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Elasticity

It’s impact in economics


Introduction
 Do you think the demand and supply
for every product change at the
same rate?

 If prices of potato chips and


cigarettes rise by the same
percentage, which product’s quantity
demanded will be hurt more?

 The reason for this is that product’s


supply and demand exhibit a
Elasticity

The responsiveness
of quantities
demanded ans
supplied to changes
in price
Price Elasticity of
Demand

% change in quantity
Coefficient of
demand elasticity = Demanded / = E
d = Q / Pd
d
% change in Price
About the change

 The effect of the change is in the


numerator of the equation

 The cause of the change is in the


denominator
Example
 Toy store
 Sells Teddy Bears for $20
 Quantity demanded is 100
 Store raises price to $25
 Quantity demanded decreases to 50
 What is the price elasticity of
demand?
Solution
% change in quantity demanded / % change in price
= ((Qn – Qo)/ (Qn+Qo)/2) / ((Pn – Po)/(Pn+Po)/2)
= ((50 – 100)/(150/2)) / ((25 – 20) /(45/2))
= (50/75) / (5/22.5)
= .67/.22
= 3.045
Results
 The coefficient will signify whether
the demand between the points was
 Elastic = >1
 Unitary Elasticity = 1
 Inelastic <1
 Measure the absolute value (no
negatives)
Elasticity types
Elastic coefficient:
A % change in price results in a larger %
change in Quantity Demanded

Unitary elastic coefficient:


A % change in price results in an equal %
change in Quantity Demanded

Inelastic coefficient:
A % change in price results in a smaller %
change in Quantity Demanded
Others to consider
 0 = Perfect inelasticity
 Infinity = Perfect elasticity

Elastic Unitary Inelastic

Perfect Elastic Perfect Inelastic


The Total Revenue
Approach
 Businesses must try to figure out if a
change in price will result in greater
revenue
 Revenue = price X quantity
 In the previous example, was the
price change a good move?
Result
Old revenue
= $20 X 100 bears
= $2000

New Revenue
= $25 X 50
= $1250

Therefore the price change resulted in lost


revenues – bad move
General Rule
 Goods with inelastic demand
coefficients: When price rises, total
revenues rise. When price falls, total
revenues fall

 Goods with elastic demand coefficients:


When price rises, total revenues fall.
When price falls, total revenues rise

 Goods with unitary demand coefficients:


When price rises of falls, toal revenue
stays the same
Factors affecting Demand
Elasticity
 Availability of Substitutes
 The more subsitutes, the more elastic the demand

 Nature of the item


 Goods that are neccesities tend to be more inelastic

 Fraction of income spent on the item


 More expensive goods tend to be more elastic

 Amount of time available


 The more time to make a purchase, the more elastic
they may become

• These are not absolutes, why?


To complete
 Check your Understanding
 Pg.97
 1-4
Elasticity of Supply
 Similar to demand

% change in quantity
Coefficient of
supply elasticity = Supplied / = E
s = Q / Ps
s
% change in Price
Example
 Toy store
 Sells Teddy Bears for $20
 Quantity supplied is 100
 Store raises price to $25
 Quantity supplied increases to 105
 What is the price elasticity of supply?
Solution
% change in quantity supplied / % change in price
= ((Qn – Qo)/ (Qn+Qo)/2) / ((Pn – Po)/(Pn+Po)/2)
= ((105 – 100)/(205/2)) / ((25 – 20) / (45/2))
= (5/102.5) / (5/22.5)
= .05/.22
= .227
Elasticity types
 Elastic coefficient:
 A % change in price results in a larger %
change in Quantity Supplied

 Unitary elastic coefficient:


 A % change in price results in an equal %
change in Quantity Supplied

 Inelastic coefficient:
 A % change in price results in a smaller %
change in Quantity Supplied
Factors affecting Supply
Elasticity
 Time
 The longer a time period a seller has to
increase production, the more elastic
the supply will be
 Ease of Storage
 If product can be stored, supply
becomes more elastic
 Cost
 Some products are difficult to increase
the supply of quickly, such as cars and
homes
Others to consider
 0 = Perfect inelasticity
 Infinity = Perfect elasticity

Elastic Unitary Inelastic

Perfect Elastic Perfect Inelastic


Check Your
Understanding
 Pg. 101
 1-2