CHAPTER III ELASTICITY P A 1% B ?% Copyright © 2014 by Quan Hong NGUYEN Q CHAPTER III ELASTICITY Contents Elasticity of demand Elasticity of supply Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand * Price elasticity of demand (EDP) * Income elasticity of demand (EDI) * Cross elasticity of demand (EDPy) Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand Price elasticity of demand (EPD) •The percentage changed in quantity demanded resulting from 1% change in price Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand Price elasticity of demand (EPD) •Point elasticity •E.g: Demand curve: P = 18 – 2Q and point A (P=6, Q=6) What is price elasticity of demand at point A Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand Price elasticity of demand (EPD) • Arc elasticity • Eg: At price P=7.000VND, consumer buys 10kilos of pork/ month At price P= 6.000 VND, consumer buys 15kilos/ month What is price elasticity of demand? Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand Conclusion: Price elasticity of demand always: •Unit – free and negative value •Usually use absolute value Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Price elasticity of demand (EPD) Inelastic demand P P2 - steep demand curve - large change in price, small change in quantity demanded - Consumers are not very sensitive to the change in price - the goods is hard to replace or necessity P1 Copyright © 2014 by Quan Hong NGUYEN Q2 Q1 Q CHAPTER III ELASTICITY Price elasticity of demand (EPD) Elastic demand P - flat demand curve - small change in price, large change in quantity demanded - Consumers are very sensitive to the change in price - the goods is easy to replace P2 P1 Q2 Copyright © 2014 by Quan Hong NGUYEN Q1 Q CHAPTER III ELASTICITY Price elasticity of demand (EPD) Unitary-elastic demand - slope down demand curve - %change in price equal to % change in quantity demanded P P2 P1 Q2 10 Copyright © 2014 by Quan Hong NGUYEN Q1 Q CHAPTER III ELASTICITY Price elasticity of demand (EPD) Perfectly elastic demand P - Demand curve is parallel to the horizontal axis - Change in price affects totally on P1 quantity demanded - Consumers are perfectly sensitive to the change in price - The good is in the perfect competition market 12 Copyright © 2014 by Quan Hong NGUYEN Q CHAPTER III ELASTICITY 13 Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Factors effecting on EPD •The availability of substitutes goods •The characteristic of the goods •The time needed to find out the substitutes goods •The ratio of the spending in total income 14 Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY The relationship between EPD, P and TR E1 P TR? TR? TR? P TR? TR? TR = P x Q 15 Copyright © 2014 by Quan Hong NGUYEN TR? CHAPTER III ELASTICITY The relationship between EPD, P and TR /E/1: TR ↑ when P↓ Decrease P1 Increase P2 Q1 17 Copyright © 2014 by Quan Hong NGUYEN Q2 CHAPTER III ELASTICITY The relationship between EPD, P and TR E1 P TR TR = const TR P TR TR = const TR = P x Q 18 Copyright © 2014 by Quan Hong NGUYEN TR CHAPTER III ELASTICITY Elasticity of demand Income elasticity of demand (EID) •The percentage changed in quantity demanded resulting from 1% change in income 19 Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand Inferior goods No relationship with income Normal goods Essential goods Luxury goods 20 Copyright © 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand Cross-elasticity of demand (EPyD) •The percentage changed in quantity demanded resulting from 1% change in price of related goods ã 21 Copyright â 2012 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand X & Y are complement goods X & Y are independent goods X & Y are substitute goods 22 Copyright © 2012 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of supply Price elasticity of supply (EPS) •The percentage changed in quantity supplied resulting from 1% change in price 23 Copyright © 2012 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of supply E=0: Perfectly inelastic supply E1: Elastic supply E=1: Unitary elastic supply E=∞: Perfectly elastic supply 24 Copyright © 2012 by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of supply Factors affecting on elasticity of supply: •Time needed to find substitutes resources for inputs •Availability of inputs 25 Copyright © 2012 by Quan Hong NGUYEN CHAPTER III ELASTICITY Questions: If 10% increase in A’s price leads to 2% increase in total revenue, A is elastic – demand Decrease in gasoline’s price makes the demand curve of motorbikes (D1) shift to the right to (D2) and this (D2) is more elastic than (D1) at any quantity level (in absolute value) All points in a demand curve has the same value of slope and price elasticity of demand (point elasticity) “Food” is less elastic demand than “Kinh Do soft cake” Per-unit tax imposed on producer of good, which demand is more elastic than supply will makes that producer bear the smaller part in total tax amount in comparison with consumer’s part 26 Copyright © 2012 by Quan Hong NGUYEN ... 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY The relationship between EPD, P and TR E1 P TR? TR? TR? P TR? TR? TR = P x Q 15 Copyright © 2014 by Quan Hong NGUYEN TR? CHAPTER III ELASTICITY... 2014 by Quan Hong NGUYEN CHAPTER III ELASTICITY The relationship between EPD, P and TR /E/>1: TR ↑ when P↓ Decrease P1 Increase P2 Q1 17 Copyright © 2014 by Quan Hong NGUYEN Q2 CHAPTER III ELASTICITY... by Quan Hong NGUYEN CHAPTER III ELASTICITY Elasticity of demand Inferior goods No relationship with income Normal goods Essential goods Luxury goods 20 Copyright © 2014 by Quan Hong NGUYEN CHAPTER