BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social...
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BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen CHAPTER 6 ELASTICITY ANALYSIS 2 nd Semester, S.Y 2013 – 2014
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Transcript of BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social...
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
CHAPTER 6ELASTICITY ANALYSIS2nd Semester, S.Y 2013 – 2014
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
The Concept of ElasticityElasticity is a measure of the degree of responsiveness or sensitivity of one variable to changes in another variable.
The greater the elasticity, the greater the responsiveness.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Importance of Elasticity
Relationship between changes in price and total revenue
Importance in determining what goods to tax (tax revenue)
Importance in analysing time lags in production.
Influences the behaviour of a firm.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Elasticity
• The responsiveness of one variable to changes in another.
• When price rises, what happens to demand?
• Demand falls.• BUT!• How much does demand fall?
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
• If price decreases by 10% - what happens to demand?
• We know demand will increase• By more than 10%?• By less than 10%?• Elasticity measures the extent to which
demand will change
Elasticity
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Four Types of Elasticity
Price Elasticity of Demand Income Elasticity of Demand Cross-price Elasticity Price Elasticity of supply
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Four Types of Elasticity
Price Elasticity of Demand The responsiveness of demand to changes in price
Income Elasticity of Demand The responsiveness of demand to changes in incomes
Cross-price Elasticity The responsiveness of demand of one good to changes
in the price of a related good – either a substitute or a complement
Price Elasticity of Supply The responsiveness of demand to changes in price
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Price Elasticity of Demand
Price Elasticity of Demand the responsiveness of demand to changes in
price the percentage change in quantity demanded
divided by the percentage change in price. % change in quantity demanded is greater
than % change in price – elastic % change in quantity demanded is less than
% change in price - inelastic
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
The Formula:
% Change in Quantity Demanded___________________________
% Change in Price
Price Elasticity of Demand
Where Original Quantity Demanded Original Price New Quantity Demanded New Price
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Interpreting the Price Elasticity of Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Elastic Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Inelastic Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Unit Elastic Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Perfectly Elastic Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Perfectly Inelastic Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Price Elasticity of Demand - Summary
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Selected Goods – Price Elasticities of Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Let’s Check Your Understanding
1. When the price of gasoline per liter rises from P40 to P50, a taxi driver reduces it demand from 90 liters to 85 liters a week. Based on the data, compute for the price elasticity of demand. Interpret the computed elasticity value.
2. The price of Baguio strawberries falls from P150 to P100 per carton and the quantity demanded goes from 1,000 to 2,000 cartons. Compute for the price elasticity of demand. Interpret the computed elasticity value.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Identify the following goods as either elastic or inelastic.
1. Pandesal2. Mango3. Grapes4. Detergent5. Tide Detergent6. Coffee7. LPG8. Digital camera9. Condominiums10. Household appliances
Let’s Check Your Understanding
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Total Revenue and the Price Elasticity of Demand
Total revenue (TR) defined as the total value of sales of a
good or service is the total amount the seller receives from
the sale of a product in a particular time period; it is calculated by multiplying the product price (P) by the quantity sold (Q). In equation form:
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Graphical Illustration – Total Revenue
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Total Revenue Test
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Total Revenue Test
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Price Change Impact on Total Revenue
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Price Elasticity and the Total-Revenue Curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
The Price Elasticity of Demand Changes Along the Demand Curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Income elasticity of demand measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good. The coefficient of income elasticity of demand Ei is determined with the formula
Normal Goods For most goods, the income-elasticity coefficient Ei is positive, meaning that more of them are demanded as incomes rise. Such goods are called normal goods. But the value of Ei varies greatly
among normal goods. Inferior Goods A negative income-elasticity coefficient designates an inferior good. Retread tires, cabbage, long-distance bus tickets, used clothing, and muscatel wine are likely candidates. Consumers decrease their purchases of inferior goods as incomes rise.
Income Elasticity of Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Interpreting the Income Elasticity of Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
For example: Good is an inferior good but inelastic – a rise in
income of 3% would lead to demand falling by 1.8%
Good is a normal good but inelastic – a rise in incomes of 3% would lead to demand rising by 1.2%
Good is a normal good and elastic – a rise in incomes of 3% would lead to demand rising by 4.8%
, Good is an inferior good and elastic – a rise in incomes of 3% would lead to a fall in demand of 6.3%
Interpreting the Income Elasticity of Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Let’s Check Your Understanding!
Income (per
month)
Quantity Demanded (No. of Meals)
P8,000 6
P12,000 5
Given the demand data for carinderia meals subject to the change in income, calculate the income elasticity for carinderia meals. Is demand elastic, inelastic or unitary? Is the good normal or inferior?
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Cross Elasticity Of Demand The responsiveness of demand of one good to changes in
the price of a related good – either a substitute or a complement/
Measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y). It is expressed by the formula.
Cross Price Elasticity of Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Cross-Price Elasticity of Demand
Goods which are complements: Cross Elasticity will have negative sign
(inverse relationship between the two)
Goods which are substitutes: Cross Elasticity will have a positive sign
(positive relationship between the two)
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Interpreting the Cross-Price Elasticity of Demand
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Price Elasticity of Supply
Price Elasticity of Supply The responsiveness of supply to changes in price. If is inelastic - it will be difficult for suppliers to
react swiftly to changes in price. If is elastic – supply can react quickly to changes
in price. The formula is expressed by
𝐸𝑠=% h𝐶 𝑎𝑛𝑔𝑒 𝑖𝑛𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑
% h𝐶 𝑎𝑛𝑔𝑒 𝑖𝑛𝑃𝑟𝑖𝑐𝑒
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Elastic Supply
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Inelastic Supply
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Unit Elastic Supply
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Perfectly Elastic Supply
BACHELOR OF ARTS IN ECONOMICS Econ 111 – ECONOMIC ANALYSIS
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Perfectly Inelastic Supply
