ELASTICITY (KINH tế VI mô SLIDE)

ELASTICITY


Contents
Elasticity

of demand

Elasticity

of supply 


*Price elasticity of demand (ED )
P

Elasticity of demand
*Income elasticity of demand (ED )
I

*Cross elasticity of demand (ED )  
Py


Elasticity of demand
Price elasticity of demand (E D)
P

-

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

E

D
P

% ∆Q
=
% ∆P


Elasticity of demand
Price elasticity of demand (EPD)
Point elasticity

E

D
P

% ∆Q
∆Q ∆P
∆Q P
P
=
=
:
=
. = Q '( P ) .
% ∆P

Q
P
∆P Q
Q

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
Price elasticity of demand (EPD)
Arc elasticity

E PDAB

Q1 − Q2
Q1 + Q2
2
=
P1 − P2
P1 + P2
2

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
Price elasticity of demand
(E D)
P
/E/ < 1: Inelastic demand

•
•

P

- 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
Price elasticity of demand (E D)
P

•
•

/E/ > 1: Elastic demand,
- flat demand curve
- small change in price, large
change in quantity demanded

P

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

Q


Elasticity of demand
Price elasticity of demand (E D)
P

•
•

/E/ = 1: Unitary-elastic demand

- slope down demand curve
- %change in price equal to %
change in quantity demanded


Elasticity of demand
Price elasticity of demand (E D)
P

•
•

/E/ = 0: Perfectly Inelastic demand
- Demand curve is parallel to the
vertical axis

P

- 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
PPPPP PPPPPPPPPP PP PPPPnP PP P P P
• /P/ = ∞: PPPPPPPPP PPPPPPP PPPPnP

• P PPPPnP PPPPP PP PPPPPPPP PP PPP

PPPPPPnPPP PPPP
P PPPngP Pn PPPPP PPPPPPP PPPPPPP Pn
PPPnPPPP PPPPnPPP
P PPnPPPPPP PPP PPPPPPPPP PPnPPPPPP PP PPP
PPPngP Pn PPPPP
P PPP gPPP PP Pn PPP PPPPPPP PPPPPPPPPPn
PPPPPP


Elasticity of demand
Price elasticity of demand (E D)
P

•

Factors effecting on E D
P

- 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
Price elasticity of demand (E D)
P

•

The relationship between

E D P and TR
P ,

/E/<1: P ↓  TR ↓

O


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


Elasticity of demand
E<
1

• PPP PPPPPPPnPPPP PPPPPPn

E=1

E>1

PPPP P PnP PP



P

TR

P

TR

TR

TR


Elasticity of demand
PnPPPP PPPPPPPPPP PP PPPPnP PP P P P
- PPP PPPPPnPPgP PPPngPP Pn PPPnPPPP
PPPPPPPng PPPP 1P PPPngP Pn PnPPPP
-

PPPPnPPP

%∆Q
I
E =
= Q '( I ) .
%∆I
Q

D
I

- PPP <0:
- PPP P0:
- PPP P1:




Elasticity of demand
PPPPPPPPPPPPPPPP PP PPPPnP PP PP P P
- PPP PPPPPnPPgP PPPngPP Pn PPPnPPPP PPPPnPPP PPPPPPPng

PPPP 1P PPPngP Pn PPPPP PP PPPPPPP gPPPP

%∆Q
PY
E =
= Q' PY .
%∆PY
Q
D
PY

 PPPP P 0 :

 PPPP < 0 :
 PPPP = 0 : 

-


Elasticity of supply
Price elasticity of supply (E S)
P

-

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

E

S
P

% ∆QS
=
% ∆P


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.