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Lecture 7

The document discusses the concept of elasticity in microeconomics, focusing on price elasticity, income elasticity, and cross elasticity of demand. It explains how price elasticity measures the responsiveness of quantity demanded to price changes, detailing types such as unitary, elastic, inelastic, perfectly elastic, and perfectly inelastic demand. Additionally, it covers factors affecting price elasticity and provides definitions and formulas for income and cross elasticity of demand.

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SIBGHAT ULLAH MUJADDIDI
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4 views

Lecture 7

The document discusses the concept of elasticity in microeconomics, focusing on price elasticity, income elasticity, and cross elasticity of demand. It explains how price elasticity measures the responsiveness of quantity demanded to price changes, detailing types such as unitary, elastic, inelastic, perfectly elastic, and perfectly inelastic demand. Additionally, it covers factors affecting price elasticity and provides definitions and formulas for income and cross elasticity of demand.

Uploaded by

SIBGHAT ULLAH MUJADDIDI
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Course Title:

Microeconomics
Class BBA 3rd Semester
Instructure
Dr. Haidar Farooqe
[email protected]

Lecture# 7

Faculty of Management Sciences,


National University of Modern Languages, Islamabad
Topic
The concept of Elasticity

Elasticity is the measurement of the percentage change of one


economic variable in response to a change in another variable.
Three types of elasticity of demand

Price elasticity Income elasticity Cross elasticity


of demand of demand of demand
Price elasticity of Demand
• Price elasticity of demand is a measure of the responsiveness of
change in quantity demanded of a good/service to a change in price
• A numerical measure of responsiveness of one variable following a
change in another variable.
• Measures that how sensitive the quantity demanded is to a change in
price

% change in quantity demanded of a product


PED = (1.1)
% change in price of that product
Types of price elasticity of demand

Unitary elastic Elastic Inelastic


demand Demand demand

Perfectly Perfectly
elastic inelastic
Unitary elastic demand
The change in price is relatively the same as the change in quantity demanded.
The percentage change in price is equal to the percentage change in quantity
Mathematical
Derivation:
Figure 1.1
P=5 $
Q=50 U
Price $
P/Po*100
5/10*100
= 50%...........(1.2) 15
Q/Qo*100
50/100*100 10
= 50%.........(1.3)
% P=% Q D
PED= % Q/ % P……(1.4)
50/50= 1
50 100 Quantity
It means that if the PED=1
Demanded
Then it will be the UED
Elastic Demand
A change in price leads to a greater percentage change in quantity demand.
Mathematical Price sensitiveness/ many substitutes
Examples: Construction materials, car, Luxury goods, clothes, Pizza, books
Derivation:
P=5 $
Price $ Figure 1.2
Q=70 U
P/Po*100
15
5/10*100
= 50% 10
Q/Qo*100
70/100*100 D
= 70%
50%  70%
% P  % Q 30 100 Quantity
PED= % Q/ % P Demand
70/50= 1.4
PED  1
Inelastic demand
A change in price leads to a smaller percentage change in Quantity demand
Mathematical
Examples: petroleum products, food items
Derivation:
P=5 $ Figure 1.3
Price $
Q=50 U
P/Po*100 15
5/10*100
= 50% 10
Q/Qo*100
25/100*100
= 25% D
50%  25%
% P  % Q 75 100 Quantity
PED= % Q/ % P Demand

25/50= 0.5
Perfectly inelastic demand
where a change in price has no effect on the quantity demanded.
Completely insensitive to price/No substitute
Example: Life saving drugs, cigarette, electricity

Price $
% P Figure 1.5

Does not effect D

% Q 15
PED = 0
10

100 Quantity
Demand
Perfectly elastic demand
where all that is produced is sold at a given price.
Completely sensitive to price/infinite substitutes/A firm cannot change the price
Examples: Milk, subsidies goods

A vary slight Price Figure 1.4

P may make($)
the Q
demand zero
10 D
or infinite
PED = 

50 100
Quantity
Demanded
Factors affecting price elasticity of
demand
 The range and attractiveness of substitutes
 Time
 Share in total expenditures
 Nature of commodity (necessity or luxury)
 Number of users
 Habit of consumer
Price range (low, high and medium)(salt, gold, clothes)
Income elasticity of demand
• A numerical measure of the responsiveness of the quantity demanded following
a change in income.
Normally quantity demand increases due to increase in income (normal goods)
But it may not be positive at all the time
Negative relationship with inferior goods

% change in quantity demanded


YED =
% change in income
Cross elasticity of demand
• A numerical measure of the responsiveness of the quantity demanded for one
product following a change in the price of another related product.
If the price of one substitute good increase
Demand for other substitute good will be increases

% change in quantity demanded of product A


XED =
% change in the price of product B

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