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ELASTICITY

ELASTICITY. RESPONSIVENESS. Price Elasticity of Demand. measures the responsiveness of the quantity demanded of a good or service to a change in its price. Price Elasticity of demand is calculated by dividing the percentage change in quantity by the percentage change in price. Ep =.

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ELASTICITY

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  1. ELASTICITY RESPONSIVENESS

  2. Price Elasticity of Demand measures the responsiveness of the quantity demanded of a good or service to a change in its price.

  3. Price Elasticity of demand is calculated by dividing the percentage change in quantity by the percentage change in price. Ep = % DQD % DP Use this method if both the price and the quantity data is given as percentages

  4. Mid - point method Ep = ∆Q x (p1 + p2)/2 ∆P (q1 + q2)/2 Use this method if we have two set of points

  5. What does the co-efficient mean?

  6. TOTAL REVENUE METHOD • IF PRICE AND TOTAL REVENUE MOVE IN THE SAME DIRECTION THEN • IF PRICE AND TOTAL REVENUE MOVE IN OPPOSITE DIRECTIONS THEN INELASTIC DEMAND ELASTIC DEMAND

  7. EXAMPLE ONE Ep = 1 * 3 2 6.5 = 0.23 = inelastic P $ 4 2 0 D 6 7 Q

  8. Total revenue method 0.23 = INELASTIC D An increase in price ($2-$4) causes an increase in total revenue ($14-$24). A decrease in price ($4-$2) causes a decrease in total revenue ($24-$14) P $ 4 2 0 6 7 Q

  9. EXAMPLE TWO Ep = 2 * 3 2 3 = 1 = unitary P $ 4 2 0 D 2 4 Q

  10. Total revenue method 1 = UNITARY An increase or decrease in price will have no affect on total revenue. $4 x 2 = $8 $2 x 4 = $8 P $ 4 2 0 D 2 4 Q

  11. EXAMPLE THREE Ep = 2 * 3.5 1 5 = 1.4 = elastic P $ 4 3 0 D 4 6 Q

  12. Total revenue method 1.4 = ELASTIC An increase in price brings about a decrease in total revenue (P*Q).($18 - $16) A decrease in price brings about an increase in TR (from $16 - $18) P $ 4 3 0 D 4 6 Q

  13. SPECIAL CASES Ed= D Ed=0 P P D Q Q PERFECTLY ELASTIC A change in price brings about an infinite response in quantity demand. PERFECTLY INELASTIC. A change in price brings about no response - no change in quantity demand.

  14. Elasticities, Price Changes and Total Revenue

  15. What determines elasticity for a product?

  16. 1. Whether or not it has close substitutes. Close substitutes = elastic No close substitutes = inelastic

  17. 2. Is it a necessity or a luxury? Necessity = inelastic Luxury = elastic

  18. 3.Is it a small or large proportion of income? Small proportion = inelastic Large proportion - elastic

  19. 4. Is it durable or not Durable = more elastic. Consumption can be postponed until price falls Non - durable = more inelastic. It is used up quickly so consumption can not be postponed.

  20. 5. Is it addictive? Addictive goods will have inelastic demand as some consumers can not do without them.

  21. Elasticity along the Demand Curve Elastic Region $ Point of Unitary Elasticity 80 50 Inelastic Region 20 D Q 25 40 10

  22. Income elasticity of demand measures the responsiveness of the quantity demanded of a good or service to a change in income.

  23. Income Elasticity of demand is calculated by dividing the percentage change in quantity by the percentage change in income. % DQD Ey = % D Y

  24. What does the co- efficient mean?

  25. Inferior Goods Have a negative income elasticity because when income increases, less of the good will be purchased.

  26. Necessities Have a income elasticity of between 0 and 1. This is an inelastic response, the percentage increase in amount purchased is less than the percentage increase in income.

  27. Luxuries Have an income elasticity of greater than 1. This is an elastic response as the percentage change in amount purchased is greater than the percentage change in income.

  28. Cross-price elasticity of demand. measures the responsiveness of the quantity demanded of one good to changes in price of another good.

  29. Cross-price elasticity of demand is calculated by dividing the percentage change in quantity of one good by the percentage change in price of the other good. % DQx Ecross= % DPy

  30. Complements. These are goods that are used together. They will have a negative cross elasticity.

  31. Substitutes These are goods that are used in place of each other. They will have a positive cross elasticity.

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