ELASTICITY
1. Elasticity is a general measure of the responsiveness of an economic
variable in response to a change in another economic variable.
The three major forms of elasticity are price elasticity of demand, cross-price
elasticity of demand, and income elasticity of demand.
The four factors that affect price elasticity of demand are
(1) availability of substitutes
(2) if the good is a luxury or a necessity
(3) the proportion of income spent on the good
(4) duration of price change
If income elasticity is positive, the good is normal. If income elasticity is
negative, the good is inferior.
2. Elasticity and Revenue
Revenue = Quantity demanded x Price
If quantity demanded increases by 10%, and price decreases by 5% (this
means that the product is elastic), then revenue increases.
3. The price change of a substitute or complementary product affects the
quantity demanded of the other substitute or complementary product.
Substitutes have a positive cross price elasticity of demand.
Complements have a negative cross price elasticity of demand.
4.
5. Inferior Goods vs. Normal Goods
Depending on the values of the income elasticity of demand, goods can be
broadly categorized as inferior and normal goods :
a. Normal goods have a positive income elasticity of demand; as
incomes rise, more goods are demanded at each price level.
Normal goods whose income elasticity of demand is between zero and
one are typically referred to as necessity goods, which are products
and services that consumers will buy regardless of changes in their
income levels. Examples of necessity goods and services include
tobacco products, haircuts, water, and electricity.
b. Inferior goods have a negative income elasticity of demand; as
consumers' income rises, they buy fewer inferior goods. A typical
example of such a type of product is margarine, which is much
cheaper than butter.
6. Determinants of price elasticity of demand are:
The availability of close substitutes. The more substitutes, the
greater the elasticity.
The product’s expense to the consumer relative to her/his income
or wealth. The higher the expense, the greater the elasticity.
The period of time under consideration. The longer the time
period, the greater the elasticity.
7. Elastic
8. Elasticity Demand ?
Known :
P1 = 13,000
P2 = 17,000
Qd1 = 20 kg
Qd2 = 18 kg
( )
18−20
19
Ep=
17,000−13,000
15,000
( )
−2
19
Ep=
4,000
15,000
Ep= ( −219 ) . 154
Ep= ( −15
38 )
=−0 ,39
The elasticity of demand is approximately -0.39, which means that if the
price increases by 100%, the quantity demanded will decrease by about
39%.
ESSAY
1. The condition of the laptop market in Japan is illustrated by the following
table of demand and supply.
Price (Yen) Requested amount Amount offered
(units) (units)
200 600 800
400 400 1000
600 200 1200
a. Look for laptop demand and supply functions!
Qd = a – b(P)
Qd1= a – b (200) Qs = c + d (P)
600= a – 200b… (1) Qs1 = c + d (400)
Qd2= a – b (400) 1000 = c + 400d … (1)
400 = a – 400b … (2) Qs2 = c + d (600)
1200 = c + 600d … (2)
600= a – 200b
400= a – 400b -
1000 = c + 400d
200= 200b
1200 = c + 600d -
b=1
200 = 200d
Qd1 = a – 200b
d=1
600 = a – 200 (1)
Qs1 = c + 400 (1)
a = 800
1000 = c + 400
Qd = 800 – P (Demand
Function) c = 600
Qs = c + d (P)
Qs = 600 + P (Supply
Function)
b. What is the price and balance amount of the laptop? Equilibrium
Qs = Qd
800 – P = 600 + P
2P = 800 - 600
2P = 200
P = 100
c. What is the elasticity of demand and what does it mean?
Elasticity of demand is the change of quantity demanded of products
in response to the change of price.
d. What is the elasticity of supply and what does it mean?
Elasticity of supply is the change of quantity of supply of products in
response to the change of price.
e. When the price of a laptop is $50/unit, there will be an excess…………
of………
P = 50, Q = … ?
Qd = 800 – P
Qd = 800 – 50
Qd = 750
Qs = 600 + P
Qs = 600 + 50
Qs = 650
Qd > Qs …. There is an excess of demand
Qd – Qs = 100
f. Draw a graph of all the conditions above!
2. Qd = 50,000 – 2P
Qs = –10000 + 4P
a. Price and Q in equilibrium
Qd = Qs
50,000 – 2P = -10,000 + 4P
6P = 50,000 + 10,000
P = 60,000/6
P = 10,000
Q = 50,000 – 2P
Q = 50,000 – 2 (10,000)
Q = 50,000 – 20,000
Q = 30,000
b. Ed= ?