ZURONI MD. JUSOH
JPSPP, FEM
ObjectivesObjectivesIn this chapter you will…In this chapter you will…
Learn the meaning of the elasticity of demand.
Examine what determines the elasticity of demand.
Apply the concept of elasticity in three types of elasticity to determine the goods.
THE ELASTICITY OF DEMANDMeasuring the impact
of price changes on quantity demanded as a result of changes in a variable.
variables:The price of the own goods consumers income Other prices – substitutes or complements
TYPES OF DEMAND ELASTICITY
Price elasticity of demand (Ed)Income elasticity of demand (Ey)
Cross price elasticity of demand (Ec)
Price Elasticity of Demand (Ed)measures the percentage change in
quantity demanded caused by a percent change in price.
Formula :Ed = % Quantity demanded
% Price = (-) Q X P
Q P
Cont.Ed = (-) Q1 – Q0 X P0
Q0 P1 – P0
where: Q0= The original quantity demanded
Q1 = New quantity demanded
P0 = Original Price
P1 = New Price
Interpreting values of price elasticity coefficients (Ed)
Ed = 0 –Perfectly inelastic demand
Ed < 1 – inelastic demandEd = 1 –Unit elastic, unit
elasticity, unitary elasticity, or unitarily elastic demand
Ed > 1 – elastic demandEd = - perfectly elastic
demand
Different Elasticity values along DD curve
P A
Ed > 1 Ed = 1 E Ed < 1 B Qty
FACTORS INFLUENCE on EdSubstitute goods
If a lot of substitutes, the DD is elasticRatio of income spent on goods
The larger the income spent on goods, the more elastic DD.
Interests / Needs ProductsFlexible if the goods do not have toNot flexible if the goods have
use of goodsElastic where goods have many uses
FavoriteElastic if less fond on stuff/goods
Cont.Timeline
Short term- DD is not elasticLong term– DD elastic
New Consumerelastic if have many new consumer
Number of firmElastic where many sellers / producers
Total revenue TR = P x QPrice changes affect sales and depends
on the elasticity of the demand involved.
Cont.
Income Elasticity of Demand (Ey)measures the percentage change in demand
caused by a percent change in income.Formula :
Ey = % Quantity demand
% Income = (-) Q X Y
Q Y
Cont.Ey = (-) Q1 – Q0 X Y0
Q0 Y1 – Y0
Di mana : Q0 =The original quantity demanded
Q1 = New quantity demanded
Y0 = Original income
Y1 = New Income
DEGREES OF INCOME ELASTICITY OF DEMAND Engel curve - the curve I describe the relationship
between changes in income (Y) with the change in quantity demanded (Qd).
A) Ey = 1 Y KE
Y1
Y0 10%
10%
Q0 Q1 Qty Example : Clothes
Cont.B) Ey > 1 Y KE
Y1
10%
Y0
20%
Q0 Q1 Qty Example : luxurious stuff
Cont.C) 1>Ey > 0
Y KE
Y1
Y0 20%
10%
Q0 Q1 Qty Example : Common necessities
Cont.
D) Ey = 0 Y KE
Y1
Y0
Q0 Qty
Example : compulsory stuff
Cont.E) Ey < 0 (-ve) Y
Y1
Y0
KE
Q0 Qty Example : Inferior goods
Cross Price Elasticity of Demand (Ec)
measures the percentage change in demand for a particular good caused by a percent change in the price of another good.
Formula :Ec = % Quantity demanded for A
% price of B = (-) QA X PB
QA PB
Cont.Ec = (-) QA1 – QA0 X PB0
QA0 PB1 – PB0
Where: QA0 = Original quantity demanded for product A
QA1 = New quantity demanded for product A
PB0 = The original price of the product B
PB1 = The new prices of product B
Types of Cross Price Elasticity of Demand (Ec)
1) Ec = value +ve (substitute goods) P
D
PB1
PB0
QA0 QA1 QtyRelations + ve (continued) between P and Qd.
Cont.2) Ec = -ve values
(complementary goods)P
PB0
PB1
D QA0 QA1 Qty
Relationship -ve (inverse) of P with Qd
Cont.3) Ec = 0 (unrelated goods)
P D
P1
P0
Q0 Qty Price change does not affect the quantity
demanded of other goods.
Summary Price elasticity of demand is influenced
by their price of own goods, income & other prices. 3 types of the elasticity of
demand Ed, Ey, Ec 5 values of Ed:
not perfectly elastic (Ed = 0), not elastic (Ed <1), unity (Ed = 1), elastic (Ed>1),perfectly elastic (Ed = ∞)
Cont. 5 types of Ey
Ey = 0 (necessities goods), 1> Ey> 0 (the ordinary necessities), Ey = 1 (normal goods), Ey>1 (luxury goods), Ey <0 (inferior or giffen)
3 types of EcEc = + ve (substitute goods) Ec =-ve (complementary goods) and Ec = 0 (unrelated goods)
Thank You