KINH TẾ VI MÔ Chapter III quan nguyen

ELASTICITYElasticity of demand * Price elasticity of demand EDP * Income elasticity of demand EDI * Cross elasticity of demand EDPy... ELASTICITYElasticity of demand Price elasticity of

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CHAPTER III ELASTICITY

Contents

Elasticity of demand

Elasticity of supply

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* Price elasticity of demand (EDP)

* Income elasticity of demand (EDI)

* Cross elasticity of demand (EDPy)

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Price elasticity of demand (E P D )

• The percentage changed in quantity

demanded resulting from 1% change in price

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Price elasticity of demand (EPD)

• Arc elasticity

• 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?

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Conclusion: Price elasticity of demand always:

• Unit – free and negative value

• Usually use absolute value

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Price elasticity of demand (EP D)

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

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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

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Unitary-elastic demand

- slope down demand curve

- %change in price equal to %

change in quantity demanded

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Perfectly Inelastic demand

- Demand curve is parallel to the

vertical axis

- Change in price doesn’t affect

on quantity demanded

- Consumers are not sensitive

to the change in price

- The good is irreplaceable

Q 1 P

Q

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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

P 1 P

Q

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4 Factors effecting on EP D

•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

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5 The relationship between

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The relationship between

B

O

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The relationship between EPD

, P and TR/E/>1: TR ↑ when P↓

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5 The relationship between

TR = const

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Income elasticity of demand (EI D)

resulting from 1% change in income

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Cross-elasticity of demand (EPy D)

• The percentage changed in quantity demanded resulting from 1% change in price of related goods

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X & Y are complement goods

X & Y are independent goods

X & Y are substitute goods

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•The percentage changed in quantity supplied

resulting from 1% change in price

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E=0: Perfectly inelastic supply

E<1: Inelastic supply

E>1: Elastic supply

E=1: Unitary elastic supply

E=∞: Perfectly elastic supply

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Factors affecting on elasticity of supply:

•Time needed to find substitutes resources for inputs

•Availability of inputs

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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.

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