3. What is elasticity?
๏ต Elasticity is the responsiveness of
the dependent variable to the
changes of the independent
variable.
๏ต Elasticity simply refers to;
๏ต Responsiveness
๏ต Response
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5. Point method
๏ต This measures the elasticity at a
specific point on the curve
๏ต Weaknesses of using point method are;
๏ต Coefficient takes 2 different values for the
same given change in quantity demand and
price though slope is constant at every place.
๏ต Due to this weakness this method is not used
in practice to make economic decisions
๏ต Arc elasticity is used to avoid this problem.
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6. Arc method
๏ต This calculates the average
responsiveness of quantity demand
over some portion on the curve.
(Along the curve)
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7. Types of elasticities
๏ต Price elasticity
๏ต Price elasticity of demand
๏ต Price elasticity of supply
๏ต Cross price elasticity of demand
๏ต Income elasticity of demand
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8. Price elasticity of demand
๏ต Definition; Price elasticity of demand
measures the responsiveness of quantity
demand following a change in the price.
In other words it is the percentage
change in the quantity demanded of a
product that results from 1% change in
the price of the same product.
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16. ๏ต Uses of price elasticity of demand
๏ต To the government to take practical
decisions and to make economic
policies, tax rates and tax revenue.
๏ต To analyze market situations
๏ต Helps businessmen
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17. ๏ต Determinants of price elasticity of demand
๏ต substitutability
๏ต More substitutes-elastic
๏ต less substitutes-inelastic
๏ต definition of the good
๏ต broadly defined-inelastic
๏ต narrowly defined-elastic
๏ต habit forming or not
๏ต habit forming-inelastic
๏ต non-habit forming-elastic
๏ต income portion that is allocated on the product
๏ต high income portion-elastic
๏ต low income portion-inelastic
๏ต number of uses or benefits of the product
๏ต more uses-inelastic
๏ต less uses-elastic
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18. Relationship between price elasticity of demand,
producer revenue and consumer expenditure
๏ต Consumer expenditure= price x quantity
bought
๏ต Producer revenue= price x quantity sold
๏ต Therefore producer revenue = consumer
expenditure
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19. Effect on CE/PR
When price
decrease
When price
increase
Inelastic demand Decrease Increase
Elastic demand Increase Decrease
Unitary elastic
demand
No change No change
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20. Price elasticity of supply
๏ต Definitions; Price elasticity of supply
measures the responsiveness of quantity
supplied that results in 1% change in
price of the concerned product.
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28. ๏ต Determinants of elasticity of supply;
๏ต Perishability
๏ต High โelastic
๏ต Low -inelastic
๏ต Time taken for production
๏ต High โinelastic
๏ต Low -elastic
๏ต Factor mobility
๏ต High โelastic
๏ต Low -inelastic
๏ต Flexibility of the production process
๏ต High โelastic
๏ต Low -inelastic
๏ต Uses of the product
๏ต More โinelastic
๏ต Less -elastic
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29. Cross price elasticity of
demand
๏ต Definitions; Cross price elasticity of
demand measures the responsiveness of
quantity demand following a change in
the price of other products. Normally
we measure this only for demand
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32. ๏ต Uses of cross price elasticity of demand
๏ต To identify the inter relationship
between the products
๏ต For the preparation of economic
policies
๏ต To determine the degree of monopoly
powers
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33. Income elasticity of demand
๏ต Definitions; YED measures the
responsiveness of the quantity demand
of a product following a change in the
income of people.
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