KINH TẾ VI MÔ Chapter 3 for student

CHAPTER 3

ELASTICITY


Contents

•Elasticity of demand
•Elasticity of supply 


Elasticity of demand

D
*Price elasticity of demand (E P)
D
*Income elasticity of demand (E I)
D
*Cross elasticity of demand (E Py)  


Elasticity of demand
D
Price elasticity of demand (EP )

•The percentage changed in quantity demanded resulting from 1% change in price
•


Elasticity of demand
D

Price elasticity of demand (EP )

•Point elasticity

•E.g: Demand curve: P = 18 – 2Q and point A (P=6, Q=6)
What is price elasticity of demand at point A


Elasticity of demand
D
Price elasticity of demand (EP )

•Arc elasticity

•Eg: At price P=7.000VND, consumer buys

10kilos of pork/ month. At price P= 6.000 VND, consumer buys

15kilos/ month. What is price elasticity of demand?


Elasticity of demand
Conclusion:

Price elasticity of demand always:

•Unit – free and negative value
•Usually use absolute value

Elasticity of demand
P

Price elasticity of demand
D
(EP )

•/E/ < 1: Inelastic demand
•- steep demand curve
- large change in price, small
change in quantity demanded
- Consumers are not very sensitive
to the change in price
- the goods is hard to replace
or necessity

Q


Elasticity of demand
D
Price elasticity of demand (EP )

•/E/ > 1: Elastic demand,
•- flat demand curve

P

- small change in price, large
change in quantity demanded

- Consumers are very sensitive
to the change in price
- the goods is easy to replace

Q


Elasticity of demand
D
Price elasticity of demand (EP )

•/E/ = 1: Unitary-elastic demand
•- slope down demand curve
- %change in price equal to %
change in quantity demanded


Elasticity of demand
D
Price elasticity of demand (EP )

•/E/ = 0: Perfectly Inelastic demand

P

•- Demand curve is parallel to the
vertical axis
- Change in price doesn’t affect
on quantity demanded
- Consumers are not sensitive

to the change in price
- The good is irreplaceable
Q


Elasticity of demand

D
Price elasticity of demand (EP )

•/E/ = ∞: Perfectly elastic demand
•- Demand curve is parallel to the horizontal axis
- Change in price affects totally on quantity demanded
- Consumers are perfectly sensitive to the change in price
- The good is in the perfect competition market


Elasticity of demand
D
Price elasticity of demand (EP )

•Factors effecting on EPD
•The availability of substitutes goods

•The characteristic of the goods
•The time needed to find out the substitutes goods

•The ratio of the spending in total income

Elasticity of demand
D
Price elasticity of demand (EP )

•The relationship between
D
EP , P and TR

/E/<1: P ↓ → TR ↓

O


Elasticity of demand
D
Price elasticity of demand (EP )
* The relationship between EPD, P and TR
/E/>1: TR ↑ when P↓


Elasticity of demand

E<1

•

D
The relationship between EP , P and TR

P

TR

E=1

E>1

TR


P

TR

TR


Elasticity of demand

D
Income elasticity of demand (EI )

•The percentage changed in quantity demanded resulting from 1% change in income
•

•EID <0:
•EID >0:
•EID >1:



Elasticity of demand
D
Cross-elasticity of demand (EPy )

•The percentage changed in quantity demanded resulting from 1% change in price of related goods

•EPyD > 0 :
•EPyD < 0 :
•EPyD = 0 : 

•


Elasticity of supply
S
Price elasticity of supply (EP )

•The percentage changed in quantity supplied resulting from 1% change in price
•


Elasticity of supply

•E=0: Perfectly inelastic supply
•E<1: Inelastic supply
•E>1: Elastic supply
•E=1: Unitary elastic supply
•E=∞: Perfectly elastic supply

Elasticity of supply
Factors affecting on elasticity of supply:

•Time needed to find substitutes resources for inputs
•Availability of inputs


Questions:
1. If 10% increase in A’s price leads to 2% increase in total revenue, A is elastic – demand

2. Decrease in gasoline’s price makes the demand curve of motorbikes (D1) shift to the right to (D2) and this (D2) is more
elastic than (D1) at any quantity level (in absolute value)

3. All points in a demand curve has the same value of slope and price elasticity of demand (point elasticity)

4. “Food” is less elastic demand than “Kinh Do soft cake”

5. Per-unit tax imposed on producer of good, which demand is more elastic than supply will makes that producer
bear the smaller part in total tax amount in comparison with consumer’s part.