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1.elasticity of Demand

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25 views19 pages

1.elasticity of Demand

Uploaded by

clinton.p
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ELASTICITY OF DEMAND

Price elasticity
Income elasticity
Cross elasticity
PRICE ELASTICITY OF DEMAND & SUPPLY

The price elasticity of demand is the percentage change in the


quantity demanded of a good or service divided by the percentage
change in the price.

The price elasticity of supply is the percentage change in quantity


supplied divided by the percentage change in price.
We talk about elasticities as positive numbers. So mathematically,
we take the absolute value of the result.
FACTORS THAT AFFECT PRICE ELASTICITY OF
DAMAND

1. Availability of substitutes
2. If the good is a luxury or a necessity
3. The proportion of income spent on the good
4. How much time has elapsed since the time of price
changed
IMPORTANT NOTE:- In general, Elasticity along a linear /straight Demand curve is
CALCULATING ELASTICITY OF DEMAND

Midpoint method
• we get the same elasticity between two price
points whether there is a price increase or
decrease

• is also referred to as the arc elasticity

• drawback of the midpoint method is that as the


two points get farther apart, the elasticity value
loses its meaning
CALCULATING ELASTICITY OF DEMAND

Interpretation:

This means that, along the demand curve between point B and
point A, if the price changes by 1%, the quantity demanded will
Calculate the elasticity as price decreases from $70 at change by 0.45%.
point B, to $60 at point A
A change in the price will result in a smaller percentage change
in the quantity demanded
CALCULATING ELASTICITY OF DEMAND
• Income elasticity of demand is an economic measure of how responsive the quantity demanded for a good or
service is to a change in income.
• The formula for calculating income elasticity of demand is the percentage change in quantity demanded divided
by the percentage change in income.
• Income elasticity of demand will denote whether a product is an essential item or a luxury item.

How Do You Interpret Income Elasticity of


Demand?

Income Elasticities of Demand can be Positive or Negative and fall into three interesting ranges,

Greater than 1 (normal good, income elastic)


Positive and less than 1 (normal good, income inelastic)
Negative (inferior good)
Cross elasticity of demand refers to the way that changes in the price of one good can affect the
quantity demanded of another good. This relationship can vary depending on whether the two goods
are substitutes, complements, or unrelated to each other. We can say that the cross elasticity of
demand is,

Percentage change in demand of commodity X divided


Percentage change in price of commodity Y.

How Do You Interpret Cross Elasticity of Demand?


The Cross elasticity of Demand can be Positive or Negative . It is positive for a Substitute and
Negative for a Complement.
The Elasticity of Supply Definition
The price elasticity of supply is a measure of the degree of responsiveness of the quantity supplied to
the change in the price of a given commodity. It is an important parameter in determining how the supply of a
particular product is affected by fluctuations in its market price. It also gives an idea about the profit that could
be made by selling that product at its price difference

ES=%ΔP%ΔQ
Here, Es,denotes the elasticity of supply which is equal to the percentage change in quantity supplied
divided by the percentage change in the price of the commodity.
5 Types of Elasticity of Supply
Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit elastic supply, less than unit elastic,
and perfectly inelastic. Read below to know them in more detail.
1.Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is infinite. This means
that even for a slight increase in price, the supply becomes infinite. For a perfectly elastic supply, the percentage
change in the price is zero for any change in the quantity supplied.
2.More than Unit Elastic Supply: When the percentage change in the supply is greater than the percentage change in
price, then the commodity has the price elasticity of supply greater than 1.
3.Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its quantity supplied is
proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to 1.
4.Less than Unit Elastic Supply: When the change in the supply of a commodity is lesser as compared to the change
in its price, we can say that it has a relatively less elastic supply. In such a case, the price elasticity of supply is less
than 1.
5.Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the percentage change in the
quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply applies to
exclusive items. For example, a designer gown styled by a famous personality. The point to be noted is that the
elasticity of supply is always a positive number. This is because the law of supply states that the quantity supplied is
always directly proportional to the change in the price of a particular commodity. This means that the supply of a
product either increases or remains the same with the increase in its market price.
Determinants of Price Elasticity of Supply

•Marginal Cost- As the cost of producing one more unit is rising with output or Marginal Costs (which
are the increased costs related to each additional unit produced) are rising rapidly with output, then
the rate of output production will be limited, i.e. Price Elasticity of Supply will be inelastic., which
means that the percentage of quantity supplied changes less than the change in price. However, if
Marginal Cost rises slowly, then Supply will be elastic.
•Time- As the price elasticity of supply increases over time, producers would increase the quantity
supplied by a greater percentage than the price increases.
•Number of Firms- It is more likely that the supply will be elastic when there are a large number of
firms. This occurs because other firms can step in to fill the supply gap.
•Mobility of Factors of Production- When the factors of production are mobile, then the price
elasticities of supply are higher. This means that labor and other manufacturing inputs may be
imported from other regions to quickly increase production.

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