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Elasticity

(Demand)

Aji Raditya
week_06
INTRODUCTION
'The prices of cars increase by 5%'
'The prices of computers decrease by 8%'

Significant as they may seem, the above statements


alone are of little value to firms.
However, this information is not sufficient.
What firms require is a numerical value that outlines
the responsiveness of quantity demanded to such
price changes at various price levels.
INTRO…
For example, when the price of a car is £9000,
will a 5% increase in price result in a 5%
decrease in demand, or a larger percentage
decrease in demand???

When the price of a car is £9200, will a 5%


increase in price result in a smaller or larger
percentage decrease in demand???
CONCEPT
The concept of elasticity, as used in economics,
is the ratio of the percentage change in the
quantity demanded (or supplied) to a percentage
change in an economic variable, such as price,
income, etc.

Elasticity may be used to predict the


responsiveness of demand (and supply) to changes
in such economic variables.
Price elasticity of demand measures the
responsiveness (sensitivity) of quantity demanded to
changes in the good's own price. It is also referred
to as own-price elasticity. It is represented by the
general elasticity formula:
Note:
The negative sign associated with εd
indicates the direction and magnitude of the
responsiveness of one variable w.r.t. another.
A negative sign indicates that an increase
in one variable is accompanied by a
decrease in the other or vice versa. A
positive sign indicates that an increase
(decrease) in one is accompanied by an
increase (decrease) in the other.
Example:
In 1960, the price elasticity of butter in a
certain country was estimated to be −1.

This means that an increase of 1% in the


price would lead to a decrease of 1% in the
demand, if all the other factors that
influence the demand remained constant.
Note:
There is a convention in some economic
textbooks to give the numerical value of
elasticity
without the sign. This is known as the absolute
value or magnitude of elasticity, |ε| , which only
indicates the magnitude of the responsiveness
of one variable to a change in another and not
the direction of the responsiveness.
Elasticity Coefficient
Perfectly Inelastic Demand
- Elasticity equals 0
Price Demand

1. An $5
increase
in price... 4

100 Quantity
2. ...leaves the quantity demanded unchanged.
Inelastic Demand
- Elasticity is less than 1
Price

1. A 25% $5
increase
in price... 4

Demand

90 100 Quantity
2. ...leads to a 10% decrease in quantity.
Unit Elastic Demand
- Elasticity equals 1
Price

1. A 25% $5
increase
in price... 4

Demand

75 100 Quantity
2. ...leads to a 25% decrease in quantity.
Elastic Demand
- Elasticity is greater than 1
Price

1. A 25% $5
increase
in price... 4

Demand

50 100 Quantity
2. ...leads to a 50% decrease in quantity.
Perfectly Elastic Demand
- Elasticity equals infinity
Price
1. At any price
above $4, quantity
demanded is zero.

$4 Demand

2. At exactly $4,
consumers will
buy any quantity.

3. At a price below $4, Quantity


quantity demanded is infinite.
EXAMPLE
Given the demand function for computers
as P = 2400 - 0.5Q.
(a) Determine the elasticity of demand
when P = 1800.
(b) If the price of computers increases by
12%, calculate the percentage change in
the quantity demanded at P = 1800.
Solution
a) Q P
d  .
P = 2400 - 0.5Q P Q
0.5Q = 2400 - P   4800  2 P  1800
d  .
Q = 4800 - 2P P  4800  2 1800  
1800
 d  2.
1200
 d  3
The coefficient of point elasticity of demand is εd. Which indicates that
at the price P = 1800 a 1% increase (decrease) in price will cause a
3% decrease (increase) in the quantity of computers demanded.
Demand is elastic, | εd | > 1.
Solution
b) Remember the definition:

∆𝑄(%)
𝜀𝑑 =
∆𝑃(%)
∆𝑄 % = ∆𝑃 % . 𝜀𝑑
∆𝑄 % =12%.(-3)
∆𝑄 =36%
If The price increased by 12% than the quantity demanded
decreases by 36%. Demand is strongly responsive to price change
and is described as elastic demand.
Question
Question
Given the demand function 𝑃 = 60 − 𝑄 2 .
Calculate the point elasticity of demand at P =
44.
TERIMA KASIH

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