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Chapter 3: Elasticity
Transcript of Chapter 3: Elasticity
Measures the responsiveness of one variable to a certain change of another variable
The percentage change in one variable in relation to the percentage change in another variable
The basic formula used to determine elasticity is:
percentage change in variable x
percentage change in variable y Price Elasticity
Measures the percentage change in quantity with respect to percentage change in price
Price Elasticity of Demand
Measures the responsiveness of the quantity demanded with respect to its price
of Elasticity Chapter 3 The Concept of
Elasticity Five Types of Elasticity 1. Elastic
percentage change in variable x is greater than the percentage change in variable y.
elasticity coefficient is greater than 1
percentage change in variable x is less than the percentage change in variable y
elasticity coefficient is less than 1
3. Unitary Elasticity
percentage change in variable x is equal to the percentage change in variable y
elasticity coefficient is equal to 1
4. Perfectly Elastic
any change in variable y will have an infinite effect on variable x
5. Perfectly Inelastic
any change in variable y will have no effect on variable x Basic formula:
ED = Q2 - Q1
P2 - P1
P2 - P1
P1 Arc Elasticity
Earc = Q2 - Q1 x (P1 + P2) / 2
P2 - P1 (Q1 + Q2) / 2
Classification of Price Elasticity of Demand
Elastic Demand – a certain good is price elastic when the elasticity coefficient is greater than 1
Inelastic Demand – a certain good is price inelastic when the elasticity coefficient is less than one
Unitary Elastic Demand – a certain good is unitary when elasticity coefficient is equal to 1
Perfectly Elastic Demand – a good is perfectly elastic when elasticity coefficient equals infinity
Perfectly Inelastic Demand – a good is perfectly inelastic when elasticity coefficient equals zero
Determinants of Price Elasticity of Demand
The importance or degree of necessity of the goods.
Number of available substitutes.
The properties of income in price changes.
The time period.
Price Elasticity of Supply
Measures the responsiveness of quantity supplied in response to a percentage change in the price of the goods.
Formula of Price Elasticity of Supply:
ES = Q2 - Q1
P2 - P1
Classification of Price Elasticity of Supply
Elastic Supply – a change in price leads to a greater change in quantity supplied
Inelastic Supply – a change in price leads to a lesser change in quantity supplied
Unitary Elastic Supply – a change in price leads to an equal change in quantity supplied
Perfectly Elastic Supply – this occurs when there is no change in price, and there is an infinite change in quantity supplied
Determinants of Price Elasticity of Supply
Monetary or Intermediate
Income Elasticity of Demand
the responsiveness of quantity demanded in response to change in income
Ey = Qd2 - Qd1
M2 - M1
M1 Summary of Income Elasticity Coefficient TYPES OF GOODS INCOME ELASTICITY COEFFICIENT Normal good
Normal, Luxury good
Normal, Necessity good
Positive elasticity ((E > 0)
Negative elasticity ((E < 0)
Positive elasticity greater than
one (E > 1)
Positive elasticity but less than
one ((E < 1)
Cross Elasticity of Demand
Measures the responsiveness of quantity demanded of a good to a change in the price of another good
Exy = Qd2 - Qd1
Py2 - Py1
Cross elasticity demand simply measures whether the good is a:
Complementary good – a good that is used in conjunction with other goods
Cross elasticity of demand is negative
Supplementary good – a good that can be used in place of another
Cross elasticity of demand is positive
Importance and Application of Elasticity:
Helps every policy formulating body develop appropriate strategies and programs
Determine the effect of price changes on the revenue
Hence, producers can asses consumers’ responsiveness with respect to any change in the price of commodity
end of chapter 3....