Meeting 4

Elasticity of Demand
and Supply
MANAGERIAL ECONOMIC TEAM
Subject

▪ Example of demand elasticity analysis

▪ Three concept of demand elasticity
▪ Type of demand elasticity
▪ Demand curve and demand elasticity
▪ Factors which influence elasticity of demand
▪ Elasticity of Supply
▪ Supply curve and Supply elasticity
▪ Factors which influence supply elasticity
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“
Elasticity
Level of sensitivity (change) from an economic phenomenon to
changes in other economic phenomena (Meiriki, 2005)

Indicator which measure how much responsive amount of

demand and supply changed to one of the factor which
determine (Mankiw, 2008)

A quantitative measure that shows how much influence price

changes or other factors have on the demand or supply of a
commodity (Sukirno, 2019)

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Elasticity

The concept of elasticity is an analysis to describe the degree of

sensitivity or response of the quantity demanded or offered, as a result
of changes in factors that influence it

What is the percent change in the quantity demanded or supplied if the

influencing factor changes 1 percent?

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 Elasticity of Demand
Measures the magnitude of the change in the quantity demanded of a
good, as a result of changes in the factors that influence it

Factors which take effect on Price Elasticity

demand: A change in the quantity demanded is the
The price
of the result of a change in the price of the good
goods itself
Price Elasticity itself
Cross Elasticity
Change the number of demand
Changes in quantity demanded as
as a result of the change income Price of
Income a result of changes in the prices of
other other goods
goods
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Determinants of Elasticity of Demand
Measures the percentage change in quantity demanded
when the price of the good itself changes by one
percent.
(Negative relationship according to the law of demand)

1. The equation for the elasticity of demand (Point Elasticity):

%  ∆ Q %  Perubahan jumlah barang yang diminta Definition of Point Elasticity:the

Eh= =
%  ∆ P %  Perubahan harga barang itu sendiri degree of sensitivity to price changes
at a point of change in demand
Q2 − Q1
Q1 ∆ 𝑄 𝑃1
Eh= x 100 %= 𝑥
P 2 − P1 ∆ 𝑃 𝑄1
P1
The Case of Increased Goods Price
▪ When the price of rice increased from IDR 3,000 to IDR 4,000, the demand for rice
decreased from 15,000 kg to 10,000 kg. what is the level of elasticity?
▪ Known: Price = Rp 3,000 () Rp 4,000 ()
Demand = 15,000 kg () 10,000 kg ()

▪ Answered:

%  Perubahan jumlah barang yang diminta

Eh=
%  Perubahan harga barang itu sendiri
10.000− 15.000
10.000 − 5.000 3.000 A one percent change (increase) in rice
Eh= x 100 %= 𝑥
4 . 000 −3 . 000 1.000 15.000 prices results in a 1 percent change
3 . 000 (decrease) in rice demand
Eh=− 1 7
Case of Decreased Goods Price
▪ When the price of rice decreased from IDR 4,000 to IDR 3,000, the demand for rice
increased from 10,000 kg to 15,000 kg. What is the level of elasticity?
▪ Known: Price = Rp 4,000 () Rp 3,000 ()
Demand = 10,000 kg () 15,000 kg ()

▪ Answered:

%  Perubahan jumlah barang yang diminta

Eh=
%  Perubahan harga barang itu sendiri
15.000− 10.000
10.000 5.000 4.000 A one percent change (decrease) in rice
Eh= x 100 %= 𝑥
3. 000 − 4. 000 − 1.000 10.000 prices results in a 2 percent change
4. 000 (increase) in rice demand
Eh=− 2 8
Determinants of Demand Elasticity (2)
2. Equation of elasticity of demand (Arc Elasticity):
% ∆ Q %  Perubahan jumlah barang yang diminta
Eh= =
%  ∆ P %  Perubahan harga barang itu sendiri
Definition of Arch Elasticity:degree of
sensitivity to price changes between 2
events of change in demand (elasticity
between 2 points)

Q 2 −Q1
Midpoint formula
(Q ¿ ¿ 2+Q1)/ 2
Eh= ¿
P 2 − P1
x 100 % ¿
(Q ¿ ¿ 2 ∓ Q1 )/ 2
Elasticity Along the Demand Curve
In a demand curve, the level of elasticity is different because it shows that changes in different price levels
will affect changes in the quantity demanded of different goods

Mangosteen Demand Curve:

If the price changes from IDR 1,000 to IDR 800 (state 1) 1000 = 3 (state 1)
If the price changes from IDR 800 to IDR 600 (state 2) 800 = 1.4 (state 2)
If the price changes from IDR 600 to IDR 400 (state 3)
If the price changes from IDR 400 to IDR 200 (state 4) 6 00 = 3 (state 3)
400
= 0.33 (state 4)
Price Amount which state Coefficient Elasticity 2 00
requested
=3
1,000 2,000 1 2 4 6 8 10
800 4,000 2 = 1.4
That in the high section curve, the value
600 6,000 3 = 0.71 of the coefficient of elasticity is high
400 8.000 4
= 0.33
200 10,000

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 Types and Curves of Elasticity of Demand
Type
No Formula Logic Definition
Elasticity
Elastic %Qd > %P The quantity demanded of a commodity will change by a
1 E>1 Luxurious Goods
demand percentage that exceeds the percentage change in price
If the quantity of a commodity demanded is less sensitive to
Inelastic
2 E<1 %Qd < %P price changes. In this case the percentage change in price is Basic Needs
demand
greater than the percentage change in quantity demanded.
Changes in the price of the commodity in a certain
Unitary
3 E=1 %Qd = %P percentage, will be followed by a change in the quantity Secondary needs
Demand
demanded of the commodity in the same percentage
At a certain price, the market is able to buy all the
Perfectly
commodities in the market, regardless of how many World Needs
4 elastic E= %qd, %P = 0
commodities are marketed by the sellers at that price, all of (wheat, oil)
demand
them can be bought.
Perfectly
A change in the price of a commodity will not change the
5 inelastic E=0 %Qd = 0, %P Land, water
quantity demanded of that commodity
demand

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Types and Curves of Elasticity of Demand (2)
0 > Eh=1

Eh<1 Eh>1

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Determinants of Elasticity of Demand
▪ The number of substitute items available
“If a good has many substitutes, its demand tends to be elastic”
A small change in price will cause a big change in demand

▪ Percentage of income that spent

"The greater the share of income spent on buying goods, the more elastic it will be”
Cheap stuff -> inelastic (changes in price will not affect the level of demand for goods, because it only affects a small
part of the level of income)
Expensive stuff-> Elastic (changes in price will affect the level of demand for goods, because it only affects a large part
of the level of income)
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Determinants of Demand Elasticity (2)
▪ Timeframe Analysis
” The longer the time period in which the demand is analyzed, the more elastic the nature
of the demand for an item is”
For a short period of time, the demand will be inelastic because the new changes in the market are not known to the
buyers
In the long term, buyers can look for substitute goods that have increased in price and this will reduce their demand

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Cross Demand Elasticity
The coefficient that shows the extent to which the change in
demand for an item occurs when there is a change in the price of
another item (Sadono, 2005)
Cross demand elasticity equation:

% ∆ Q x % Perubahan jumlahbarang X yang diminta If a change in the price of good Y

E c= = causes the demand for good X to
% ∆ P y %  Perubahan harga barang Y change

Q x 2 −Q x 1 Item Nature:
Information:
Qx 1 = Permintaan barang X periode 1 Negative Ec -> Complementary
E c= x 100 %
Py 2 − P𝑦 1 = Permintaan barang X periode 2 ItemsPositive Ec -> Substitute Items
= Harga barang Y periode 1
P𝑦1 = Harga barang Y periode 2
Ec =0 -> Neutral Item
=
x =
Case of Cross Demand Elasticity
▪ The average price of a car rise from Rp 80 million to Rp 100 million, while the demand for
motorcycles increased from 90 units to 120 units, what is the value of cross elasticity between
cars and motorcycles? what is the relationship between the two items?
▪ Known: Price Car = Rp 80 million () Rp 100 million ()
Demand of motorcycle = 90 units () 120 units ()
▪ Answered:

% Perubahan jumlahbarang X yang diminta the elasticity coefficient is positive, it

E h= indicates that the relationship
%  Perubahan harga barang Y between the two goods is a substitute
120 − 90 product, meaning that when the price
90 30 80 𝑗𝑢𝑡𝑎 of cars increases, the demand for the
Eh= x 100 %= 𝑥 number of cars will decrease causing
100 𝑗𝑢𝑡𝑎 − 80 𝑗𝑢𝑡𝑎 20 𝑗𝑢𝑡𝑎 90
the demand for motorcycles to
80 𝑗𝑢𝑡𝑎 increase.
Eh=1,67 16
Income Demand Elasticity
Elasticity coefficient which shows the extent to which the change in demand
for an item is due to changes in the income of buyers

Income elasticity of demand equation:

% ∆ Q x % Perubahan jumlahbarang yang diminta When income changes, the demand
E c= = for goods changes
% ∆ 𝐼 %  Perubahan pendapatan
Item Nature:
Q x 2 −Q x 1 EI >1 (Luxury Commodity)
Keterangan:
Qx1 = Permintaan barang X periode 1
EI < 1 (basic commodities)
E c= x 100 % EI = negative (Inferior commodity)
I2 − I1 = Permintaan barang X periode 2
= Pendpatan periode 1 EI = positive (Normal commodity)
I1
= Pendapatan periode 2
=
x =
The Case of Income Demand Elasticity
▪ When the monthly income is Rp. 1,000,000, it is used to buy satay 4 times a month. the following
year there was an increase in income of Rp. 1,500,000, and consumption of satay also increased
up to 10 times a month. What is the income elasticity?
▪ Known: Income = Rp 1,000,000 () Rp 1,500,000 ()
Demand for satay = 4 () 6 ()
▪ Answered:

%  Perubahan jumlah barang X yang diminta

E i=
% Perubahan pendapatan
The value of the income elasticity
10 − 4
coefficient is 3 (Ei > 1), then satay is a
4 6 1 𝑗𝑢𝑡𝑎 superior (luxury) item.
E i= x 100 %= 𝑥
1 , 5 𝑗𝑢𝑡𝑎 −1 𝑗𝑢𝑡𝑎 500 𝑟𝑏 4
1 𝑗𝑢𝑡𝑎
3
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Supply Elasticity
measure supply responsiveness as a result of price changes
Equation of elasticity of supply:

%  ∆Q %  Perubahan jumlahbarang yang 𝑑𝑖𝑡𝑎𝑤𝑎𝑟𝑘𝑎𝑛

E s= =
% ∆ P %  Perubahan harga barang itu sendiri
Q 2 −Q 1 Keterangan:
Q1 ∆ 𝑄 𝑃1 = Penawaran barang X periode 1
E s= x 100 % = 𝑥 = Penawaran barang X periode 2
P 2 − P1 ∆ 𝑃 𝑄1 = Harga barang X periode 1
P1 = Harga barang X periode 1
=
=

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At the time the price was Rp 5000 per unit, the number of sandals offered was 20
units. Then the price dropped to IDR 4,500 per unit and the number of sandals
offered was 10 units. Based on these data, what is the coefficient of elasticity of
supply?
known: Price sandal = Rp 5000 () Rp 4500 ()
Supply of sandal = 20 units () 10 units ()
Answered:

%  Perubahan jumlah barang X yang ditawarkan

E s=
%  Perubahan harga barang X
10 −20
10 − 10 5.000
E s= x 100 %= 𝑥
𝑅𝑝 4.500 − 𝑅𝑝 5.000 − 500 20
𝑅𝑝 5.000

5 Es −→ Elastic Supply

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Perfectly Inelastic Supply: Elasticity Equals 0

%∆Qs = 0, %Ps
Changes in the price of a commodity
will not change the quantity supplied
of the commodity
Ex: land needs, drinking water

Inelastic Supply: Elasticity Is Less Than 1

%∆Qs < %∆PS

The number of commodities offered is
less sensitive to price changes. In this
case the percentage change in price
is greater than the percentage change
in quantity suppliedEx: basic/primary
needs
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Unit Elastic Supply: Elasticity Equals 1

%∆Qs = %∆Ps
Changes in the price of the commodity
in a certain percentage, will be
followed by a change in the quantity of
the commodity offered in the same
percentage
Ex: secondary needs

Elastic Supply: Elasticity Is Greater Than 1

%∆Qs > %∆Ps

The number of commodities offered
will change by a percentage that
exceeds the percentage change in
priceEx: luxury needs

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Perfectly Elastic Supply: Elasticity Equals Infinity
%∆Qs, %∆Ps = 0
Pada suatu harga tertentu, pasar
sanggup menjual semua komoditas
yang ada di pasar, berapapun
banyaknya komoditas yang
dipasarkan oleh para penjual pada
harga tersebut semuanya akan dapat
terjual.
Ex: kebutuhan dunia, gandum)

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Next Meeting:

Consumer Behavior Analysis (Cardinal Approach):

• What is Utility
• What is Consumer behaviour (Rational and Irrational
Consumen)
• Utility Assumption
• Cardinal Approach
• Total Utility
• Marginal utility
• The Law Diminishing Marginal Utility
• Maximal Utility

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