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Elasticity and its application

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  • 1. Elasticity and its Application
  • 2. Elasticity • A measure of how much buyers and sellers respond to changes in market conditions • A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
  • 3. Price Elasticity of Demand • Measures how much the quantity demanded responds to a change in price.
  • 4. Factors Influencing PED • Availability of Close Substitute • Necessities vs. Luxuries • Definition of Market • Time Horizon
  • 5. Computing the PED Price Elasticity of Demand = % ∆ Qd % ∆P PED = 20% / 10% = 2
  • 6. Midpoint Method • Price elasticity between two points on a demand curve Ex. Point A: P=$4 Q=120 Point B: P=$6 Q=80 $6 $5 $4 80 100 120 A (6-4)/ 5 X 100 = /40%/ B (4-6)/ 5 X 100 = /40%/
  • 7. Variety of Demand Curves • Elastic- when elasticity is greater than 1. • Inelastic-when elasticity is less than 1. • Unit Elastic- when elasticity is equal to 1. • Perfectly elastic- when elasticity is infinite. • Perfectly inelastic- when elasticity is 0.
  • 8. demand
  • 9. Inelastic Demand: Elasticity Is Less Than 1 demand
  • 10. Unit Elastic Demand: Elasticity Equals 1 demand
  • 11. Elastic Demand: Elasticity Is Greater Than 1 demand
  • 12. Perfectly elastic demand: Elasticity equals infinity demand
  • 13. Total Revenue and the PED • amount paid by the buyers and received by the sellers. (PxQ) a. The Case of Inelastic Demand Ex. Consider rice as an inelastic demand. An increase in price leads to a decrease in quantity demanded that is proportionately smaller
  • 14. $5 $4 90 100
  • 15. $5 $4 70 100 b.The Case of Elastic Demand The increase in price leads to a decrease in quantity demanded that is proportionately larger.
  • 16. Elasticity and TR along a linear demand curve •The slope of a linear demand curve is constant but its elasticity is not.
  • 17. Price Quantity TR (PxQ) %Change in Price % Change in Quantity Elasticity Description 7 0 0 15 200 13.0 Elastic 6 2 12 18 67 3.7 Elastic 5 4 20 22 40 1.8 Elastic 4 6 24 29 29 1.0 Unit elastic 3 8 24 40 22 0.6 Inelastic 2 10 20 67 18 0.3 Inelastic 1 12 12 200 15 0.1 Inelastic 0 14 0 Inelastic
  • 18. Elasticity is larger than 1 Elasticity is smaller than 1
  • 19. Income Elasticity of demand • Measures how the quantity demanded changes as consumer income changes. • = %∆Qd/%∆Y Cross Price Elasticity of Demand -- measures how the quantity demanded of one good respond to a change in the price of another good. = %∆Qd of good 1 %∆P of good 2
  • 20. The Elasticity of Supply DETERMINANTS  Flexibility of Sellers Time Period
  • 21. Price Elasticity of Supply • Measures how much the quantity supplied responds to changes in the price • = %∆ Quantity Supplied %∆ in Price
  • 22. (a) Perfectly Inelastic Supply: Elasticity Equals 0 supply
  • 23. Supply (b) Inelastic Supply: Elasticity Is Less Than 1
  • 24. supply c) Unit Elastic Supply: Elasticity Equals 1
  • 25. (d) Elastic Supply: Elasticity Is Greater Than 1 supply
  • 26. Supply Perfectly Elastic Supply