Elasticity and its applicationPresentation Transcript
• 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
Price Elasticity of Demand
• Measures how much the quantity demanded
responds to a change in price.
Factors Influencing PED
• Availability of Close Substitute
• Necessities vs. Luxuries
• Definition of Market
• Time Horizon
Computing the PED
Price Elasticity of Demand = % ∆ Qd
PED = 20% / 10% = 2
• Price elasticity between two points on a demand curve
Ex. Point A: P=$4 Q=120
Point B: P=$6 Q=80
80 100 120
A (6-4)/ 5 X 100 = /40%/
B (4-6)/ 5 X 100 = /40%/
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.
Inelastic Demand: Elasticity Is Less Than 1
Unit Elastic Demand: Elasticity Equals 1
Elastic Demand: Elasticity Is Greater Than 1
Total Revenue and the PED
• amount paid by the buyers and received by the sellers.
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
b.The Case of Elastic Demand
The increase in price leads to a decrease in quantity demanded that is
Elasticity and TR along a linear demand
•The slope of a linear demand curve is constant
but its elasticity is not.
Income Elasticity of demand
• Measures how the quantity demanded changes as consumer income
• = %∆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
The Elasticity of Supply
Flexibility of Sellers
Price Elasticity of Supply
• Measures how much the quantity supplied responds
to changes in the price
• = %∆ Quantity Supplied
%∆ in Price