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5_LECTURE

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0% found this document useful (0 votes)
23 views8 pages

5_LECTURE

Uploaded by

mamdouhbevnoty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ELASTICITY

Elasticity of  Elasticity a measure of the responsiveness of quantity demanded

demand to one of its determinants.

1. Price Elasticity of Demand

definition  Price elasticity of demand: a measure of how much the quantity

demanded of a good responds to a change in Price

Percentage change in quatity demanded


Price elasticity of demand 
Percentage change in price

 Q / Q Q P Q2  Q1 P2  P1
The formula
EP    EP  
 P / P P Q P2  P1 Q2  Q1

"Point " "Arc "

*When you calculate the price elasticity the answer is always

(negative) so the negative sign is ignored.

1. Perfectly elastic demand Ep = ∞

 %Change in quantity demanded is very large of % change in price

Degree of 2. Elastic demand Ep > 1

elasticity  %Change in quantity demanded is greater than of % change in

Or price

Ranges of 3. Inelastic demand Ep < 1

Elasticity  %Change in quantity demanded is less than of % change in price

4. Unit elastic demand Ep = 1

 %Change in quantity demanded equals % change in price

5.Perfectly inelastic demand Ep = 0

1
 Unresponsive quantity demanded of the change in price

Graphic

shapes and

curves

Example (1):

If price of ice cream rises by 10% and quantity demanded falls by

20%.
Percentage change in quatity demanded
Price elasticity of demand 
Percentage change in price
Example (1)

%Q
Price elasticity of demand 
%P

- 20%
Price elasticity of demand   2
10%

We will ignore the minus sign

Price elasticity of demand = 2 & 2> 1 " Elastic demand"


2
If price rises from $4 to $6 and quantity demanded falls from 120

Example (2) to 80.

% change in price = (6 - 4)/5 × 100% = 40%

% change in quantity demanded = (120-80)/100 = 40%

Price elasticity of demand = -40/40 =- 1 We will ignore the minus

sign

Price elasticity of demand = 1 "unit" elastic

1. The closeness of substitutes: a commodity with a large number of

potential substitutes will have high elasticity, , a lack of substitutes

Factors or will make a commodity's demand inelastic.

Determinants 2. Proportion of income spent on the commodity: If a high

that proportion of income is spent on a particular commodity, its demand

influence the will be elastic. In comparison, for items requiring a small proportion

elasticity of of income such as soap, tea, , etc., the demand is inelastic.

demand 3. Time and Elasticity: The time period: Period to cope with the

changes that occur in the price of good, The longer the time period

the greater the demand for the commodity has become more

elastic and inverse True.

 Mid-point on the Demand

Elasticity curve, (elasticity = 1).

along a  At prices above the mid-

point of the demand curve,


Straight –
demand is elastic.
line Demand
 At prices below the mid-point of the demand curve, demand is inelastic.
Curve

3
Elastic Ed > 1 an increase in price reduces revenue
Total Elastic Ed > 1 a decrease in price increases revenue
Revenue and Inelastic Ed < 1 an increase in price increases revenue
Elasticity of Inelastic Ed < 1 a decrease in price reduces revenue
Demand
unit-elastic Ed = 1 an increase in price does not affect revenue

unit-elastic Ed = 1 a decrease in price does not affect revenue

2. Cross-Price Elasticity of Demand

 Cross elasticity of demand: a measure of how much the quantity

definition demanded of a good (X) responds to a change in Price (Y).

 This kind of elastic makes a distinction between goods

complements and goods Substitutes.

QX / QX QX PY QX 2  QX 1 PY 2  PY 1
EXY    EXY  
PY / PY PY QX PY 2  PY 1 QX 2  QX 1
The formula
Point Arc

 Substitute's goods have positive signal, while complements goods

have negative signal, But Independent goods (EI= zero).

4
Degree of 1. Perfectly elastic demand Exy = ∞

elasticity 2. Elastic demand Exy > 1

Or 3. Inelastic demand Exy < 1

Ranges of 4. Unit elastic demand Exy = 1

Elasticity 5.Perfectly inelastic demand Exy = 0

Example (1):

The price of apples rises from $1.00 per pound to $1.50 per pound.

As a result, the quantity of oranges demanded rises from 8,000 per

week to 9,500.

Example % change in quantity of oranges demanded = (9,500-8,000)/8,750 =

.1714 = 17.14%

% change in price of apples = (1.50-1.00)/1.25 = .40 = 40%

Cross-price elasticity = 17.14% / 40% = 0.43

Because the cross-price elasticity is positive, the two goods are

substitutes.

3. Income Elasticity of Demand

 Income elasticity of demand: a measure of how much the quantity

definition demanded of a good responds to a change in income.

Q / Q Q I Q2  Q1 I 2  I1
EI    EI  
I / I I Q I 2  I1 Q2  Q1

The formula "Point " "Arc"

*goods Normal and a necessity "Income Elasticity is positive but

less than 1"

5
* goods Normal and a luxury "Income Elasticity is positive but

greater than 1"

*Inferior Goods "Income Elasticity is negative".

Example (1):

John’s income rises from $20,000 to $22,000 and the quantity of

hamburger he buys each week falls from 2 to 1.

Example % change in quantity demanded = (1-2)/1.5 = -.6667 = -66.67%

% change in income = (22,000-20,000)/21,000 = .0952 = 9.52%

Income elasticity = -66.67% ÷ 9.52% = -7.00

* Hamburger is an inferior good for John.

Elasticity of  Elasticity a measure of the responsiveness of quantity supplied to

supply one of its determinants.

Price Elasticity of Supply

 Price elasticity of supply: a measure of how much the quantity

definition supplied of a responds to a change in Price.

Percentage change in quatity supplieded


Price elasticity of demand 
Percentage change in price

 Q / Q Q P Q2  Q1 P2  P1
EP    EP  
 P / P P Q P2  P1 Q2  Q1
The formula
"Point " "Arc "

*When you calculate the price elasticity the answer is always

(positive)

6
1. Perfectly elastic supply Es = ∞

 %Change in quantity supplied is very large of % change in price

Degree of 2. Elastic supply Es > 1

elasticity  %Change in quantity supplied is greater than of % change in price

Or 3. Inelastic supply Es < 1

Ranges of  %Change in quantity supplied is less than of % change in price

Elasticity 4. Unit elastic supply Es = 1

 %Change in quantity supplied equals % change in price

5.Perfectly inelastic supply Es = 0

 Unresponsive quantity supplied of the change in price

Graphic

shapes and

curves

7
1. Time frame for the supply decision

Factors Dependent elasticity of supply in the short term and long

that term

influence It can be said that the firm can increase or decrease its

the production capacity in the long term only.

elasticity 2. Resources substitution possibilities

of supply In the case of increasing the degree of substitutes between

resource supply be elastic.

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