Elasticity Elasticities of Demand Supply PRICE ELASCITY OF
- Slides: 24
Elasticity
Elasticities of Demand Supply • PRICE ELASCITY OF DEMAND • POINT ELASTICITY VS. ARC ELASTICITY
OTHER DEMAND ELASTICITIES • INCOME ELASTICITY OF DEMAND- is the percentage change in Qd, resulting from 1 percent change in income (I). EI= (ΔQ/Q)/(ΔI/I) = (I/Q) (ΔQ/ΔI)
• A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand may lead to changes to more luxurious substitutes. • A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the demand of a good. These would be sticky goods.
• A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the demand of a good. These would be sticky goods.
• CROSS-PRICE ELASTICITY OF DEMAND- refers to the percentage change in the quantity demanded for a good that result from a 1 percent increase in the price of another good.
• So the elasticity of demand for butter with respect to the price of margarine would be written as: • EQb. Pm = (ΔQb/Qb) / (ΔPm/Pm) = • • Where (Pm/Qb)(ΔQb/ΔPm) Qb is the qty of butter and Pm is the price of margarine.
• In the equation, the cross-price elasticity will be positive because the goods are substitutes. • Some goods are complements, in which an increase in the price of one tends to push down the consumption of the other.
ELASTICITIES OF SUPPLY- are defined in a similar manner. • The price elasticity of supply is the percentage in Qs resulting from 1 -percent increase in price. • The elasticity is usually positive because higher price gives producers an incentive to increase output.
• We can also refer to elasticities of supply with respect to such variables as Interest rates Wage rates Prices of raw materials and other intermediate goods
• For example, for most manufactured goods, the elasticities of supply with respect to the prices of raw materials are negative. • An increase in the price of raw a material input means higher costs for the firm, other things being equal, therefore, the Qs will fall
The Market for Wheat • For the statistical studies, we know that for 1981 the supply curve for wheat was approximately as follows: • Supply: Qs = 1800+240 P • Demand: Qd = 3550 -266 P
• • Qs = Qd 1800+240 P=3550 -266 P 560 P=1750 P= 3. 46
• Q= 1800+(240)(3. 46)=2630 • • Price Market-clearing price
• Elasticity of Demand= (3. 46/2630) (-266) = -0. 35
• Elasticity of Supply= • (3. 46/2630) (240) • = o. 32
Short-Run versus Long-Run Elasticities • When analyzing demand supply, we must distinguish between the short run and the long run. • If we allow only a short time to pass-say, one year of less- then we are dealing with short run.
• When we refer to long run we mean that enough time is allowed for consumers and producers to adjust fully to the price change.
Demand • For many goods, demand is much more price elastic in the long run than in the short run. -For one thing, it takes time for people to change their consumption habits.
• Demand Durability- On the other hand, for some goods just the opposite is truedemand is elastic in the short run than in the long run.
• Income elasticities also differ from the short run to the long run. For most goods and services- foods, beverages, fuel, entertainment, etc. - the income elasticity of demand is larger in the long run than in the long run.
• For a durable good, the opposite is true. If we consider automobiles, if the aggregate income rises by 10 percent, the stock of cars that consumers would like to own will rise- say by 5 percent.
• Cyclinal industries- Industries in which sales tend to magnify cyclical changes in GDP and national income. • These industries are vulnerable to changing macroeconomic conditions and in particular to the business cycle- recessions and booms.
• Coverage: all topics covered.
- Price and income elasticity
- What is elascity
- Cross elasticity equation
- Price elasticity of demand numericals
- Ped and yed formula
- Elasticity and its application in economics
- Cross-price elasticity of demand formula
- Arc cross price elasticity
- Demand analysis example
- Factors affecting price elasticity of demand
- Unitary elastic.
- Formula for price elasticity of demand
- Perfectly inelastic demand
- What is the formula for income elasticity of demand
- Price elasticity of demand numericals
- Cross advertising elasticity measures
- What are the 5 determinants of price elasticity of demand
- Price elasticity of demand
- Price elasticity of demand formula
- Kilala bilang maximum price policy
- Chapter 6 section 2 supply and demand in everyday life
- Module 5 supply and demand introduction and demand
- Matching supply with demand
- Slutsky equation
- Own price elasticity