CENTRE FOR POLICY STUDIES UNIVERSITY COLLEGE CORK EC2204 TUTORIAL 3 WS 29102012 Academic Year: 2012/2013Instructors: Brenda Lynch and P.J. Hunt Contact: firstname.lastname@example.org or email@example.com
Elasticity Elasticity is a measures of responsiveness. Some Definitions Price elasticity of Demand (Ep). Theresponsiveness in demand for a good to a change in price of that good.
Income elasticity (Ei). The responsiveness indemand and supply for a good to a change in income. (Inferior / normal good).Cross price elasticity. The responsiveness indemand for one good caused by a change inprice of another good. (Complement /Substitute good).
Price elasticity of Demand (Ep)Ep is calculated using the average change in price and demand.Formula: Ep is measured by the formula% ∆ QD % ∆P• Example:• A small hot-dog stand charges €3.10 per hot- dog and sell 9 per hour (the original point on the demand curve). The price falls to €2.90 and demand rises to 11 per hour (the new point on the demand curve).
(-€0.20 / €3.10) * 100 = - 6.45% = % ∆ P (2/9) * 100 = 22.2%So using the Ep formula% ∆ QD% ∆P = 22.2%/ - 6.45% = - 3.44%In English; A 1% change in P causes a 3.44% change in Qd
Three categories: Ep > -1 (demand is elastic, big response) Ep < -1 (demand is inelastic, small response) Ep = -1 (demand is unit elastic)What affects elasticity? Substitutes: The closer the substitute for a good or service, the more elastic the demand for it. Is petrol elastic or inelastic?
Necessities tend to have inelastic demand (bread,heating oil, electricity) luxury goods tend to be elastic(4 by 4’s, long haul holidays, private swimming pools)Total expenditure on the good: How much is it worth looking for substitutes? Example; a new car and a packet of crisps. If the price of both doubled which item would most likely suffer a sizeable drop in demand?
Adjustment time (short run and the long run).The greater the time lapse since a price change the greater the chance of finding effectives substitutes and the more elastic is demand. Home heating oil.Total Revenue (TR) and Price ElasticitiesTR from the sale of a good equals the price of the good multiplied by the quantity sold or.... TR = P * Q
Questions If a price cut increases TR demand is __________. Why? If a price cut decreases TR demand is __________. Why? If a price cut leaves TR unchanged demand is __________. Why?