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Economics Presentation.
 

Economics Presentation.

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These Presentation are a Gift 4rm Sir Hassan to BSPA 1st Year..Study Well..;-)

These Presentation are a Gift 4rm Sir Hassan to BSPA 1st Year..Study Well..;-)

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    Economics Presentation. Economics Presentation. Presentation Transcript

    • Chapter 4 Price and income elasticity $ Price
      • Quantity
      • demanded
      • supplied
      $ Income
    • Lecture Plan
      • Price elasticity of demand
      • Measuring price elasticity of demand
      • Income elasticity of demand
      • Price elasticity of supply
      • Measuring price elasticity of supply
      • Factors affecting elasticity of demand
      • Factors affecting elasticity of supply
    • Price Elasticity of Demand
      • How responsive consumers are to a change in the price of a product
      • Types:
        • Elastic demand
        • Inelastic demand
        • Unit elasticity
        • Perfectly elastic demand
        • Perfectly inelastic demand
    • 1. Elastic Demand
      • Small price changes lead to large changes in the quantity demanded
      • E.g. a product with many substitutes
      • Consumer demand is relatively responsive to price changes
    • 2. Inelastic Demand
      • Consumers’ demand is relatively unresponsive to price changes (i.e. a large price change causes only a small change in quantity demanded)
        • E.g. cigarettes, essentials
    • 3. Unit Elasticity ( E d = 1)
      • A change in price causes an equal change in Q d
      • e.g. a 10% increase in P causes a 10% decrease in Q d
    • 4. Perfectly Elastic Demand ( E d = 
      • A change in price causes quantity demanded to be non-existent
      • This is one theoretical extreme
    • 5. Perfectly Inelastic Demand ( E d = 0)
      • A change in price causes no change in the quantity demanded
      • E.g. drugs of addiction, essential medicines
      • This is the other theoretical extreme
    • Measuring Elasticity of Demand
      • Two methods:
      • Total revenue method
      • Point method
      • Total revenue = the amount received by firms from
      • consumers buying goods/services
      • = Price × Quantity
      • TR = P × Q
      1. Total revenue method
    • Example A
      • A firm decides to reduce the price of its product from $10 to $8. Quantity demanded will increase from 30 to 40 units sold
      • At P = $10, TR = 10 x 30 = $300
      • At P = $8, TR = 8 x 40 = $320
      • Due to the price decrease, TR has risen
      • DEMAND IS ELASTIC
    • Example B
      • The firm decides to reduce price further from $8 to $6 ( Q d at $6 is 50 units)
      • At P = $8, TR = $320
      • At P = $6, TR = 6 x 50 = $300
      • TR has fallen, DEMAND IS INELASTIC
      P Q D 10 8 6 30 40 50 A B C
    • Summary of Total Revenue Method
      • When TR moves in the opposite direction to a price change, demand is ELASTIC
      • If TR remains the same when price changes then demand has UNITARY ELASTICITY
      • When TR moves in the same direction as the price change then demand is INELASTIC
    • 2. The Point Method
      • The degree of elasticity can be measured by the elasticity coefficient , or E d in this formula:
      • E d = percentage change in Q d percentage change in price
      • Note:
      • % change in Q d = change in Q d × 100 original Q d 1
      • % change in price = change in price × 100 original price 1
    • Interpretations
      • Elastic demand : a given % change in price results in a larger % change in Q d
      • E.g. 2% decline in price results in a 4% increase in Q d
      • E d = 4/2 = 2
      • Where demand is elastic, E d > 1
      • Note: it is conventional to ignore the minus sign
      (cont.)
    • Interpretations (cont.)
      • Inelastic demand : a % change in price is accompanied by a relatively smaller change in Q d
      • E.g. 3% decline in price leads to a 1% increase in Q d
      • E d = 1/3
      • Where demand is inelastic, E d < 1
      • Unitary elasticity E d = 1
    • Income Elasticity of Demand
      • Measures responsiveness of the demand for a product due to changes in income
      • Cross elasticity of demand: measures how the Q d of one good responds to changes in the price of another good
    • Price Elasticity of Supply
      • The responsiveness of producers to changes in the price of a product i.e. ‘how much more’ will be supplied in response to a price rise?
      • Measuring elasticity of supply
      • E s = % change in Q s
      • % change in price
    • Factors affecting elasticity of demand
      • Availability of substitutes
      • Necessity
      • Habit and desirability
      • Proportion of income
      • Complementary products
      • Time
    • Factors affecting elasticity of supply
      • Time
      • Ability to hold stocks
      • Excess capacity
      • Business expectations