# ELASTICITY (PowerPoint) by yaohongm

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```									ELASTICITY
Chapter 9 – Mohr and Fourie
Week 4
Today’s session

   Definition of Elasticity
   Different types of elasticity
 1. Price elasticity of demand
 Calculating the price elasticity of
demand (at a point =>
point elasticity)
Elasticity
   Elasticity is a measure of responsiveness or
sensitivity.
 How sensitive or responsive the
dependent variable is to changes in the
independent variable.

 Example – maize crop dependent of
rainfall and …..
 MAIZE CROP = DEPENDENT
VARIABLE (BEING EXPLAINED)
 RAINFALL = INDEPENDENT
(EXPLANATORY) VARIABLE
 How sensitive to is maize crop to
changes in rainfall
Elasticity

   Other examples –
 How responsive is investment
spending to changes in the
interest rate
 How responsive is governments
tax revenue to changes in
taxpayers’ income
 How responsive is the quantity of
labour supplied to changes in the
wage rate
Elasticity

   The measure of such
responsiveness is called elasticity.

   ELASTICITY is THE
PERCENTAGE CHANGE IN THE
DEPENDENT VARIABLE IF THE
RELEVANT INDEPENDENT
VARIABLE CHANGES BY ONE
PER CENT.
Elasticity

   Elasticity = % change in dep. var.
% change in indep. var.

E.g.’s
DV= Maize crop,       IV= Rainfall
DV=Investment,        IV= Interest Rate
DV=Qd of Rice,        IV= Price of Rice
Elasticity

We will look at different types of
elasticity: -
1.   Price elasticity of demand
2.   Income elasticity of demand
3.   Cross elasticity of demand
4.   Price elasticity of supply
1. Price elasticity of demand

   % change in quantity demanded if
the price of the product changes by
one per cent, ceteris paribus.

   If quantity demanded = dependant variable
&              price = independent variable,
-- how responsive is quantity
demanded to changes in price.
continued…
1. Price elasticity of demand

   Price elasticity of demand =
% change in quantity demanded of a product
% change in the price of the product
continued…
1. Price elasticity of demand
   Example:-
   If the price of the product changes by 5%, and it
results in a 10% change in the quantity demanded,
ceteris paribus, the price elasticity of demand is 2.

   Product >> calculators
   Initial price = R100
   Price increases by 5% => to R105
   Quantity of calculators demanded per month was 1000
(at initial price of R100)
   After price increase => quantity of calculators
demanded is 900 >>> a reduction of 10%.

   So price elasticity of demand for calculators is 2
   % change in quantity demanded/ % change in price
   = -10/5
   = -2
Elasticity

   Important – it uses percentage changes
and not units, i.e. relative changes, not
absolute.
   Absolute => price expressed in monetary
terms (rands, pounds, euros), quantity
expressed in term of physical units (kilos,
boxes, bags).
   Price elasticity of demand is the ratio and
this ratio is called the
ELASTICITY COEFFICIENT
Elasticity

   ELASTICITY COEFFICIENT shows
how people react to changes in
prices of different goods and
services.
   Because it is in %, we can compare
them to each other.
Elasticity

   E.g. because we use % changes, we
can compare how people react to price
changes of meat, bread, petrol, cars,
pens….etc.
   Would not be possible if used ‘absolute
numbers’ e.g. a R1 change in price of
these products would have very different
effects on the quantity demanded.
   Can compare a 1% change in the
price of the product.
Elasticity
   E.g. look at two products
   Cars and bread
   If the price of cars and bread ↑ by R1,
the effect on quantity demanded would
be very different.
   Because the price of a car of
approximately R100,000 is far greater
compared to the price of a bread that is
under R10.
   % change in car price would be <1%,
% change in price of bread (R10 each)
would be 10%.
Today’s session

   Definition of Elasticity
   Different types of elasticity
 1. Price elasticity of demand
 Calculating the price elasticity of
demand
(at a point => point elasticity)
Calculating the price elasticity
of demand
   Price elasticity of demand (ep) =
% change in quantity demanded of a product
% change in the price of the product

   ∆Q/Q x100     (can cancel out the 100s)
∆P/P x 100
= ∆Q/Q
∆P/P

= ∆Q/ Q x P/∆P
ep = ∆Q/∆P x P/Q
(elasticity at a POINT)
Calculating the price elasticity
of demand
   Price elasticity of demand (ep) =
% change in quantity demanded of a product
% change in the price of the product

   ∆Q/Q x100    (can cancel out the 100s)
∆P/P x 100

Calculator example
Initial price R100, after increase of 5% increase, R105
Initial Qd 1000 per week, after P increase, 900 per week

Working out % change in Qd
= ∆Q/Q = 100/1000 = 0.1 (0.1x100 = 10%)
Calculating the price elasticity
of demand
   Price elasticity of demand (ep) =
% change in quantity demanded of a product
% change in the price of the product

   ∆Q/Q x100    (can cancel out the 100s)
∆P/P x 100

Working out change in price
Initial price R100, after increase of 5% increase, R105
∆P/P
=5/100 = 0.05 (0.05x100 = 5%)
Calculating the price elasticity
of demand
   Price elasticity of demand (ep) =
% change in quantity demanded of a product
% change in the price of the product

   ∆Q/Q x100      (can cancel out the 100s)
∆P/P x 100

= ∆Q/Q
∆P/P

= ∆Q/ Q x P/∆P

ep = ∆Q/∆P x P/Q

(Derive this for yourself to check if you fully
understand how we got to this final equation!)
Continued…

Calculating the price elasticity
of demand
   The slope of the linear demand curve
= ∆P/ ∆Q
   So the one part of the equation is ∆Q/
∆P which is the inverse of the slope of
the linear demand curve.
   Second part of the equation is P/Q which
is the ratio of price to quantity at any
point on the line (therefore the know
as POINT ELASTICITY… ELASTICITY
AT A POINT.
Continued…

Calculating the price elasticity
of demand
   Since the ratio is different at any point on
the demand curve, the price elasticity of
demand will be different at any point on
the curve, since the slope (or inverse of the
slope) is constant.
Today’s session

   Definition of Elasticity
   Different types of elasticity
 1. Price elasticity of demand
 Calculating the price elasticity of
demand (at a point =>
point elasticity)

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