Transcript of "BAEB602 Chapter 3: Elasticity of Demand and Supply"
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BAEB602 MICROECONOMICS CHAPTER 3ELASTICITY OF DEMAND AND SUPPLYPREPARED BY:Nur Suhaili RamliSchool of Marketing andEntrepreneurship (SoME)FACULTY OF BUSINESS AND MANAGEMENT
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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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