Chapter 4 Elasticity of Supply and Demand PDF

CHAPTER 4 – ELASTICITY OF SUPPLY AND DEMAND Prepared by: Rolando M. Solano Instructor  OTHER CONCEPTS OF ELASTICITY  Elasticity - It is a measure used in response to changes of demand and supply.  Price Elasticity - A measure used in determining the percentage change in qu...

CHAPTER 4 – ELASTICITY OF SUPPLY AND DEMAND Prepared by: Rolando M. Solano Instructor  OTHER CONCEPTS OF ELASTICITY  Elasticity - It is a measure used in response to changes of demand and supply.  Price Elasticity - A measure used in determining the percentage change in quantity against the percentage change in price.  Income Elasticity - The percentage change in quantity compared to the percentage change in income.  Cross Elasticity - The percentage change in quantity of one good compared to the percentage change in the price of related goods. Elasticity – refers to the degree of response of demand and supply to a change in price or nonprice determinant.  Formula of Elasticity Ending Quantity – Beginning Quantity Average Quantity_________ or Ending Price – Beginning Price from $5 to $10. Example : Price changes Average Quantity change from 30 to 20. What is Price the price elasticity of demand? What is Price Elasticity What is Price Elasticity PRICE ELASTICITY – HIGH Demand for one can of diet coke is elastic because there are other cheap alternatives available. PRICE ELASTICITY – LOW Even if milk prices go up, people will continue buying it, especially if they have children. PRICE ELASTICITY – Very High A spa treatment is a non-essential luxury item. They are the first things back on when prices go up or our disposable income  Types of Elasticity 1. Elastic - Demand may be elastic when a percentage change in price leads to a proportionately greater percentage change in quantity demanded. 2. Inelastic - Demand is described as inelastic when a percentage change in. price results in a proportionately lesser change in price evokes less than one percent change in quantity demanded, it is inelastic. The coefficient of elasticity is less than 1. 3. Unitary – Demand is unitary when a percentage change in price leads to proportionately equal percentage change in quantity demanded. 4. Perfectly Elastic - At a given price, percentage change in quantity demanded can change infinitely. 5. Perfectly Inelastic – A percentage change in price creates no change in quantity demanded. Effects of Elasticities in Market 1. For demand, the Equilibrium more elastic the new demand is, the less will be the increase in price, and the greater will be the expansion of quantity sold. 2. On the other hand, the less elastic the new demand is, the steeper the rise in price and the less the increase in quantity sold. 3. For supply, the less elastic supply is, the higher the increase in price and the smaller the quantity increase will be, while the more elastic supply is, the less will be the increase in price and the greater the increase in quantity sold. Elasticities and shifts in supply and demand  Income Elasticity The coefficient of income elasticity measures a product's percentage change in quantity as a ratio of the percentage change in income which caused the change in quantity. The formula of income elasticity is: ey = Percentage change in quantity/ Percentage change in income  Example: Income Quantity Demanded ₱1000.00 200 ₱2000.00 800 Let: Q2 = 800 Y2 = 2000 Q1 = 200 Y1 = 1000 Solution  Cross Elasticity The coefficient of cross elasticity of demand relates a percentage change in quantity demanded of Good A in response to a percentage change in the price of Good B. Thus: Ec = Percentage change in QD of Good A / Percentage change in price of Good B Where: QA = Quantity demanded of Good A PB = Price of Good B Example: QA1 = 500 PB1 = ₱10.00 QA2 = 600 PB2 = ₱15.00 Solution: