Docsity
Docsity

Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity


Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan


Guidelines and tips
Guidelines and tips

Elasticity of Demand-Engineering Economics-Lecture Slides, Slides of Microeconomics

This lecture is part of lecture series for Engineering Economics course at M. J. P. Rohilkhand University. It was delivered by Dr. Badrinath Singh to cover following points: Elasticity, Demand, Price, Quantity, Percentage, Change, Perfectly, Relatively, Unitary, Substitutes

Typology: Slides

2011/2012

Uploaded on 07/06/2012

aanila
aanila 🇮🇳

4.4

(36)

171 documents

1 / 6

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
1
Elasticity of Demand
We know, from the Law of Demand, that price and quantity
demanded are inversely related.
Now, we are going to get more specific in defining that
relationship, … allows us to analyze demand and supply with
greater precision.
We want to know just how much will quantity demanded change
when price changes? That is what elasticity of demand measures.
It is a measure of how much buyers and sellers respond to
changes in market conditions
Price elasticity of demand is a measure of how much the quantity
demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity
demanded given a percent change in the price.
Elasticity of Demand
The above formula usually yields a negative value, due to the
inverse nature of the relationship between price and quantity
demanded.
How Do We Interpret the Price Elasticity of Demand?
A good economist is not just interested in calculating numbers.
The number is a means to an end;
in the case of price elasticity of demand it is used to see how
sensitive the demand for a good is to a price change.
The higher the price elasticity, the more sensitive consumers are
to price changes.
A very low price elasticity implies just the opposite, that
changes in price have little influence on demand.
Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price
We can read it as the percentage change in quantity for a
1% change in price
Thus, if Ed = 2, that means in that part of the demand
curve, a 1% change in price will cause a 2% change in
quantity demanded. Or if we extrapolate, a 2% change in
price will cause a 4% change in quantity demanded, and
so on.
Elasticity of Demand
Degrees of Ed
Perfectly Inelastic
Ed = % Δ in Qd
% Δ in P
Ed = 0___
% Δ in P
Ed = 0 it is also called zero elasticity
docsity.com
pf3
pf4
pf5

Partial preview of the text

Download Elasticity of Demand-Engineering Economics-Lecture Slides and more Slides Microeconomics in PDF only on Docsity!

Elasticity of Demand

 We know, from the Law of Demand, that price and quantity

demanded are inversely related.

 Now, we are going to get more specific in defining that

relationship, … allows us to analyze demand and supply with

greater precision.

 We want to know just how much will quantity demanded change

when price changes? That is what elasticity of demand measures.

 It is a measure of how much buyers and sellers respond to

changes in market conditions

 Price elasticity of demand is a measure of how much the quantity

demanded of a good responds to a change in the price of that good.

 Price elasticity of demand is the percentage change in quantity

demanded given a percent change in the price.

Elasticity of Demand

 The above formula usually yields a negative value, due to the

inverse nature of the relationship between price and quantity

demanded.

 How Do We Interpret the Price Elasticity of Demand?

 A good economist is not just interested in calculating numbers.

The number is a means to an end;

 in the case of price elasticity of demand it is used to see how

sensitive the demand for a good is to a price change.

 The higher the price elasticity, the more sensitive consumers are

to price changes.

 A very low price elasticity implies just the opposite, that

changes in price have little influence on demand.

Price elasticity of demand =

Percentage change in quantity demanded

Percentage change in price

 We can read it as the percentage change in quantity for a

1% change in price

 Thus, if E

d

= 2, that means in that part of the demand

curve, a 1% change in price will cause a 2% change in

quantity demanded. Or if we extrapolate, a 2% change in

price will cause a 4% change in quantity demanded, and

so on.

Elasticity of Demand

Degrees of E

d

 Perfectly Inelastic

  • E

d

= % Δ in Q

d

% Δ in P

  • E

d

= 0___

% Δ in P

  • E d

= 0 it is also called zero elasticity

docsity.com

 Perfectly elastic demand

 Ed = % Δ in Q

d

% Δ in P

 Ed = % Δ in Q

d

 Ed = ∞

Degrees of Ed

 Relatively Inelastic or

Inelastic

E

d

= % Δ in Q

d

% Δ in P

E

d

< 1 (in absolute value)

% Δ in Q

d

< % Δ in P

 For every 1% change in P, Q

d

changes by less than 1%

 Quantity demanded does not

respond strongly to price

changes.

Degrees of E

d

 Relatively elastic or elastic

Demand

Ed = % Δ in Q

d

% Δ in P

Ed > 1 (in absolute value)

% Δ in Q

d

> % Δ in P

 For every 1% change in P,

Q

d

changes by more than

1% (in opposite direction)

Degrees of E

d

 Unitary Elastic Demand

E

d

= % Δ in Q

d

% Δ in P

E

d

= 1 (in absolute value)

% Δ in Q

d

= % Δ in P

 For every 1% change in P,

Q

d

changes by 1% (in opposite

direction)

 Quantity demanded responds

strongly to changes in price.

Degrees of Ed

docsity.com

 Necessities vs. Luxuries

• The more necessary a good is, the more inelastic the

demand for the good (and vice versa).

• With a true necessity a consumer has neither the

willingness nor the ability to postpone consumption.

• There are few or no satisfactory substitutes.

• Insulin is the ultimate necessity, so the demand for it

is inelastic.

Elasticity of Demand and Its Determinants

 Availability of information concerning substitute

goods

 The easier it is for a consumer to locate the substitute

goods, the more willing he will be to undertake the

search, and the more elastic demand will be.

 an attachment to a certain brand—either out of

tradition or because of proprietary barriers—can

override sensitivity to price changes, resulting in

more inelastic demand

Elasticity of Demand and Its Determinants

Price of Pen (P) Quantity

Demanded (Q)

T. Expenditures

or Revenue

(PxQ)

Price Elasticity

of Demand

5.00 30 150 -

4.75 40 190 E >

4.50 50 225 E>

4.25 60 255 E>

4.00 75 300 E>

3.75 80 300 E=

3.50 84 294 E<

3.25 87 282.75 E<

Total Revenue and Elasticity of Demand

 When the price elasticity of demand for a good is perfectly inelastic

(Ed = 0), changes in the price do not affect the quantity demanded for

the good; raising prices will cause total revenue to increase.

 When the price elasticity of demand for a good is relatively inelastic

(0 < Ed < 1), the percentage change in quantity demanded is smaller

than that in price. Hence, when the price is raised, the total revenue

rises, and vice versa.

 When the price elasticity of demand for a good is unitary elastic (Ed

= 1), the percentage change in quantity is equal to that in price, so a

change in price will not affect total revenue.

 When the price elasticity of demand for a good is relatively elastic

(Ed > 1), the percentage change in quantity demanded is greater than

that in price. Hence, when the price is raised, the total revenue falls,

and vice versa.

Total Revenue and Elasticity of Demand

docsity.com

 Income elasticity of demand (E

d

Y

) measures how much

the quantity demanded of a good responds to a change in

consumers’ income.

 It is computed as the percentage change in the quantity

demanded divided by the percentage change in income.

 E

d

Y

= %D in Q

d

%D in Y

Income Elasticity of Demand

 Typically, if our income rises, we buy more and visa versa.

These types of goods are called normal goods.

 E

d

Y

> 0 - normal good

 A necessity good is a good whose quantity demanded is not

very sensitive to income changes

 In other words, we buy it no matter what happens to our

income.

 If a good’s elasticity is 0 < E

d

Y

< 1 then it is a necessity good.

 A luxury good is one that we buy a lot of when our income

goes up and we cut back on significantly when our income

goes down.

 If a good’s elasticity is E

d

Y

> 1, then it is a luxury good.

 If a goods elasticity is E

d

Y

< 0 it is an inferior good

Income Elasticity of Demand

 Another type of elasticity is the Cross Price Elasticity. This gets at how

changes in price of one good can effect the demand of another

 Cross Price Elasticity of Demand (E

1,

 Cross price elasticity of demand measures the percentage change in

demand for a particular good caused by a percent change in the price

of another good.

 It measures the responsiveness of quantity demanded of good one

when the price of good 2 changes.

E

1,

= % ∆ in Q

d

of Good 1

% ∆ in P of Good 2

Cross Price Elasticity of Demand

yo x

x y

y xo

P

Q

E

P Q

 This relationship is called substitutes and can be seen

when E

 This relationship is called complements and can be seen

when E

 For example, if, in response to a 10% increase in the price

of fuel, the demand of new cars that are fuel inefficient

decreased by 20%, the cross elasticity of demand would

be: - 20%/10% = - 2

 A negative cross elasticity denotes two products that are

complements,

 while a positive cross elasticity denotes two substitute

products.

Cross Price Elasticity of Demand

docsity.com