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CHAPTER 3 ELASTICITIES

CHAPTER 3 ELASTICITIES. ZURONI MD. JUSOH JPSPP, FEM. Objectives In this chapter you will…. Learn the meaning of the elasticity of demand. Examine what determines the elasticity of demand. Apply the concept of elasticity in three types of elasticity to determine the goods.

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CHAPTER 3 ELASTICITIES

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  1. CHAPTER 3ELASTICITIES ZURONI MD. JUSOH JPSPP, FEM

  2. ObjectivesIn this chapter you will… • Learn the meaning of the elasticity of demand. • Examine what determines the elasticity of demand. • Apply the concept of elasticity in three types of elasticity to determine the goods.

  3. THE ELASTICITY OF DEMAND • Measuring the impact of price changes on quantity demanded as a result of changes in a variable. • variables: • The price of the own goods  • consumers income  • Other prices – substitutes or complements

  4. TYPES OF DEMAND ELASTICITY • Price elasticity of demand (Ed) • Income elasticity of demand  (Ey) • Cross price elasticity of demand (Ec)

  5. Price Elasticity of Demand (Ed) • measures the percentage change in quantity demanded caused by a percent change in price. • Formula : Ed = % Quantity demanded %  Price = (-) Q X P Q P

  6. Cont. • Ed = (-) Q1 – Q0 X P0 Q0 P1 – P0 where: Q0= The original quantity demanded Q1 = New quantity demanded P0 = Original Price P1 = New Price

  7. Interpreting values of price elasticity coefficients (Ed) • Ed = 0 –Perfectly inelastic demand • Ed < 1 – inelastic demand • Ed = 1 –Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand • Ed > 1 – elastic demand • Ed =  - perfectly elastic demand

  8. Different Elasticity values along DD curve P A Ed > 1 Ed = 1 E Ed < 1 B Qty

  9. FACTORS INFLUENCE on Ed • Substitute goods • If a lot of substitutes, the DD is elastic • Ratio of income spent on goods • The larger the income spent on goods, the more elastic DD. • Interests / Needs Products • Flexible if the goods do not have to • Not flexible if the goods have • use of goods • Elastic where goods have many uses • Favorite • Elastic if less fond on stuff/goods

  10. Cont. • Timeline • Short  term- DD is not elastic • Long term– DD elastic • New Consumer • elastic if have many new consumer • Number of firm • Elastic where many sellers / producers • Total revenue • TR = P x Q • Price changes affect sales and depends on the elasticity of the demand involved.

  11. Relationship between Ed and TR

  12. Cont.

  13. Income Elasticity of Demand (Ey) • measures the percentage change in demand caused by a percent change in income. • Formula : Ey = % Quantity demand %  Income = (-) Q X Y Q Y

  14. Cont. • Ey = (-) Q1 – Q0 X Y0 Q0 Y1 – Y0 Di mana : Q0 =The original quantity demanded Q1 = New quantity demanded Y0 = Original income Y1 = New Income

  15. DEGREES OF INCOME  ELASTICITY OF DEMAND • Engel curve - the curve I describe the relationship between changes in income (Y) with the change in quantity demanded (Qd). A) Ey = 1 Y KE Y1 Y010% 10% Q0 Q1 Qty Example : Clothes

  16. Cont. B) Ey > 1 Y KE Y1 10% Y0 20% Q0 Q1 Qty Example : luxurious stuff

  17. Cont. C) 1>Ey > 0 Y KE Y1 Y0 20% 10% Q0 Q1 Qty Example : Common necessities

  18. Cont. D) Ey = 0 Y KE Y1 Y0 Q0 Qty Example : compulsory stuff

  19. Cont. E) Ey < 0 (-ve) Y Y1 Y0 KE Q0 Qty Example : Inferior goods

  20. Cross Price Elasticity of Demand (Ec) • measures the percentage change in demand for a particular good caused by a percent change in the price of another good. • Formula : Ec = % Quantity demanded for A %  price of B = (-) QA X PB QA PB

  21. Cont. • Ec = (-) QA1 – QA0 X PB0 QA0 PB1 – PB0 Where: QA0 = Original quantity demanded for  product A QA1 = New quantity demanded for  product A PB0 = The original price of the product B PB1 = The new prices of product B

  22. Types of Cross Price Elasticity of Demand (Ec) • 1) Ec = value +ve (substitute goods) P D PB1 PB0 QA0 QA1 Qty • Relations + ve (continued) between P and Qd.

  23. Cont. • 2) Ec = -ve values ​​(complementary goods) P PB0 PB1 D QA0 QA1 Qty • Relationship -ve (inverse) of P with Qd 

  24. Cont. • 3) Ec = 0 (unrelated goods) P D P1 P0 Q0 Qty • Price change does not affect the quantity demanded of other goods.

  25. Summary •  Price elasticity of demand is influenced by their price of own goods, income  & other prices. •  3 types of the elasticity of demand Ed, Ey, Ec • 5 values of Ed: • not perfectly elastic (Ed = 0),  • not elastic (Ed <1), unity (Ed = 1),  • elastic (Ed>1), • perfectly elastic (Ed = ∞)

  26. Cont. • 5 types of Ey  • Ey = 0 (necessities goods),  • 1> Ey> 0 (the ordinary necessities),  • Ey = 1 (normal goods),  • Ey>1 (luxury goods),  • Ey <0 (inferior or giffen) • 3 types of Ec • Ec = + ve (substitute goods)  • Ec =-ve (complementary goods) and  • Ec = 0 (unrelated goods)

  27. Thank You

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