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# BAEB602 Chapter 3: Elasticity of Demand and Supply

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### BAEB602 Chapter 3: Elasticity of Demand and Supply

1. 1. BAEB602 MICROECONOMICS CHAPTER 3ELASTICITY OF DEMAND AND SUPPLYPREPARED BY:Nur Suhaili RamliSchool of Marketing andEntrepreneurship (SoME)FACULTY OF BUSINESS AND MANAGEMENT
2. 2. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYTypes TOPIC  There are four types of elasticity:  Price elasticity of demand  Cross elasticity of demand  Income elasticity of demand  Price elasticity of supply Slide 2 of 17
3. 3. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYPrice elasticity of demand TOPIC  Can be defined as a measure of the responsiveness of quantity demanded of a good to a change in its price with other determinants remain the same (ceteris paribus). Formula:  PED = Percentage change in quantity demanded for a good Percentage change in its price. Slide 3 of 17
4. 4. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYExample TOPIC  Suppose that the 10% increase in the price of petrol causes the amount of petrol demanded to fall by 20%, then PED can be calculated as:  Price Elasticity of Demand = 20% 10% = 2 An elasticity coefficient of 2 means that, for every one percent change in the price of petrol, there will be a corresponding change in quantity demanded of petrol by two percent. Slide 4 of 17
5. 5. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYThe Values of Price Elasticity of Demand TOPIC  If the price elasticity of demand coefficient is less than one but greater than zero, then demand is inelastic.  If the price elasticity of demand coefficient is greater than one but less than infinity, then demand is elastic.  If the price elasticity of demand coefficient is exactly equal to one, then demand is unit elastic.  If the price elasticity of demand coefficient is exactly equal to 0, the demand is said to be perfectly inelastic.  If the price elasticity of demand coefficient is exactly equal to infinity, the demand is said to be perfectly elastic. Slide 5 of 17
6. 6. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYCross Elasticity of Demand TOPIC  Cross Elasticity of Demand (XED) is a measure of the responsiveness of quantity demanded for a good to change in the price of another good with other determinants remain the same. Formula: XED = Percentage change in quantity demanded of good A Percentage change in the price of good B Slide 6 of 17
7. 7. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYCategories of Cross Elasticity of Demand TOPIC  Cross elasticity of demand can be positive (XED greater than zero) or negative (XED less than zero).  In the case of substitute goods, such as butter and margarine, the cross elasticity of demand will be positive (XED greater than zero).  However if two related goods are complementary, such as bread and butter, the cross elasticity of demand will be negative (XED less than zero). Slide 7 of 17
8. 8. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYIncome Elasticity of Demand TOPIC  The relationship between quantity demanded of a good and income can be measured using the concept of income elasticity of demand.  Measure the responsiveness of quantity demanded for a good to a change in income with other determinants remain the same.  YED = Percentage change in quantity demanded Percentage change in income Slide 8 of 17
9. 9. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYCategories of Income Elasticity of Demand TOPIC  If the income elasticity is positive (YED>0), it indicates a positive relationship between quantity demanded for a good and income. Thus we say that the good is normal good.  However, if the income elasticity is negative (YED<0), it indicates a negative relationship between quantity demanded for a good and income. Thus, we say that the good is inferior good. Some examples of negative income elasticity of demand is bus travel and used car.  If the income elasticity is zero (YED = 0), it indicates that quantity demanded remain constant as income rises, and we say the good is necessity good. Slide 9 of 17
10. 10. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYPrice Elasticity of Supply TOPIC  Measure the responsiveness of quantity supplied of a good to change in its price.  Measure by dividing the percentage change in quantity supplied with the percentage change in its price. That is; PES = Percentage change in quantity supplied Percentage change in its price. Slide 10 of 17
11. 11. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYDifferent Types of Price Elasticity of Supply TOPIC  There are different types of price elasticity of supply. Supply is:  Inelastic – if there is a less than proportionate response in supply to a change in price.  Elastic – if there is a more than proportionate response in supply to a change in price  Unit Elastic – if the percentage change in quantity supplied equals the percentage change in price.  Perfectly inelastic – if there is no response in supply to a change in price.  Perfectly elastic – if producers are prepared to supply any amount at a given price. Slide 11 of 17
12. 12. CHAPTER 3: ELASTICITY OF DEMAND AND SUPPLYCLASS ACTIVITY TOPIC  Perform a group of 4.  Discuss with examples for both Demand and Supply according to the following:  Inelastic Elastic Unit elastic Perfectly inelastic Perfectly elastic  Additional marks to be given for any additional information (different from other groups)  Submission date: next week Slide 12 of 17
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