Elasticity by dfhdhdhdhjr

VIEWS: 3 PAGES: 12

									Elasticity

        Elasticity is a general concept
         that can be used to quantify
         the response in one variable
         when another variable
         changes.
                                        % A
    elasticity of A with respect to B 
                                        % B
Price Elasticity of Demand
   A popular measure of elasticity is price
    elasticity of demand measures how
    responsive consumers are to changes in
    the price of a product.
                                 % change in quantity demanded
    price elasticity of demand 
                                       % change in price

       • The value of demand elasticity is
         always negative, but it is stated in
         absolute terms.
Types of Elasticity
Hypothetical Demand Elasticities for Four Products
                          %
                                 % CHANGE IN
                      CHANGE
                                  QUANTITY                      ELASTICITY
                      IN PRICE
       PRODUCT                 DEMANDED (%QD)                 (%QD d %P)
                        (%P)
Insulin                 +10%               0%            0.0       Perfectly
                                                                   inelastic
Basic telephone         +10%               -1%          -0.1       Inelastic
service
Beef                    +10%             -10%           -1.0       Unitarily elastic
Bananas                 +10%             -30%           -3.0       Elastic
•   When the percentage change in quantity demanded is smaller than
    the percentage change in price, demand for that product is inelastic.

•   When the percentage change in quantity demanded is larger than the
    percentage change in price, demand for that product is elastic.
Perfectly Elastic and
Perfectly Inelastic Demand
Curves




   When demand does not               Demand is perfectly elastic when
    respond at all to a change in       quantity demanded drops to zero
    price, demand is perfectly          at the slightest increase in price.
    inelastic.
Calculating Elasticities
 Calculating   percentage changes:
                            P2  P
        % change in price        1
                                    x 100%
                               P1




                                    Q2  Q1
    % change in quantity demanded          x 100%
                                      Q1
Calculating Elasticities
                             Elasticityis a ratio of
                               percentages.
                            • Using the values on the
                              graph to compute
                              elasticity, using
                              percentage changes
                              yields the following
                              result:
                                    100%
      price elasticity of demand            3.0
                                    33.3%
Calculating Elasticities
                                A more accurate way of
                                 computing elasticity than
                                 percentage changes is the
                                 midpoint formula:
                                            Q2  Q1
                                                        x 100%
                                 %  Qd (Q1  Q2 ) / 2
                                       
                                 % P        P2  P1
                                                        x 100%
                                         ( P  P2 ) / 2
                                            1

           10  5              5
                     x 100%       x 100%
%  Qd (5  10) / 2           7.5           66.7%
                                       =          167
                                                       .
% P        2 3              -1           -40.0%
                     x 100%       x 100%
        ( 3  2) / 2          2.5
Calculating Elasticities
Here is how to interpret two different values
 of elasticity:
   When e = 0.2, a 10% increase in price
    leads to a 2% decrease in quantity
    demanded.
   When e = 2.0, a 10% increase in price
    leads to a 20% decrease in quantity
    demanded.
Elasticity and Total Revenue
                                TR  P  Q
                                                 Effect of an
                                                 increase in     Effect of a
Type of                     Change in quantity   price on        decrease in
deman        Value of       versus change in     total           price on total
d            Ed             price                revenue         revenue
Elastic      Greater than   Larger percentage    Total revenue   Total revenue
             1.0            change in quantity   decreases       increases
Inelastic    Less than      Smaller percentage   Total revenue   Total revenue
             1.0            change in quantity   increases       decreases
Unitary     Equal to 1.0 Same percentage        Total revenue Total revenue does
                                                total revenues are
elastic When demand is inelastic, price anddoes not
                         change in quantity and               not change
        directly related.price                  change
                            Price increases generate higher revenues.
     When demand is elastic, price and total revenues are
          indirectly related. Price increases generate lower revenues.
Other Important Elasticities
   Income elasticity of demand – measures
    the responsiveness of demand to changes
    in income.
                                  % change in quantity demanded
    income elasticity of demand 
                                       % change in income

         • Income elasticity of demand is
           positive for normal goods and
           negative for inferior goods.
Other Important Elasticities
   Cross-price elasticity of demand: A
    measure of the response of the quantity of
    one good demanded to a change in the
    price of another good.
                                       % change in quantity of Y demanded
cross - price elasticity of demand 
                                            % change in price of X

         • Cross-price elasticity of demand is
           positive for substitutes and negative
           for complements.
Other Important Elasticities
   Elasticity of supply: A measure of the
    response of quantity of a good supplied to
    a change in price of that good. Likely to
    be positive in output markets.
                             % change in quantity supplied
      elasticity of supply 
                                  % change in price

								
To top