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Elasticity of demand

Elasticity of demand. Which one is the most elastic if I apply the same force on them?. Elasticity of demand. To measure the responsiveness ( 反應 ) of the change in Qd as a result of a change in one of its determinants , ceteris paribus. (1)Price, Or (2) income,

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Elasticity of demand

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  1. Elasticity of demand

  2. Which one is the most elastic if I apply the same force on them?

  3. Elasticity of demand • To measure the responsiveness (反應) of the change in Qd as a result of a change in one of its determinants, ceteris paribus. • (1)Price, • Or (2) income, • Or (3) price of related good

  4. The determinants can be: (1)The price of the good – price elasticity of demand %∆Qd %∆Price (2)The income of the consumer – income elasticity of demand %∆Qd %∆ income (3) The price of another good – cross elasticity of demand = =

  5. Price Elasticity of demand (價格需求彈性) • Measures the responsiveness of quantity demanded of a good to a change in the price of the good. Q2-Q1 X 100% Q1 2. Response % ∆Qd Ed= = P2-P1 % ∆P 1.Action X 100% P1 新一舊 X 100% 舊

  6. Why the Elasticity measured as the %∆ rather than absolute change (減數)? • Case 1 if P1 = $10  Qd = 100 if P2 = $9  Qd = 110 • Case 2 if P1 = $10  Qd = 10000 if P2 = $9  Qd = 10010 P↓ $ 1 Absolute change Qd↑10units Absolute change Qd↑10units P↓ $ 1 Does the absolute change show the Elasticity? Then which case is more elastic when P↓? No!

  7. Remarks:  • Case 1 is more elasticity than case 2 when calculated by the percentage change • Consideration of percentage change of quantity demand not absolute changes (減數)

  8. Why price elasticity of demand is alwaysnegative? • Price Ed = -1 or -2 or -0.8 … etc • Hint: P Vs Qd relationship is? • Price and quantity demand is negatively related • (When P↓ Qd↑ or P↑ Qd ↓) • We ignore the sign of price Ed • high Ed or low Ed is in absolute value • Ed = -1 = 1; -2 = 2 ; -0.8 = 0.8 • Price Ed = 2 > Ed = 1 > Ed = o.8

  9. What is the data of P Ed wants to show us? • if P Ed = -0.8 = absolute value = 0.8 P Ed = = 反應Response % ∆Qd ↑0.8% 0.8 1 %∆P ↓1% Action Since % ∆Qd in response is less than %∆P in action (0.8% < 1% ) Response < Action  in economic we call it inelastic or less elastic You can apply in different elastic range….

  10. 2 ways to calculate Price Ed: • (a) Arc elasticity: • To measure the elasticity between two points on a demand curve • **weakness: a different Price Ed when the direction of price movement is reversed. P Ed= 2.25 3 1 Ed=0.85 D Qd

  11. (b) Point elasticity of Ed • To measure the elasticity on a point of the demand curve. • The ∆Qd and ∆P are infinitely small (very very small) Ed= % ∆Qd % ∆P

  12. Types of Price elasticity of demand. P Ed may vary form o to ∞ P D • 1. Perfectly inelastic demand (%∆ Qd = 0) Ed = 0 • 2. Inelastic demand; %∆Qd < %∆P 1> Ed > 0 e.g. 0.1, 0.8, 0.3.. • 3. unitarily Ed; Ed = 1 %∆Qd = %∆P; rectangular hyperbola TR = P↑ X Qd↓ P↑ Q Q P TR gain TR Loss P ↑ D Qd ↓ Q

  13. Continues…. • 4. Elastic demand ∞ >Ed > 1 %∆Qd > %∆P 反應大 • 5. perfectly elastic demand Ed = ∞ %∆Qd =∞ > %∆P  反應無限大 P D Q

  14. % ∆Qd Ed= PriceElasticity of demand (價格需求彈性) % ∆P Q2-Q1 Q2-Q1 P1 Q1 Ed = X = P2-P1 Q1 P2-P1 P1 Q2-Q1 P1 X = Q1 P2-P1 P1 Slope of the ray from pt (0,0) to (P1, Q1) Q1 = Ed P2-P1 Slope of the demand curve (P1,Q1), (P2,Q2) Q2-Q1

  15. Use slopes or angles to measure the Price elasticity demand • A linear demand curve P If ray from the origin slope > D curve slope ∠ a > ∠ b Ed >1 elastic range (P2,Q2) If ray form the origin slope = D curve slope ∠a =∠b Ed = 1 at M Unitarily range M P1 If ray from the origin slope < D curve slope ∠ a < ∠ b Ed <1 inelastic range a b D (0,0) Q

  16. 5.4 The price Ed varies along a straight line demand curve P Ed = infinitive Ed>1 (elastic) Upper p range Mid point, Ed = 1 (unitarily Ed) P1 Ed < 1 (inelastic) Lower p range Qd Ed = 0 So don’t think that a flat demand curve will be elastic !! P P 10 10 100 Q 100

  17. Compare the elasticities of D1 & D2 P P1,Q1 (P2,0) Slope of the ray from the origin to P1 P1 P1,Q1’ Ed at D1, P1 = D1 D2 Slope of D1 Q (0,0) Q1 Q1’ (P1,Q1); (0,0) (P1,Q1’); (0,0) Ed at D2, P1 = = (P2,0); (P1,Q1) (P2,0); (P1,Q1’) P1/Q1’ P1/Q1 = = (P2-P1)/(0 –Q1) (P2-P1)/(0 –Q1’) P1/Q1 P1/Q1’ = = (P2-P1)/ Q1 (P2-P1)/ Q1’ P1 P1 = = P2-P1 P2-P1 Since P2 is the same intercept on both curve, Ed of D1 = D2.

  18. If both D curves intercept on the Y-axis at the same point, their Ed are the same P Ed = 6.33 Ed = 6.33 Ed = 3.1 Ed = 3.1 Ed = 0.69 Ed = 0.69 Ed = 0.16 Ed = 0.16 Q

  19. Compare the elasticities of D2 & D3 P (P2’,0) P1,Q1 Slope of the ray from the origin to P1 (P2,0) P1 P1,Q1’ Ed at D3, P1 = D2 D3 Slope of D1 Q (0,0) Q1 Q1’ (P1,Q1’); (0,0) (P1,Q1 ); (0,0) Ed at D2, P1 = = (P2’,0); (P1,Q1’) (P2,0); (P1,Q1) P1/Q1 P1/Q1’ = = (P2’-P1)/(0 –Q1’) (P2-P1)/(0 –Q1) P1/Q1’ P1/Q1 = = (P2’-P1)/ Q1’ (P2-P1)/ Q1 P1 P1 = = P2’-P1 P2-P1 Since P2’>P2, Ed of D3< D2

  20. Compare Ed between D1 &D2 P1/(P2-P1) for D1 > P1/(P2’-P1) for D2 D1 has a greater price elasticity of demand than D2. P P2’ P2 P1 D1 D2 Q

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