KINH TẾ VI MÔ Chapter 3 for student

Elasticity of demandPrice elasticity of demand EP D • The percentage changed in quantity demanded resulting from 1% change in price •... Elasticity of demandPrice elasticity of demand EP

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CHAPTER 3

ELASTICITY

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• Elasticity of demand 

• Elasticity of supply 

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Elasticity of demand

*Price elasticity of demand (EDP) 

*Income elasticity of demand (EDI) 

*Cross elasticity of demand (EDPy)   

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Price elasticity of demand (EP D)

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

•

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Price elasticity of demand (EP D)

•Point elasticity

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

What is price elasticity of demand at point A

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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)

• /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

P

Q

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• /E/ > 1: Elastic demand,

•- flat demand curve

- small change in price, large

change in quantity demanded

- Consumers are very sensitive

- the goods is easy to replace

P

Q

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•/E/ = 1: Unitary-elastic demand

•- slope down demand curve

- %change in price equal to % change in quantity demanded

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• /E/ = 0: Perfectly Inelastic demand

•- Demand curve is parallel to the

vertical axis

- Change in price doesn’t affect

on quantity demanded

- Consumers are not sensitive

- The good is irreplaceable

P

Q

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• /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

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• 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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• The relationship between

EP D , P and TR

/E/<1: P ↓ → TR ↓

O

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Price elasticity of demand (EP D)

* The relationship between EP D , P and TR /E/>1: TR ↑ when P↓

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TR

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Income elasticity of demand (EI D)

• The percentage changed in quantity demanded resulting from 1% change in income

•

• EI D <0:

• EI D >0:

• EI D >1: 

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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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Elasticity of supply

Price elasticity of supply (EP S)

• 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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