Elasticity
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Elasticity refers to the responsiveness of one economic variable to changes in another. There are several types of elasticity: - Price elasticity of demand measures the responsiveness of demand to price changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. - Income elasticity of demand measures responsiveness of demand to changes in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. - Price elasticity of supply measures responsiveness of supply to price changes. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.
Elasticity
- 1. ElasticityElasticity By Hira Saeed.By Hira Saeed. University Of KarachiUniversity Of Karachi
- 2. Elasticity • Elasticity is the measurement of how responsive an economic variable is to a change in another. • Responsiveness of household to change in Prices and Income. • It Measures the responsiveness in terms of direction as well as magnitude of change. • To what extent demand is increasing due to change in price or income.
- 3. Price Elasticity Of Demand • Responsiveness of demand due to change in prices. • it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). • e > 1-elastic, e < 1-Inelastic, e=1-unitary elastic.
- 4. Price Elasticity Of Demand Types Own Price ElasticityOwn Price Elasticity • Percentage change in Quantity demanded of a good due to change in its price by one percent. • Own Price elasticity = %Change in quantity demanded of X %Change in Price of X • P = QD • Generally own price elasticity is negative (Since the law of demand holds generally)
- 5. Price Elasticity Of Demand Cross Price ElasticityCross Price Elasticity • Percentage change in Quantity demanded of a good due to change in the price of some other goods by one percent. • cross price elasticity = %change in quantity demanded of X %change in the price of good Y • One change is positive, the other will be negative. • In case of complimentary goods, Cross price elasticity will be negative. • If the two goods aren't substitutes of Each other cross price elasticity will be 0 Substitute : Tea and Coffee, Margarine and Butter. Complimentary :sugar And tea, hot dog and Hot dog buns.
- 6. Price Elasticity Of Demand %Change in quantity demanded of X %Change in Price of X • = ΔQd / ΔP . P1 / Q1 • = Q2- Q1 / P2 – P2 . P1 / Q1 • = 120-100 / 2.20-2.00 . 2.00 / 100 • = 20 / 0.2 . 2.00 / 100 • = 100 . 0.02 • = 2 • Here price elasticity of demand is elastic because e > 1 • Demand curve is positively leftward sloped. 120100 2.20 2.00 Quantity demanded Price
- 7. Income Elasticity Of Demand • Measures the percentage change in the amount of a commodity purchased per unit of time resulting from a given percentage change in a consumer’s income. • eM = %change in quantity demanded of X %change in income
- 8. Income Elasticity Of Demand Types of Goods • When income elasticity is negative, the good is inferior • When income elasticity is positive, the good is normal. • eM > 0 - Normal Goods eM > 1 – Luxury 0 < eM < 1 - Necessity • eM < 0 - Inferior Goods Thus, a good may be Luxury at low levels Of income. A necessity at inter- Mediate levels of Income. Inferior good at high Levels of income
- 10. Arc Elasticity • The co-efficient of price elasticity of demand between two points on a demand curve is called arc elasticity. Mid point Elasticity at pointMid point Elasticity at point AA To BTo B • Mid point of Q = (200+300) / 2 = 250 • Mid Point of P = (3+4) / 2 = 3.5 • Q % = (100/250) = 40% • P % = 1/3.5 = 28.57 • PED = 40/-28.57 = - 1.4
- 11. Point Elasticity • The coefficient of price elasticity of demand at a particular point on a demand curve. We can find elasticity at B for the Demand curve. • Quantity increase from 200 to 300 = 100/200 = 50% • Price falls from 4 to 3 = 1/4 = -25% • Therefore PED = 50/ -25 = –2.0
- 12. Price Elasticity Of Supply. • It measures the percentage change in the quantity supplied of a commodity per unit of time resulting from a given percentage change in the price of the commodity. • eS = %change in the quantity supplied %change in price
- 13. Price Elasticity Of Supply. • When the supply curve is positively sloped price and quantity move in the same direction and e > 0. • Supply curve is said to be elastic if eS > 1, inelastic if eS < 1, unitary elastic if eS = 1
- 14. Price Elasticity Of Supply. • eS = %change in the quantity supplied %change in price • =ΔQs / ΔP . P1 / Q1 • =Q2 –Q1 / P2-P1 . P1 / Q1 • =120-100 / 2.20-2.00 . 2.00 / 100 • =20 / 0.2 . 2.00 / 100 • =100 . 0.02 • =2 • Here supply curve is said to be elastic because eS > 1 • Supply curve is upward positively sloped.