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CHAPTER 4

ELASTICITY OF DEMAND

AND SUPPLY

tutor2u.net/blog/index.php/gcse-...Bdemand/

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Arrow Process

Why use graphics from PowerPointing.com?

TYPES

-Definition-The importanceof e a!ticit"

Re ation!hip#et$een pricee a!ticit" of %eman%an% tota re&en'e

Factor! thatinf 'ence

-Perfect " ine a!tic-Ine a!tic-Unitar" e a!tic-E a!tic-Perfect " e a!tic

(Price E a!ticit" of Deman%(Income E a!ticit"(Cro!! E a!ticit"(Price E a!ticit" of S'pp "

TOTALRE)ENUEANDELASTICITY

DETERMINANTSOF ELASTICITY

DE*REE OFELASTICITY

THE CONCEPT OFELASTICITY

ELASTICITY OF DEMAND AND SUPPLY

This illustration is a part of Building Plan. See the whole presentation at slideshop.com/value

http://slideshop.com/PowerPoint-Value-Chain?utm_source=free+sample&utm_medium=free+sample&utm_campaign=free+samplehttp://slideshop.com/PowerPoint-Value-Chain?utm_source=free+sample&utm_medium=free+sample&utm_campaign=free+samplehttp://slideshop.com/PowerPoint-Value-Chain?utm_source=free+sample&utm_medium=free+sample&utm_campaign=free+sample

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Example of Case Study

Drug Problem

Source !!!.bi"ed.co.u#/current/research...$$%&.htm

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Definition of Elasticity

Elasticity is a measure of theresponsi'eness of one 'ariable toanother.(he greater the elasticity) the greater theresponsi'eness.

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Elasticity of Demand * (he Concept

(he responsi'eness of ho! responsi'edemand is to price changes+hen price rises) !hat happensto demand,Demand falls

B (o! much does demand fall,

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(he responsi'eness of ho! responsi'esupply is to price changes+hen price rises) !hat happensto supply,Supply rises

B (o! much does supply rises,

Elasticity of Supply * (he Concept

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+h" Economi!t! U!e E a!ticit"

Economists !ant to compare apples and 0e!els all the time.1s oil mar#et demand more pricesensiti'e than !heat demand,1s the labor supply of !omen more !agesensiti'e than the labor sup ply of men ,

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1f you are a #'!ine!!per!on and!ant to increa!e re&en'e! ) oneimportant uestion is !hether !eincrea!e price or %ecrea!e price,(ells suppliers ho! their tota re&en'e !ill change if their price changes(he ans!er is the concept of elasticity

The Importance of E a!ticit"

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1nelastic Economic 3elations

+hen an elasticity is small 4E5$6) !e callthe relation that it describes inelastic.1nelastic demand means that the

uantity demanded is not &er"!en!iti&e to the price.

1nelastic supply means that the uantitysupplied is not &er" !en!iti&e to theprice.

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1nelastic of Demand/Supply

Changes in uantity demanded is lessthan changes in priceE5$Example Ed 7$/21f the price increase $8) uantity

demanded decrease %.981f the price decrease $%8) uantitydemanded increase ::::8

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E a!tic Economic Re ation!

+hen an elasticity is large 4E;$6) !e callthe relation that it describes elastic

Elastic demand means that theuantity demanded is sensiti'e to theprice. Elastic supply means that the uantitysupplied is sensiti'e to the price .

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Elastic of Demand / Supply

Changes in uantity demanded isgreater than changes in priceE;$Example Ed 7 < means1f the price increase $8) uantity

demanded !ill decrease

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(ypes of Demand Elasticity

Price elasticity of demand 4Ed61ncome elasticity of demand 4Ey6

Cross elasticity of demand 4Ec6

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Price Elasticity of Demand

=easure the sensiti'ity/responsi'enessof the uantity demanded due to achange in its price

o! sensiti'e is the uantity demandedto a change in the price of the good.

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1ncome Elasticity of Demand

=easure of the sensiti'ity /responsi'eness of the uantitydemanded due to a change in incomeEy;% 4positi'e > elastic6 * luxury goodsEy;% 4positi'e > inelastic6 * normalgoods

Ey5% * inferior goodsEy 7 % * necessity goods

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Determinants of Elasticity ofDemand

?'ailability of substitutesElastic for goods/ser'ices !ith closesubstitutesExample Cars and buses1nelastic for goods/ser'ices !ith no closesubtitutes

Example tobacco

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Determinants of Elasticity ofDemand

Share of budget spent on the productElastic * if the budget is spending large onthe products/ser'icesExample College fees1nelastic * if only small budget ta#en intoaccount

Example price of salt

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Determinants of Elasticity ofDemand

?d0ustment to a price change o'er timeShort-run inelastic@ong-run elastic

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=easure of the sensiti'ity /responsi'eness of the uantitydemanded for one product 4Ax6 dueto a change in the price of relatedproduct 4Py6

Ec ; % * substitutesEc 5 % - complementary

Cross Elasticity of Demand

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( PES DE=? DE@?S(1C1(1ES

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Elasticity

Price ($)

Quantity Demanded

The demand curve can be arange of shapes each of whichis associated with a differentrelationship between price andthe quantity demanded.

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igure $ (he Price Elasticity of Demand

Cop"ri-ht./001 So'th$e!tern2Thom!on Learnin-

3a Perfect " Ine a!tic Deman%5 E a!ticit" E6'a ! 0

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