(FS) 5-Elasticity
Page 1: Elasticity
Page 2: Price Elasticity of Demand
Definition: Measures buyers’ responsiveness to price changes.
Types of Demand:
Elastic Demand:
Sensitive to price changes.
Results in a large change in quantity demanded.
Inelastic Demand:
Insensitive to price changes.
Results in a small change in quantity demanded.
Page 3: Price Elasticity of Demand Formula
Formula:
Ed = (Percentage Change in Quantity Demanded of Product X) / (Percentage Change in Price of Product X)
Page 4: Price Elasticity of Demand Example
Example Calculation:
If a cinema increases its ticket price from $10 to $11:
Demand falls from 3500 to 3325 customers per week.
Calculate PED:
PED = ???
Page 5: Elimination of the Minus Sign
Explanation:
The inverse relationship between price and quantity demanded results in a negative elasticity coefficient.
Economists typically ignore the minus sign, presenting only the absolute value.
Page 6: Midpoint Formula for PED
Standard Method:
Different results depending on direction of changes.
Example:
From A to B:
Price rises 25%, Quantity falls 33%,
PED = 33/25 = 1.33
From B to A:
Price falls 20%, Quantity rises 50%,
PED = 50/20 = 2.50
Page 7: Price Elasticity of Demand Calculation
Equations:
% change in Price = (P_new - P_old) / P_old x 100%
% change in Quantity = (Q_new - Q_old) / Q_old x 100%
Example:
Given prices and quantities, calculate PED.
Price increase from $200 to $250:
% change in P = (250-200)/200 x 100% = 25%
Quantity decrease from 12 to 8:
% change in Q = (8-12)/12 x 100% = -33.33%
PED = |-33.33% / 25%| = 1.33
Page 8: Interpretation of Elasticity of Demand
Elasticity Ranges:
Ed > 1: demand is elastic.
Ed = 1: demand is unit elastic.
Ed < 1: demand is inelastic.
Extreme Cases:
Perfectly Inelastic: Ed = 0.
Perfectly Elastic: Ed approaches infinity.
Page 9: Demand Curve Representation
Graph Representation:
Perfectly Inelastic Demand: vertical demand curve.
Demand Curve Location: illustrates inelastic demand properties.
Page 10: Elastic Demand Curve Representation
Graph Representation:
Perfectly Elastic Demand: horizontal demand curve.
Dynamics of supply and demand affected at these extremes.
Page 11: Determinants of Elasticity of Demand
Factors Influencing Elasticity:
Substitutability: More substitutes yield more elastic demand.
Proportion of Income: Higher income proportion leads to more elastic demand.
Luxuries vs. Necessities: Luxury goods tend to have more elastic demand.
Time: Increased time for adjustment results in more elastic demand.
Page 12: More Determinants of Elasticity
Additional Influences:
Habits/Addictions: Typically inelastic.
Complementary Goods: Generally inelastic.
Frequency of Purchase: Frequently bought items are often inelastic.
Durability: Durable goods often exhibit elastic demand.
Page 13: Total Revenue Test
Total Revenue Formula: Total Revenue (TR) = Price (P) x Quantity (Q)
Elasticity Effects on Revenue:
Inelastic Demand: Price and TR move together.
Elastic Demand: Price and TR move oppositely.
Page 14: Total Revenue Test Example
Scenario Analysis:
Lower price with elastic demand causes a gain that exceeds loss.
Demonstrates the importance of elasticity in revenue.
Page 15: Inelastic Demand Example
Scenario Analysis:
Lower price with inelastic demand causes loss to exceed gain.
Important to recognize the impact on revenue dynamics.
Page 16: Unit Elastic Demand Example
Scenario Analysis:
Lower price with unit elastic demand shows gains and losses equal.
Indicates balance in revenue generation at unit elasticity.
Page 17: Price Elasticity of Demand for Movie Tickets
Data Summary Table:
Price and corresponding quantity of tickets demanded along with calculated elasticity and total revenue.
Importance of understanding elasticity in pricing strategies.
Page 18: Elasticity and Total Revenue
Graphical Representation:
Depicts the relationship between price, quantity demanded, and total revenue.
Differentiates between elastic, inelastic, and unit elastic demand visually.
Page 19: Summary of Price Elasticity of Demand
Absolute Value of Elasticity Coefficient:
Ed > 1: Demand is elastic, total revenue decreases with a price increase and vice versa.
Ed = 1: Unit elastic, total revenue remains unchanged with price changes.
Ed < 1: Inelastic demand, total revenue increases with a price increase.
Page 20: Significance of PED
Producers:
Understanding PED assists in market share and total revenue optimization.
Government:
Important for predicting revenue impacts from pricing strategies.
Page 21: Price Elasticity of Supply
Definition: Measures sellers’ responsiveness to price changes.
Types of Supply:
Elastic Supply: Producers respond readily to price changes.
Inelastic Supply: Producers are less responsive to price changes.
Page 22: Price Elasticity of Supply Formula
Formula:
Es = (Percentage Change in Quantity Supplied of Product X) / (Percentage Change in Price of Product X)
Page 23: Price Elasticity of Supply Example
Example Calculation:
If market price of beans increases from $2 to $2.20, resulting in supply increase from 10,000 units to 10,500 units:
PES = ???
Page 24: Interpretation of Elasticity of Supply
Elasticity Ranges:
Es > 1: Supply is elastic.
Es = 1: Supply is unit elastic.
Es < 1: Supply is inelastic.
Extreme Cases:
Perfectly Inelastic: Es = 0.
Perfectly Elastic: Es approaches infinity.
Page 25: Supply Curve Representation
Graph Representation:
Perfectly Inelastic Supply: vertical supply curve.
Supply Curve Location: illustrates inelastic supply properties.
Page 26: Elastic Supply Curve Representation
Graph Representation:
Perfectly Elastic Supply: horizontal supply curve.
Explains responsiveness of supply based on price changes.
Page 27: Determinants of Elasticity of Supply
Factors Influencing Elasticity:
Availability and Mobility: Easy relocation of production factors increases elasticity.
Stock Holding Ability: Type of goods affects elasticity.
Page 28: More Determinants of Elasticity of Supply
Additional Influences:
Technology Advancements: Increase output flexibility, enhancing elasticity.
Time Dimensions: Elasticity increases with longer adjustment periods for firms.
Page 29: Significance of PES to Firms
Importance of High PES:
Facilitates increased sales revenue and profits.
Strategies for Responsiveness:i. Creating spare capacityii. Keeping large stock volumesiii. Upgrading storage systemsiv. Adopting new technologiesv. Training employees for better mobility
Page 30: Strategies for Improving PES
Methods for Firms:
Implementing spare capacity and efficient stock management increases PES.
Embracing innovation and staff training enhances market responsiveness.
Page 31: Cross Elasticity of Demand
Definition: Measures responsiveness of quantity demanded of one good due to a price change of another good.
Signs:
Substitutes: Positive cross elasticity.
Complements: Negative cross elasticity.
Independent Goods: Zero cross elasticity.
Page 32: Visualization of Cross Elasticity
Understanding Relationships:
Negative cross elasticity in complements versus positive in substitutes, illustrating varied consumer behavior.
Independent Goods: Price changes don't affect demand.
Page 33: Cross Elasticity of Demand Calculation
Example Scenario:
What is the cross elasticity of demand for Product Y when the price of Product X rises from $10 to $15?
Data provided for calculations of changes in quantity demanded for both products.
Page 34: Income Elasticity of Demand
Definition: Measures buyers' response to changes in income.
Types:
Normal Goods: Positive income elasticity.
Inferior Goods: Negative income elasticity.
Formula:
Ei = (Percentage Change in Quantity Demanded) / (Percentage Change in Income)
Page 35: Summary of Cross and Income Elasticities
Understanding Coefficients:
Cross elasticity indicates how quantity demanded shifts in relation to price changes of other goods.
Income elasticity assesses how demand shifts with income changes, clarifying responses for normal and inferior goods.