ELASTICITY

Contents

Elasticity of demand

Elasticity of supply

Elasticity of demand

*Price elasticity of demand (EDP)

*Income elasticity of demand (EDI)

*Cross elasticity of demand (EDPy)


Elasticity of demand
Price elasticity of demand (EPD)
- The percentage changed in quantity demanded
resulting from 1% change in price
% Q
E PD =
% P

Elasticity of demand
Price elasticity of demand (EPD)

Point elasticity

D
P

% Q
% P

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

E.g: Demand curve: P = 18 2Q and point A (P=6, Q=6)

What is price elasticity of demand at point A

EDP= -1/2 . 6/6= -1/2

Conclusion:

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
(EPD)
/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

Elasticity of demand
Price elasticity of demand (EPD)
/E/ > 1: Elastic demand,
- flat demand curve

- small change in price, large

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

Elasticity of demand
Price elasticity of demand (EPD)
/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 (EPD)
/E/ = 0: Perfectly Inelastic demand P
- Demand curve is parallel to the

vertical axis
- Change in price doesnt affect
on quantity demanded
- Consumers are not sensitive
to the change in price
- The good is irreplaceable
Q

Elasticity of demand
Price elasticity of demand (EPD)

/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
Price elasticity of demand (EPD)
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
Price elasticity of demand (EPD)
The relationship between
EPD, P and TR

/E/<1: P
TR

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

Elasticity of demand
E<1

The relationship
between EPD, P and TR

TR

TR

E=1

E>1

TR

TR

Elasticity of demand
Income elasticity of demand (EID)
- The percentage changed in quantity demanded
resulting from 1% change in income
EID =

%Q
I
= Q '( I ) .
% I
Q

- EID <0: Inferior goods

- EID >0: Normal goods
- EID >1: Luxury goods

Elasticity of demand
Cross-elasticity of demand (EPyD)
- The percentage changed in quantity demanded resulting from
1% change in price of related goods

EPDY =

P
%Q
= Q' PY . Y
Q
%PY

EPyD > 0 : Substitutes goods

EPyD < 0 : Complements goods

EPyD = 0 : Independent goods

Elasticity of supply
Price elasticity of supply (EPS)
- The percentage changed in quantity supplied resulting
from 1% change in price
% QS
E PS =
% 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 As price leads to 2% increase in total revenue,
A is elastic demand
2. Decrease in gasolines 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 consumers
part.