Bài giảng topic 2(b) elasticity

Elasticity of Demand & Supply Topic 2(b) What is the difference between these diagrams? P1 Demand P1 P2 P2 Demand Q1 Q2 Q1 Q2 What is the reason for this difference? What is elasticity of demand? The responsiveness of quantity demanded  to a change in one of its determining factors  Point & Arc elasticity  Point elasticity    is elasticity at a specific point changes measured are likely to be very small Arc elasticity  is the average elasticity between points where X is the determinant of demand Price Elasticity is P As price increases from P1 to P2, quantity decreases from Q1 to Q2 P2 P1 D Q2 Q1 Q Price Elasticity of Demand  The responsiveness of quantity demanded to a change in price of a product % change in quantity demanded (Q) Ed = % change in own price (P) Ed = ΔQ ΔP x P2 + P1 Q2 + Q1 Computing the price elasticity of demand Example 1: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to cones Calculate your elasticity of demand Example 2: If the price of an ice cream cone decreases from $2.20 to $2.00 and the amount you buy increases from to 10 cones Calculate your elasticity of demand The midpoint method  The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change Price elasticity of demand = ∆Q Ed = (P2 + P1) x ∆P (Q2 + Q1) (Q2 – Q1)/[(Q2 + Q1)/2] (P2 – P1)/[(P2 + P1)/2] Price Elasticity of Demand  Use of percentages choice of units  product comparison  The minus sign indicates the demand follows the Law of Demand  The absolute value of the coefficient measures the price elasticity of demand  Price Elasticity of Demand (cont.)  Elastic Demand   a given percentage change in price results in a larger percentage change in quantity demanded Ed > Price (per unit) 10 12 14 Price Elasticity of Demand and Revenue 10 12 14 18 Ed > Ed = Total Revenue 20 16 12 Units of X (thousands per week) Price (per unit) Ed > Ed = Ed < Total Revenue 10 12 14 Price Elasticity of Demand and Revenue 20 16 TR 12 4 10 12 14 Units of X (thousands per week) 19 Elasticity & Total Revenue Elasticity & Total Revenue Summary:  If demand is elastic, a change in Price elastic will cause Total Revenue to change in the opposite direction direction  If demand is inelastic, a change in price inelastic will cause total revenue to change in the same direction Own Price elasticity – its determinants Number and closeness of substitutes  Luxuries vs Necessities  Proportion of income spent on the product  Time period  Non-functional factors   bandwagon effect etc Price Elasticity of Supply • The responsiveness of quantity supplied to a change in price of a product Es= % change in quantity supplied of product X % change in the price of product X Price Elasticity of Supply (cont.) P D2 Sm Immediate market period D1 Pm Po D2 D1 Qo Q Price Elasticity of Supply (cont.) P Ss Short run Ps Po D2 D1 Qo Qs Q Price Elasticity of Supply (cont.) P PL Po Long run SL S′L S′L D2 D1 Qo Qo QL Q′L Q Cross price elasticity  What value of EXY would you expect for a  Substitute good  Complementary good RQ #5  Cross price elasticity  EXY < : Complementary goods  EXY > : Substitute goods  EXY = or near zero : Independent goods  Size of EXY measures the degree of complementarity or substitutability Income Elasticity  Possible values of Ey  >0 (positive) : Normal goods >1 : Relatively elastic  Price Elasticity