Pekan-3 PIE (IEI2C2) Bahan Kuliah

FAKULTAS REKAYASA INDUSTRI
PENGANTAR ILMU EKONOMI (IEI2C2)

by : SIN, BYG, FRD, RKM, MDR
Lecture Note #3
ELASTICITY
IEI2C2 - PENGANTAR ILMU EKONOMI TEL U – FAK. REKAYASA
INDUSTRI
COURSE OUTLINE
Concept of Elacticity
Price Elasticity of Demand
Calculating Elasticity
Calculating Percentage Changes
Elasticity Is a Ratio of Percentages
The Midpoint Formula
Elasticity Changes Along a Straight-Line Demand Curve
Intepreting Value of Elasticity
Elasticity and Total Revenue

The Determinants of Demand Elasticity
Other Important Elasticities
Income Elasticity of Demand
Cross-Price Elasticity of Demand
Elasticity of Supply
M-03 Elasticity 2 of 29
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Concept of elasticity
elasticity. A general concept used to quantify the response in one variable when
another variable changes.
Why?
 Different goods and services have different demand curve shape
 For one good, an increase in price of 10% cause a decrease in demand of 20%, and for
the other good, an increase in price of 10% cause a decrease in demand of 5%
 Knowing how much quantity demanded falls as the price increases, holding all else
constant, is therefore important in predicting the effect of a shock in a supply-and
demand model.
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price elasticity of demand. The ratio of the percentage of change in quantity
demanded to the percentage of change in price; measures the responsiveness of
quantity demanded to changes in price.
or
price elasticity of demand (or elasticity of demand) is the percentage change in

the quantity demanded, Q, in response to a given percentage change in the price,
p, at a particular point on the demand curve
% change in the quantity demanded %∆Q/Q

price elasticity of demand, Ɛ = =
% change in the price %∆p/p
Ɛ is elasticity, expressed in a pure number

The value is always negative, but it can be stated in absolute term
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Slope and Elasticity
FIGURE 3.1 Slope Is Not a Useful Measure of Responsiveness

Changing the unit of measure from pounds to ounces changes the numerical value of the demand slope dramatically, but
the behavior of buyers in the two diagrams is identical.
5 of 29
M-03 Elasticity
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Types of Elasticity
inelastic demand Demand that responds somewhat, but not a great deal, to changes in price.
elastic demand A demand relationship in which the percentage change in quantity demanded
is larger than the percentage change in price
unitary elasticity A demand relationship in which the percentage change in quantity of a

product demanded is the same as the percentage change in price.
Characteristics of Demand Elasticity

Type of Demand Value of Elasticity Magnitudes of Change Response to Price
Changes
Elastic  > |1| %Qd > %P Responsive
Inelastic  < |1| %Qd < %P Unresponsive
Unitary elastic  = |1| %Qd = %P Proportional
A warning : You must be very careful about signs. Because it is generally understood that
demand elasticities are negative (demand curves have a negative slope), they are often
reported and discussed without the negative sign.
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Example - Types of Elasticity
TABLE 3.1 Hypothetical Demand Elasticities for Four Products
% Change In % Change
Price In Quantity
Product (% DP) Demanded Elasticity
(% DQD) (% DQD ÷ %DP)
Insulin +10% 0% .0 Perfectly inelastic

Basic telephone service +10% -1% -.1 Inelastic
Beef +10% -10% -1.0 Unitarily elastic

Bananas +10% -30% -3.0 Elastic
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Shape of Demand According to Elasticity
Type of Demand Inclination

Elastic Relatively Flat
Inelastic Relatively Steep
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Types of Elasticity
perfectly inelastic demand. Demand in which quantity demanded does not respond at all to a
change in price.
perfectly elastic demand. Demand in which quantity drops to zero at the slightest increase in price.
A good way to remember the

D difference between the two
“perfect” elasticities is:
Figure (a) shows a perfectly inelastic Figure b) shows a perfectly elastic demand curve facing a wheat
demand curve for insulin. Price elasticity farmer. A tiny price increase drives the quantity demanded to
of demand is zero. Quantity demanded is zero. In essence, perfectly elastic demand implies that
fixed; it does not change at all when individual producers can sell all they want at the going market
price changes. price but cannot charge a higher price. 9 of 29
M-03 Elasticity
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Types of Elasticity
Extreem Elasticity : Perfectly Inelastic and Perfectly Elastic
Elasticity Value Type of Elasticity Substitutes Available
=0 Perfectly Inelastic None

= Perfectly Elastic Infinite
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Elasticity along the Demand Curve
Q, Million kg of beef per year

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Calculating Elasticities
Calculating Percentage Changes
To calculate percentage change in quantity demanded using the initial value as the
base, the following formula is used:
To calculate the percentage change in price in a similar way. The formula for
calculating the percentage of change in P is :
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Use data on the graph, move froam A to B,
 Q0 = 10  Q1 = 5
 p0 = 2  p1 = 3
 Ɛ = [(5-10)/10] / [(3-2)/2]
 Ɛ = 50%/50% = 1
If the movement is from B to A, Ɛ (in point B) is

100%/33% = 3
 Q0 = 5  Q1 = 10
 p0 = 3  p1 = 2
%∆Q/Q
price elasticity of demand, Ɛ =  Ɛ = [(10-5)/5] / [(2-3)/3]
%∆p/
p  Ɛ = 100%/33% = 3
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The Midpoint Formula
A more precise way of calculating percentages using the value halfway between Q1
and Q2 as the base for calculating the percentage change in quantity demanded.
Using the point halfway between P1 and P2 as the base for calculating the percentage
change in price, we get
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Calculating Price Elasticity with The Midpoint Formula
First, calculate % change in the Quantity Demanded (%∆QD)
change in the quantity demanded
= x 100%
(Q1 + Q2)/2
Q2 – Q1 10 – 5 5
= x 100% = x 100% = x 100% = 66.7%
(Q1 + Q2)/2 (5 + 10)/2 7.5
Next, calculate % change in Price (%∆P)
change in price
= x 100%
(P1 + P2)/2
P2 – P 1 2–3 -1
= x 100% = x 100% = x 100% = - 40.0%
(P1 + P2)/2 (3 + 2)/2 2.5
Price elasticity compares the percentage change in quantity
demanded and the percentage change in price.
%∆QD 66.7%
price elasticity of demand, Ɛ = = = -1.67
%∆P -
Demand is elastic 40.0%
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Calculating Price Elasticity with The Midpoint Formula
First, calculate % change in the Quantity Demanded (%∆QD)
change in the quantity demanded
= x 100%
(Q1 + Q2)/2
Q2 – Q1
= x 100% = 160 – 80 x 100% = 80 x 100% =
(Q1 + Q2)/2 (80 + 160)/2 66.7%
120
change in price
= x 100%
(P1 + P2)/2
P2 – P 1 2–3 -1
= x 100% = x 100% = x 100% = - 40.0%
(P1 + P2)/2 (3 + 2)/2 2.5
Price elasticity compares the percentage change in quantity
demanded and the percentage change in price.
%∆QD 66.7%
price elasticity of demand, Ɛ = = = -1.67
%∆P -
Demand is elastic 40.0%
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Linear Demand Curve

 If the demand function of a linear demand curve is Q= a – bp
 a is quantity demanded when the price is zero
 -b is the ratio of the fall in quantity to the rise in price, ΔQ/ Δp (the minus sign
just to show the law of demand, that the quantity falls when the price rises)
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Linear Demand Curve
 Solved Problem - Previous Case:
 Pork has linear demand function Qd, where Qd = 286 – 20p
 Supply function is Qs , where Qs = 88 + 40p
 Equilibrium will happen when Qd equals Qs
Qd = Qs
286 – 20p = 88 + 40p
It can be seen that equilibrium is achieved when ; p = 3.3, and Q = 220
At this equilibrium point, the elasticity is –b(p/Q).
For b = 20,
Ɛ = -20 (3.3/220) or -0.3
Remember, the value is always negative, but it can be stated in absolute term
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Elasticity Changes Along a Straight-Line Demand Curve
TABLE 3.3 Demand Schedule for
Office Dining Room
Lunches
Price Quantity
(per Demanded
Lunch) (Lunches per Month)
$11 0
10 2
9 4
8 6
7 8
6 10
5 12
4 14
3 16
2 18
1 20
0 22  FIGURE 3.3 Demand Curve for Lunch at the Office Dining
Room
Between points A and B, demand is quite elastic at -6.3.
Between points C and D, demand is quite inelastic at -.294.
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Calculating Elasticities Use data on the graph, move froam A to B. First, calculate % change in
the Quantity Demanded (%∆QD)
Q – Q1 4–2 2
= 2 x 100% = x 100% = x 100% = 66.67%
(Q1 + Q2)/2 (2 + 4)/2 3
P2 – P 1 9 – 10 -1
= x 100% = x 100% = x 100% = - 10.53%
(P1 + P2)/2 (10 + 9)/2 8.5
%∆QD 66.67%
Ɛ = = - = - 6.333
%∆P
10.53%
In similar way, use data on the graph, move froam C to D. First,
calculate % change in the Quantity Demanded (%∆QD)
Q – Q1 18 – 16 2
= 2 x 100% = x 100% = x 100% = 11.76%
(Q1 + Q2)/2 (16 + 18)/2 17
• Between points A and B, demand P2 – P1 2–3 1
is quite elastic at -6.333 = x 100% = x 100% = x 100% = 40.00%
(P1 + P2)/2 (3 + 2)/2 2.5
• Between points C and D, demand %∆QD 11.76%
is quite inelastic at -.294. Ɛ = = 40.00% = - 0.294
%∆P
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Interpreting the Value of Elasticity
Here is how to interpret two different values of elasticity:
 When e = 0.2, a 10% increase in price leads to a 2% decrease in

quantity demanded.
 When e = 2.0, a 10% increase in price leads to a 20% decrease in
quantity demanded.
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In any market, P x Q is total revenue (TR) received by producers:

TR = P x Q
total revenue = price x quantity
When price (P) declines, quantity demanded (QD) increases. The two
factors, P and QD move in opposite directions:
Effects of price changes

on quantity demanded :
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Because total revenue is the product of P and Q, whether TR rises or falls in response
to a price increase depends on which is bigger : the percentage increase in price or
the percentage decrease in quantity demanded.
Effects of price increase on

a product with inelastic demand:
If the percentage decline in quantity demanded following a price increase is larger than
the percentage increase in price, total revenue will fall.
Effects of price increase on
a product with inelastic demand:
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The opposite is true for a price cut. When demand is elastic, a cut in price increases
total revenues:
effect of price cut on a product
with elastic demand:
When demand is inelastic, a cut in price reduces total revenues:
effect of price cut on a product

with inelastic demand:
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Effect of an Effect of a decrease

Type of Value of Ed Change in quantity versus
increase in price in price on total
demand change in price
on total revenue revenue
Larger percentage change in Total revenue Total revenue increases

Elastic Greater than 1.0 quantity decreases
Smaller percentage change in Total revenue Total revenue decreases
Inelastic Less than 1.0 quantity increases
Unitary Same percentage change in Total revenue does Total revenue does not
Equal to 1.0 quantity and price not change change
elastic
 When demand is inelastic, price and total revenues are directly related.
Price increases generate higher revenues.
 When demand is elastic, price and total revenues are indirectly related.
Price increases generate lower revenues.
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Availability of Substitutes
Perhaps the most obvious factor affecting demand elasticity is the
availability of substitutes.
The Importance of Being Unimportant

When an item represents a relatively small part of our total budget,
we tend to pay little attention to its price.
The Time Dimension

The elasticity of demand in the short run may be very different from the
elasticity of demand in the long run. In the longer run, demand is likely to
become more elastic, or responsive, simply because households make
adjustments over time and producers develop substitute goods.
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Elasticities at a Delicatessen in
the Short Run and Long Run
The graph shows the expected relationship

between long-run and short-run demand for
Frank’s sandwiches. Notice if you raise
prices above the current level, the expected
quantity change read off the short-run curve
is less than that from the long-run curve.
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Income Elasticity of Demand
income elasticity of demand A measure of the responsiveness of demand

to changes in income.
Cross-Price Elasticity of Demand

cross-price elasticity of demand A measure of the response of the quantity
of one good demanded to a change in the price of another good.
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Elasticity of Supply
elasticity of supply A measure of the response of quantity of a good supplied
to a change in price of that good. Likely to be positive in output markets.
elasticity of labor supply A measure of the response of labor supplied to

a change in the price of labor.

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FAKULTAS REKAYASA INDUSTRI

PENGANTAR ILMU EKONOMI (IEI2C2)

Elasticity and Total Revenue

Price Elasticity of Demand

price elasticity of demand (or elasticity of demand) is the percentage change in

% change in the quantity demanded %∆Q/Q

Ɛ is elasticity, expressed in a pure number

Price Elasticity of Demand

FIGURE 3.1 Slope Is Not a Useful Measure of Responsiveness

Price Elasticity of Demand

unitary elasticity A demand relationship in which the percentage change in quantity of a

Characteristics of Demand Elasticity

Price Elasticity of Demand

Insulin +10% 0% .0 Perfectly inelastic

Beef +10% -10% -1.0 Unitarily elastic

Price Elasticity of Demand

Type of Demand Inclination

Price Elasticity of Demand

A good way to remember the

Price Elasticity of Demand

=0 Perfectly Inelastic None

Price Elasticity of Demand

Q, Million kg of beef per year

If the movement is from B to A, Ɛ (in point B) is

Linear Demand Curve

Interpreting the Value of Elasticity

Here is how to interpret two different values of elasticity:

 When e = 0.2, a 10% increase in price leads to a 2% decrease in

Elasticity and Total Revenue

In any market, P x Q is total revenue (TR) received by producers:

Effects of price changes

Elasticity and Total Revenue

Effects of price increase on

When demand is inelastic, a cut in price reduces total revenues:

effect of price cut on a product

Effect of an Effect of a decrease

Larger percentage change in Total revenue Total revenue increases

The Determinants of Demand Elasticity

The Importance of Being Unimportant

The Time Dimension

The Determinants of Demand Elasticity

The graph shows the expected relationship

Other Important Elasticities

income elasticity of demand A measure of the responsiveness of demand

Cross-Price Elasticity of Demand

Other Important Elasticities

elasticity of labor supply A measure of the response of labor supplied to

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