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Elasticity
Term used to describe sensitivity
o Ex. Price increased
a. you still buy the product not sensitive to price
b. you dont buy the product sensitive to price
3 Kinds of Elasticity (DEMAND)
A. Price Elasticity of Demand
percentage change in quantity demanded divided by the percentage change in
price
Ed = % Change in Quantity = (Q2 - Q1) / [(Q1 + Q2)/2]
% Change in Price
(P2 - P1) / [(P1 + P2)/2]
o ALWAYS an absolute value, disregard the negative sign
Elasticities:
UNITARY ELASTIC/UNITARY DEMAND (If Ed = 1)
Quantity demanded changes by the same percentage
as price
Extreme Elasticities:
PERFECTLY INELASTIC (If Ed = 0)
Quantity demanded does not respond to price changes
o Ex. Medicine
Examples
1.
BANANAS
ORANGES
QUANTITY
200
240
400
280
PRICE
20
18
40
70
INELASTIC
Exercises
1. A 10% increase in income brings about a 15% decrease in demand for a good.
What is the INCOME ELASTICITY OF DEMAND and is the good a normal good or inferior
good?
3. Suppose a rise in the price of a good from $5.50 to $6.50 causes a decrease in
quantity demanded from 12,500 to 11,500 units. What is the PRICE ELASTICITY OF
DEMAND?
4. Product X sells at a price of $22 per kilo. An increase in the price of product X to
$25 causes your demand for the product to decrease to 6 from 8 kilos a week. What is
the PRICE ELASTICITY OF DEMAND?
6. Due to the increase of business investments in the Visayas Region, the average
income has increased by 30%. This increase was coupled by a change in quantity
demanded by a McDonalds Big Mac from 5,300 to 3000 sandwiches per day. Is the Big
Mac an INFERIOR, NORMAL or LUXURY good?
7. Freds income has just risen from $950 to $1050 per week. As a result, he
decides to increase the number of movies he watches each week from 2 to 6 times. Is
watching movies for Fred a luxury?
8. An increase in the price of good Y from $10 to $15 causes the quantity
demanded for good X to decrease by 20% from level of 80 units. Are goods X and Y
SUBSTITUTES OR COMPLEMENTARY?
Elasticity (SUPPLY)
A. Price Elasticity of Supply
Only difference between Price Elasticity of Demand and the Price Elasticity of
Supply is this is the perspective of sellers
FACTORS THAT AFFECT THE ELASTICITY OF GOODS
o Easy or Hard to produce
Easy = Elastic
Hard = Inelastic
o Time to Adjust
MORE time = Elastic
LESS time = Inelastic
Inelastic Goods - More profitable but it takes a longer time
o So, to produce ELASTIC goods, you decrease the price so that the total
revenue would increase
* IF IN THE DATA, THE PRICE IS IN PERCENTAGE FORM, THEN THE QUANTITY ALSO
HAS TO BE IN PERCENTAGE FORM.