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Principles of economics concept of elasticity


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Principles of economics concept of elasticity

  1. 1. Concept Of Elasticity Rino, Crystal Diane R. BSIE-III Sr. Sonny Ferreras Instructor
  2. 2. Elasticity Concepts
  3. 3. Elasticity Concepts Aside from knowing that consumers buy more when the price falls or less when price rises, producers also need to know the size of the change in quality.
  4. 4. Elasticity Concepts In economics, elasticity is the measurement of how changing one economic variable affects others. For example: • "If I lower the price of my product, how much more will I sell?" • "If I raise the price, how much less will I sell?" • "If we learn that a resource is becoming scarce, will people scramble to acquire it?"
  5. 5. • In more It is a tool for measuring the responsiveness of a function to changes in parameters in a unitless way. Frequently used elasticities include price elasticity of demand, price elasticity of supply,income elasticity of demand, elasticity of substitution between factors of production and elasticity of intertemporal substitution.
  6. 6. Mathematical definition
  7. 7. Mathematical definition • The definition of elasticity is based on the mathematical notion of point elasticity. • In general, the "x-elasticity of y", also called the "elasticity of y with respect to x", is:
  8. 8. Specific Elasticities
  9. 9. Specific elasticities • Elasticities of demand • Price elasticity of demand measures the percentage change in quantity demanded caused by a percent change in price. As such, it measures the extent of movement along the demand curve. This elasticity is almost always negative and is usually expressed in terms of absolute value (i.e. as positive numbers) since the negative can be assumed.
  10. 10. • Income elasticity of demand Income elasticity of demand measures the percentage change in demand caused by a percent change in income. A change in income causes the demand curve to shift reflecting the change in demand.
  11. 11. • Cross price elasticity of demand Cross price elasticity of demand measures the percentage change in demand for a particular good caused by a percent change in the price of another good. Goods can be complements, substitutes or unrelated.
  12. 12. • Cross elasticity of demand between firms Cross elasticity of demand for firms, sometimes referred to as conjectural variation, is a measure of the interdependence between firms. It captures the extent to which one firm reacts to changes in strategic variables (price, quantity, location, advertising, etc.) made by other firms.
  13. 13. • Elasticity of intertemporal substitution • Combined Effects It is possible to consider the combined effects of two or more determinant of demand. The steps are as follows: PED = (∆Q/∆P) x P/Q. Convert this to the predictive equation: ∆Q/Q = PED(∆P/P) if you wish to find the combined effect of changes in two or more determinants of demand you simply add the separate effects: ∆Q/Q = PED(∆P/P) + YED(∆Y/Y)[12]
  14. 14. • Elasticities of supply • Price elasticity of supply • The price elasticity of supply measures how the amount of a good firms wish to supply changes in response to a change in price. In a manner analogous to the price elasticity of demand, it captures the extent of movement along the supply curve.
  15. 15. • Elasticities of scale • Elasticity of scale or output elasticities measure the percentage change in output induced by a percent change in inputs. A production function or process is said to exhibit constant returns to scale if a percentage change in inputs results in an equal percentage in outputs (an elasticity equal to 1).
  16. 16. • End 