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Demand &
Supply
Types of Elasticity
Elasticity Demand :
1)Price elasticity of demand (Ep)
2)Income elasticity of demand (EY)
3)Cross elasticity of demand (Ex)
Elasticity Supply:
1)Price elasticity of supply
4.1 Elasticity Demand :
= (Q1 – Q0) x P0
• Example:
Price(RM) Quantity Demanded
30.00 65
60.00 55
• Calculate the price elasticity of demand when price increases from RM 30.00 to
RM 60.00.
• Formula:
Ep = (% ∆ in Qd for product X)
% ∆ in P of product X
= (Q1 – Q0) x P0
Q0 (P1 – P0)
4.1.1.3 Degree Of Price Elasticity
2) Inelastic Demand p < 1
1)Elastic Demand p > 1
A large percentage of change in the price of
A small percentage of change in a good will only affect a small percentage of
the price of a good will lead to change in the quantity demanded.
larger percentage of change in
quantity demanded.
15%
3) Example of goods : many
Q1 Q0 Q
substitutes goods, cloth, shoes,
detergent etc.
ii) Inelastic demand (Ep<1)
•1) Definition:
Price (RM) •A large percentage of change in
the price of a good will lead to
small percentage of change in
quantity demanded.
P1
Steeper slope of
•% ∆ Qd < % ∆Price
15%
P0 demand curve
P0
2) coefficient: Ep=1
Q1 Q0 Q
3) Example of goods : no example
in reality.
iv) Perfectly Inelastic demand (Ep=0)
1.Availability of substitutes
2.Level of income
3.Time dimensions
4.Nature of goods
5.Habits
6.Complementary goods
In short run less elastic/ inelastic dd because not enough time to find another
sunstitutes.
In the long run demand more elastic because consumers can make adjustment and
find other substitutes.
• Complementary goods
• Income level
• Habits
Price (RM)
Assume price increases from
RM10 to RM15
15
TR before = RM10 x 10 = RM100
Steep line
10 demand curve TR after = RM15 x 8 = RM120
(TR increases)
8 10 Quantity
(units)
TR before = RM11 x 10 =
Smooth line demand
RM110
11 curve TR after = RM10 x 15 =
10 RM150
(TR increases)
10 15 Q
Hyperbola line dd
curve
TR before = RM10 x 20 = RM200
20
TR after = RM20 x 10 = RM200
10
(TR remains the same)
10 20 Q
= (Q1 – Q0) x Y0
Q0 (Y1 – Y0)
4.1.2.2 Interpretation:
Three possibilities:
• Calculate the cross elasticity of demand for good x when the price of y increases
from RM18 to RM25
Answer:
Formula :
= ∆ Qx x Py0
∆ Py Qx0
= 20 - 40 x 18
40 25 – 18
= -1.29
4.2.2 Formula:
Es = (% ∆ in Qs for product X)
% ∆ in P of product X
= (Q1 – Q0) x P0
Q0 (P1 – P0)
Price Quantity Supplied
10 4
20 7
Calculate the price elasticity of supply for good X if price increases from
RM10 to RM20.
Es = 7 – 4 x 10
4 20 – 10
= 0.75
(If price of good X increases by 1%, the quantity supplied of good X
will increase by 0.75%)
the coefficient of price elasticity of supply will always have a positive
sign because QS and P is positively related.
4.2.3 Degree Of Elasticity Supply
Elastic Supply
A small percentage of change in the price of a good will lead to
larger percentage of change in the quantity supplied.
Inelastic Supply
A large percentage of change in the price of a
good will only affect a small percentage of change
of the quantity supplied.
Q0 Q1 Q
(ii) Inelastic Supply (Es<1)
Price (RM)
•1) Definition:
s
•A large percentage of change in
Steep slope of the price of a good will lead to
P1 supply curve small percentage of change in
15%
quantity supplied.
P0
•(% change in Qs < % change in
5% Price
Q0 Q1 Quantity
(units)
•2) coefficient: Es<1
iii) Unitary elastic supply (Es=1)
1) Definition:
P •A percentage of change in the
Hyperbola s price of a good equal to the
line supply
percentage of change in quantity
curve
supplied.
•(% change in Qs= % change in
P1
Price
P0
2) coefficient: Es=1
Q0 Q1 Q
(iv) Perfectly Inelastic supply (Es=0)
Q0 Quantity
(units)
(v) Perfectly elastic supply (Es = ∞ )
Q0 Q1 Quantity
(units)
4.2.4 Determinants of Price Elasticity Supply
1)Technology improvement
2)Time period
3)Nature of goods
6)Nature of market
7)Perishability
Determinants of Price Elasticity Supply
1. Technology improvement
Modern methods elastic ss
2. Time period
In short run inelastic ss (not possible to increase supply
immediately in response to change in price).
In long run more elastic ss (producers can fully adjust their
supply to the change in prices.
7. Perishability
easily perishable (eg: agricultural product) inelastic ss.
manufacturing products elastic