Presented

Elasticity and its Application By Group 3

1. Alfi Hasanah
(2010631030001)
2. Cindy Permatasari
(2010631030065)
3. Dahlia Hafsari
Soleiman
(2010631030067)
 Elasticity
Elasticity a measure of the responsiveness of
Qd (quantity demanded) or Qs (quantity
supplied) to a change in one of its
determinants.
The Elasticity of
Demand
 Price Elasticity of
Demand
Percentage change in Q d
Price elasticity
=
of demand Percentage change in P

Price Elasticity of Demand measures how much Qd

responds to a change in P.
Loosely speaking, it measures the price-sensitivity of
buyers’ demand.
 Computing Price Elasticity of
Demand
Example :
P
Suppose that a 10 percent increase in
the price of and ice-cream cone cause P2
the amount of ice-cream you buy to
fall by 20 percent. P1
Percentage change in Qd P rises D
E = by 10%
Percentage change in P Q
Q2 Q1
E = 20 Q falls
%
10 by 20%
E = 2%
The Midpoint Method to calculate

Methodend value – start x percentage

changes
value
midpoint 100
%
 The midpoint is the number halfway between the
start & end values, also the average of those
values.
 It doesn’t matter which value you use as the “start”
and which as the “end” – you get the same answer
either way!
 Computing The
Midpoint Method
Demand for 250 – 200 x
%P =
your products 225
= 100 22.2%
P %
%Q 12 – 8 x =
B
$250 = 10 100 40.0%
A %
$200
The Price Elasticity
D
40.0 = 1.8
Q E
8 12 22.2
=
The Variety
of Demand
Curves
1. Perfectly Inelastic 2. Inelastic Demand
Demand (Elasticity = (Elasticity < 1)
0)
P D P

P1 P1
P2 P2
D
Q Q
Q QQ
1 1 2
3. Unit Elastic Demand 4. Elastic Demand
(Elasticity = 1) (Elasticity > 1)

P P

P1 P1
P2 P2 D
D
Q Q
Q Q Q Q
1 2 1 2
5. Perfectly Elastic
Demand
(Elasticity = ∞)
P

P1

Q
Q1 Q
2
 Total Revenue and the Price Elasticity of
Demand Example : P

Revenue = P $4
D
x Qis the amount paid
Total Revenue Q
by buyers and received by sellers 0
100
of a good Revenue = P x Q
Revenue = $4 x
100
Price Elasticity and Total Revenue
Elastic demand (Elasticity
> 1)
Demand for
your products increased
 If P = $200 and P revenue due
lost
to higher P
Q = 12 Revenue revenue
due to
 =If $2400
P = $250 and Q $250 lower Q
=8
$200
Revenue = $2000 D
When D is elastic, a price
increase causes revenue to
fall. Q
8 12
Price Elasticity and Total Revenue
Inelastic demand
(Elasticity < 1)
Demand for increased
your products
 If P = $200 and P
revenue due to
higher P
Q = 12 Revenue
lost
 =If $2400.
P = $250 and $250 revenue
Q = 10 Revenue due to
$200 lower Q
= $2500.
D
When D is inelastic, a
price increase causes
revenue to rise. Q
10 12
 Other Elasticities
• The Income Elasticity of Demand

Income elasticity Percent change in Qd

=
of demand Percent change in income

Income Elasticity of Demand a measures how much

the quantity demanded of a good responds to a change
in consumers income
 Other Elasticities
• The Cross-Price Elasticity of Demand

Cross-Price Percentage change in Qd of

= good 1
Elasticity of Percentage change in P of good
Demand 2
Cross-Price Elasticity of Demand a measure of how
much the quantity demanded of one good responds to a
change in the price of another good
The Elasticity of
Supply
 Price Elasticity of
Supply
Percentage change in
Price
= Qs
Elasticity of Percentage change in
Supply P
Price Elasticity of Supply measures how much Qs
responds to a change in P.
Loosely speaking, it measures the price-sensitivity of
sellers’ supply. Again, use the
midpoint method
to compute the
percentage
changes
 Computing Price
Elasticity of Supply
P
S
P2 Percentage change in
E =
P1 PercentageQchange
s
in P
P
E = 16%
rises 8%
by 8% Q E = 2
Q1 Q2
Q rises
by 16%
The Variety
of Supply
Curves
1. Perfectly Inelastic 2. Inelastic Supply
Supply (Elasticity = (Elasticity < 1)
0)
P S P S

P2 P2
P1 P1

Q Q
Q1 Q1 Q2
3. Unit Elastic Supply 4. Elastic Suppy
(Elasticity = 1) (Elasticity > 1)

P P
S S
P2 P2
P1 P1

Q Q
Q1 Q2 Q1 Q2
5. Perfectly Elastic
Supply
(Elasticity = ∞)
P

P2 = P1 S

Q
Q1 Q2
APPLICATION :
Does Drug Interdiction Increase or Decrease Drug-
Related Crime?
• One side effect of illegal drug use is crime: Users
often turn to crime to finance their habit.
• We examine two policies designed to reduce illegal
drug use and see what effects they have on drug-
related crime.
• For simplicity, we assume the total dollar value of
drug-related crime equals total expenditure on drugs.
• Demand for illegal drugs is inelastic, due to addiction
issues.
Policy 1: Interdiction
Interdiction new value of drug-
reduces the Price of related crime
Drugs S2
supplydemand
of drugs. D1
Since for S1
drugs is inelastic,
P2
P rises propor-
tionally more
than Q falls. P1 initial value
Result : of drug-
an increase in related
total spending on crime
drugs, and in drug-
related crime Q2 Q1 Quantity
of Drugs
Policy 2: Education
new value of drug-
Education reduces Price of related crime
the demand for Drugs
drugs. D2 D1
S
P and Q fall.

Result: P1 initial value

of drug-
A decrease in total
P2 related
spending on drugs, crime
and in drug-related
crime. Q2 Q1 Quantity
of Drugs
 Conclusio
n
Elasticity measures the responsiveness of
Qd or Qs to one of its determinants. When
demand is inelastic, total revenue rises when
price rises. When demand is elastic, total
revenue falls when price rises.
Thank
You