Elasticity

2.6 ) ELASTICITY IN DEMAND & SUPPLY.

9TH JULY 2009

….Content…. DEFINITION  ELASTICITY IN DEMAND  ELASTICITY IN SUPPLY. 

….INTRODUCTION…. Elasticity = Responsiveness or Sensitivity.  Means Relative Response of 1 variable to changes in another variable. 

Refers to percentage change.

2.6.1) ELASTICITY IN DEMAND. Means the responsiveness of demand due to some changes to the factor which influence demand.  3 types:  Price Elasticity of Demand (Pn Dd)  Income Elasticity of Demand (YnDd)  Cross Elasticity of Demand (Cnx) 

….i)Price elasticity of Demand…. 



Measure the responsiveness of the quantity demanded due to a change in its price. Can be calculated using formula: Price elasticity = - % change in Quantity Demand of demand



% change in Price

5 Degree of Price Elasticity of Demand 

Demand is ELASTIC if :( Pn Dd > 1) 



Demand is INELASTIC if : (Pn Dd < 1) 



%▲Q = %▲P

Demand is PEFECTLY INELASTIC if : (Pn Dd = 0) 



%▲Q < %▲ P

Demand is UNITARY ELASTIC if ; (Pn Dd = 1) 



%▲Q > % ▲P

Qd totally UNRESPONSIVE to changes in price.

Demand is PERFECTLY ELASTIC if : (Pn Dd = ∞) 

If there is changes in price, and the quantity demanded either falls to ZERO@ increases to an infinitely large value.

….Price elasticity of Demand….



Example 1: If the price decrease from RM5-RM4 and the Quantity Demanded increase from 60 units to 70 units. Calculate the price elasticity of demand and determine the degree of elasticity.

….Price elasticity of Demand….



Solution:

P1 = RM5

Q1 = 60 units

P2 = RM4

Q2 = 70 units

Step 1-Find the % change in Quantity Demanded. = Q2 - Q 1 (Q 2 +

= 70-60

Q1) /2

(

= 0.15 @ 15%

60+70)/2

Step 2 – Find the % change in Price. = P2 - P1

= 4-5

(P2+P1)/2

= -0.22 @ 22% (4+5)/2

So, Pn Dd= - 0.15 (0.22) = -0.68.

….Price elasticity of Demand…. 

Exercise 1: When the price is RM2 the quantity demanded is 10 units and when price increases to RM3 the quantity demanded is 5 units. What is the price elasticity of demand when price increase? And what is the degree of elasticity?.

…Determinants of price elasticity of demand…

6 Determinants;  Availability of substitute. 

The larger the number of substitute available, the greater the elasticity of demand. Soft drinks very elastic have several close substitute. Rice Inelastic fewer close substitute. 

Proportion of Budget. The larger the proportion of the budget, the more elastic demand is. Example: cars. the purchase of a car takes a large amount of income - small increase in price - large effect on the demand for car.

…Determinants of price elasticity of demand… 

Time period Longer time period of analysis, the GREATER price elasticity of demand is. Because consumer can make adjustment to their demand and have time to find other substitute.



Income level Those with lower income changes.



more elastic

sensitive to price

Habits. Example: smokers and drinkers - are inelastic - they have to smoke @ drink no matter how expensive it is since the goods are necessities to them.



Importance of goods. The demand for important good is inelastic we still need the goods. Example: Rice

no matter how

… price elasticity of demand and total revenue…



Can be expressed as: Total Revenue = Prices x Quantity



Have 2 situation;  If demand ELASTIC, Price change will cause Total Revenue to change in the opposite direction since the increase in price has a large impact on quantity demanded. Demand Elastic:  

P P

x Qd x Qd

= TR = TR

… price elasticity of demand and total revenue… 

If Demand INELASTIC, price change will cause Total Revenue to change in same direction since the increase in price does not have a large impact on quantity demanded. Demand InElastic:  



P P

x Qd x Qd

= TR = TR

If Demand UNITARY ELASTIC, price change

TR unchanged.

ii) Income elasticity of demand Is a measure of the responsiveness of demand for a product to a change in income.  Can be calculated by: Yn Dd = % change n quantity demanded % change in income 

iii) Cross elasticity of demand Is a measure of the responsiveness of demand for one product to a change in the price of a related product.  Can be calculated by: Cn Dd = % change in demand of good 1 % change in price of good 2 

2.6.2.elasticity in supply.  

Measure “ The Responsiveness of Quantity Supplied to a change in Price” Can be expressed by: Elasticity = % change in quantity supplied supplied % change in price



5 Degree of Elasticity of Supply 

Supply is ELASTIC if :( nSS > 1) 



Supply is INELASTIC if : (nSS < 1) 



%▲Qs = %▲P

Supply is PEFECTLY INELASTIC if : (nSS= 0) 



%▲Qs < %▲ P

Supply is UNITARY ELASTIC if ; (nSS = 1) 



%▲Qs > % ▲P

Qs totally UNRESPONSIVE to changes in price.

Supply is PERFECTLY ELASTIC if : (nSS = ∞) 

If there is changes in price, and the quantity supplied either falls to ZERO@ increases to an infinitely large value.

2.6.2.elasticity in supply. 

Example 1: One company can supply 1000 units of cars at RM20,000 each per month. When the price increase to RM30, 000 the supply is 1200 units per month. So, what is the elasticity of supply?.Determine the degree of supply.

…Determinants of price elasticity of supply… 3 factors:  Time 

More elastic if in the long run supply to the change in price. 

sellers can fully adjust their

Cost & Feasibility of storage. More elastic production cost is low. Goods that are costly to be stored will have a low elasticity



Availability of substitute. 

The larger the number of substitute for factor of production, the greater the elasticity of supply.

…..CONCLUSION….. So, u should know.. • how to calculate the demand & supply elasticity • what is Total Revenue?? • factors that determine the supply and demand elasticity.

“Supply & demand will keep real estate market stable….”