ELASTICITY

Contents

Elasticity of demand

Elasticity of supply

Elasticity of demand

*Price elasticity of demand (EDP)

*Income elasticity of demand (EDI)

*Cross elasticity of demand (EDPy)


Elasticity of demand

Price elasticity of demand (EPD)

- The percentage changed in quantity demanded
resulting from 1% change in price
-
% ∆Q
E PD =
% ∆P
Elasticity of demand
Price elasticity of demand (EPD)

Point elasticity

% ∆Q ∆Q ∆P ∆Q P P
E D
= = : = . = Q '( P ) .
% ∆P
P
Q P ∆P Q Q

E.g: Demand curve: P = 18 – 2Q and point A (P=6, Q=6)

What is price elasticity of demand at point A

EDP= -1/2 . 6/6= -1/2

⇒Conclusion:
-
-
Elasticity of demand
Price elasticity of demand (EPD)

Arc elasticity
Q1 − Q2
Q1 + Q2
E PDAB = 2
P1 − P2
P1 + P2
2

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?

Elasticity of demand
Conclusion: Price elasticity of demand always:

- Unit – free and negative value

- Usually use absolute value
Elasticity of demand
P
Price elasticity of demand
(EPD)
• /E/ < 1: Inelastic demand
• - 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 Q
or necessity

Elasticity of demand
Price elasticity of demand (EPD)
• /E/ > 1: Elastic demand,
• - flat demand curve P
- small change in price, large
change in quantity demanded
- Consumers are very sensitive
to the change in price
- the goods is easy to replace

Q
Elasticity of demand
Price elasticity of demand (EPD)

• /E/ = 1: Unitary-elastic demand

• - slope down demand curve
- %change in price equal to %
change in quantity demanded

Elasticity of demand
Price elasticity of demand (EPD)
• /E/ = 0: Perfectly Inelastic demand P
• - Demand curve is parallel to the
vertical axis
- Change in price doesn’t affect
on quantity demanded
- Consumers are not sensitive
to the change in price
- The good is irreplaceable
Q
Elasticity of demand

Price elasticity of demand (EPD)

• /E/ = ∞: Perfectly elastic demand
• - Demand curve is parallel to the
horizontal axis
- Change in price affects totally on
quantity demanded
- Consumers are perfectly sensitive to
the change in price
- The good is in the perfect
competition market

Elasticity of demand
Price elasticity of demand (EPD)

• 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
Elasticity of demand
Price elasticity of demand (EPD)

• The relationship between

EPD, P and TR

/E/<1: P ↓
TR ↓

Elasticity of demand
Price elasticity of demand (EPD)
* The relationship between EPD, P and TR
/E/>1: TR ↑ when P↓
Elasticity of demand
E<1 E=1 E>1
• The relationship
between EPD, P and TR

P TR TR

P TR TR

Elasticity of demand

Income elasticity of demand (EID)

- The percentage changed in quantity demanded
resulting from 1% change in income
-
%∆Q I
EID = = Q '( I ) .
% ∆I Q

- EID <0: Inferior goods

- EID >0: Normal goods
- EID >1: Luxury goods
Elasticity of demand
Cross-elasticity of demand (EPyD)
- The percentage changed in quantity demanded resulting from
1% change in price of related goods

%∆Q P
EPDY = = Q' PY . Y
%∆PY Q

EPyD > 0 : Substitutes goods

EPyD < 0 : Complements goods

EPyD = 0 : Independent goods

Elasticity of supply

Price elasticity of supply (EPS)

- The percentage changed in quantity supplied resulting
from 1% change in price
-
% ∆QS
E PS =
% ∆P
Elasticity of supply

E=0: Perfectly inelastic supply

E<1: Inelastic supply

E>1: Elastic supply

E=1: Unitary elastic supply

E=∞: Perfectly elastic supply

Elasticity of supply
Factors affecting on elasticity of supply:

- Time needed to find substitutes resources for inputs

- Availability of inputs
Questions:
1. If 10% increase in A’s price leads to 2% increase in total revenue,
A is elastic – demand

2. 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)

3. All points in a demand curve has the same value of slope and
price elasticity of demand (point elasticity)

4. “Food” is less elastic demand than “Kinh Do soft cake”

5. 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.