demand quantifies how demand changes with price fluctuations, influenced by factors like availability of substitutes and the nature of goods. Other types of elasticity include income elasticity, which assesses demand changes with income variations, and cross-price elasticity, which evaluates how the demand for one good is affected by the price change of another good.

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2 views

D2-Elasticity

Elasticity measures the responsiveness of one variable to changes in another, particularly in economics regarding quantity demanded or supplied. Price elasticity of demand quantifies how demand changes with price fluctuations, influenced by factors like availability of substitutes and the nature of goods. Other types of elasticity include income elasticity, which assesses demand changes with income variations, and cross-price elasticity, which evaluates how the demand for one good is affected by the price change of another good.

Uploaded by

Almairah DANGDANG
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Elasticity

Elasticity

• A measure of responsiveness of one variable to a certain change


of another variable

• In economics, it is a measure of the responsiveness of quantity


demanded or quantity supplied to one of its determinants

• A measure of how much buyers and sellers respond to changes


in market conditions (e.g. changes in the price of the goods,
income of the consumers or prices of related goods)
Elasticity of Demand
Elasticity of Demand measures how much demand changes to changes in its
determinants
A. Price Elasticity of Demand (𝐸𝑝 )
• a measure of how much the quantity demanded of a good responds to a
change in the price of that good
• computed as the percentage change in quantity demanded divided by the
percentage change in price
(𝑄2 −𝑄1 )
∆𝑄𝑑 (𝑄2 +𝑄1 )
%∆𝑄𝑑 𝑄 2
𝐸𝑝 = = =
%∆𝑃 ∆𝑃 (𝑃2 −𝑃1 )
𝑃 (𝑃2 +𝑃1 )
2
Determinants of Price Elasticity of Demand

1. Availability of Close Substitutes 3. Nature of the Goods


• More close substitutes-elastic demand • Necessity- inelastic demand
• It is easier for consumers to switch from • Luxury goods- elastic demand
that good to others
• Less/no substitute- inelastic demand 4. Time Dimension
Ex . Eggs • Short-run- inelastic demand
• Long-run- elastic demand
2. Definition of the Market
• Narrowly defined markets- elastic demand
• Broadly defined markets- inelastic
demand
Types of Elasticity of Demand
Perfectly Inelastic Inelastic Unit Elastic Elastic Perfectly Elastic

𝐸𝑝 = 0 𝐸𝑝 < 1 𝐸𝑝 = 1 𝐸𝑝 > 1 𝐸𝑝 = ∞
If the percentage If the percentage If the percentage If the percentage If the percentage
change in quantity change in quantity change in quantity change in change in quantity
demanded is zero demanded is less demanded is equal quantity demanded is
with the change in than the to the percentage demanded is infinite with the
price percentage change change in price greater than the change in price
in price percentage
Qd is unresponsive Qd responds change in price Qd responds
to the change in Qd is less similarly to the infinitely to the
price responsive to the change in price Qd is more change in price
change in price responsive to the
change in price
Demand Curves and Price Elasticities
Price Elasticity of Demand
Computing Elasticities
Examples: From point A to point B
𝐸𝑝 =

From point F to point E:


𝐸𝑝 =
(100 - 50)
(100 + 50)/2
ED =
Price (4.00 - 5.00)
(4.00 + 5.00)/2
$5
4
Demand 67 percent
= = -3
- 22 percent

0 50 100 Quantity
Demand is price elastic
Total Revenue and the Price Elasticity of Demand

Total Revenue
• The total amount paid by buyers, and
received as revenue by sellers
• Equals the area of the box under the
demand curve
• TR = 𝑃𝑥𝑄
Total Revenue and the Price Elasticity of Demand

Q: How total revenue changes when price changes?


1. Inelastic demand
• With an inelastic demand curve,
an increase in the price leads to
a decrease in quantity
demanded that is
proportionately smaller.
• A price increase from P1 to P3
increases TR from P100 to
P240.
• Therefore, total revenue
increases.
Total Revenue and the Price Elasticity of Demand

2. Elastic demand
• With an elastic demand
curve, an increase in the
price leads to a decrease in
quantity demanded that is
proportionately larger.
• A price increase from P4 to
P5 decreases TR from P200
to P100.
• Therefore, total revenue
decreases.
Income Elasticity of Demand

B. Income Elasticity of Demand (𝐸𝑖 )


• Measures how the quantity demanded changes as consumer income
changes.
• Computed as the percentage change in quantity demanded divided by
the percentage change in income
(𝑄2 −𝑄1 )
∆𝑄𝑑 (𝑄2 +𝑄1 )
%∆𝑄𝑑 𝑄 2
𝐸𝑖 = = =
%∆𝐼 ∆𝐼 (𝐼2 −𝐼1 )
𝐼 (𝐼2 +𝐼1 )
2
Income Elasticity of Demand

Types of Goods
1. Normal goods
• Higher income raises quantity demanded
• Quantity demanded and income move in the same direction
• Positive income elasticities
2. Inferior Goods
• Higher income lowers the quantity demanded
• Quantity demanded and income move in opposite directions
• Negative income elasticities
Cross-Price Elasticity of Demand
C. Cross-Price Elasticity of Demand (𝐸𝑥,𝑝𝑦 )
• Measure how the quantity demanded of one good changes as the
price of another good changes
• It is calculated as the percentage change in quantity demanded of
one good, say X, divided by the percentage change in the price of
the other good, say Y.
∆𝑄𝑥
%∆𝑄𝑑𝑥 𝑄𝑥
𝐸𝑥,𝑝𝑦 = = ∆𝑃𝑦
%∆𝑃𝑦
𝑃𝑦
Cross-Price Elasticity of Demand
Types of Goods
1. Substitutes
• The cross-price elasticity (𝐸𝑥,𝑝𝑦 ) is positive. %∆ 𝑄2
>0
• The price of good 𝑋 and the quantity of %∆ 𝑃1
good 𝑌 demanded move in the same
direction
2. Complements
• The cross-price elasticity (𝐸𝑥,𝑝𝑦 ) is negative %∆ 𝑄2
• The price of good 𝑋 and the quantity of
<0
%∆ 𝑃1
good 𝑌 demanded move in opposite
direction

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