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Elasticity of Demand and Supply

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by

Miss Cummins

on 16 November 2016

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Transcript of Elasticity of Demand and Supply

What will we look at today ?
Elasticity

Elastic and Inelastic goods

Price Elasticity of Demand

So what do we know already?
Law of Demand

Price of good rises > quantity demanded falls

Price of good falls > quantity demanded rises
Elasticity
A measure of
responsiveness
of the
quantity demanded
of a good to a change in some
variable.
P
rice
E
lasticity of
D
emand
Measures the proportional or

% change in the
quantity demanded
for a good caused by the proportional or % change in the
price
of the good itself.
Degree of Elasticity
Varies products


Elastic
Lets put this all into action !
Price Elasticity of Demand
Ms Cummins
However this does not tell us the EXTENT of the increase or decrease in quantity demanded >
elasticity
.
Price of a good
Price of another good
Consumer's income
Proportional or % change in
quantity demanded
of a good is
GREATER
than the proportional or % change in
price
of good itself.


Unitary Elastic
Proportional or % change in
quantity demanded
is
equal
to the proportional or % change in the
price
of that good
Example : 30% decrease in price = 30% increase in quantity
When measuring the elasticity of a good we use the formula
After we do our calculations we need to decided on the
degree of elasticity

If elasticity is :
Greater than 1 =
elastic

Between 0 and 1 =
inelastic

Equals 1 =
unitary
elastic


Examples:
+1.5
-1.2
-0.4
+0.6
-1
+1
Elastic
Inelastic
Unitary
Lets do out an example
Use the sheets distributed
3 min to complete
Swap for correction
Summary
****Important point
Look at number and sign SEPARATELY


Number = degree of elasticity

Sign -->
negative
= normal good
-->
positive
= giffen good
Perfectly Elastic
Any increase in price = quantity falls to zero
Perfectly Inelastic
Proportional or % change in
price of a good
causes
no change
in quantity demanded
Examples ???
Unitary elastic
Proportional or % change in
quantity demanded
of a good is
LESS
than the proporational or % change in the
price
of that good


Inelastic
∆ = change
Q1 = Original Quantity
Q2 = New Quantity
P1 = Original Price
P2 = New Price

Solution
Q1 = 50 P1 = €1.50
Q2 = 90 P2 = €0.50
∆Q = +40 ∆P = -€0.50
+40 1.50 + 1
-0.50 50 + 90
= -1.4
Demand = Elastic as PED is > 1
Negative sign = normal good
Thank You !
***Pg 28 Log Tables
Luxury good > price increase will
discourage
consumers
Necessities >insensitive to change as they are
needed
Luxury good
If the price goes
up
= demand goes
down
Addictive items
Necessities
Full transcript