Elasticity of demand Ep price elasticity EI income

Elasticity of demand • Ep: price elasticity • EI: income elasticity • Exy: cross price elasticity Ep= measures the % change in quantity demanded if price changes by 1%. Mathematically:

If P↑ 5% leads to Qd ↓ 10% • Ep = - (-10%)/(5%) = 2 (price elastic) If P↓ 10% leads to Qd ↑ 5% • Ep = -(5%)/(-10%) = 0. 5 (price inelastic) • Ep>1 → price elastic, Ep<1 = price inelastic, Ep = 1: unitary elasticity, Ep = 0 → perfectly price inelastic, Ep = infinity → perfectly price elastic Price Ep=1 Ep = 0 Ep = infinity Ep>1 Ep<1 Quantity dd

Point elasticity: measures the price elasticity at a particular point on dd curve. = - (ΔQ/Qo) ÷ (ΔP/Po) = - (ΔQ/ ΔP) x (Po/Qo)

Price A Ep=3 3 B Ep=1 2 C Ep=1/3 1 D 0 5 10 15 quantity Ep = (ΔQ/ΔP) X (Po/Qo) ΔQ/ΔP = 5/1 = 5 At point A: Ep = 5 x 3/5 = 3 At point B: Ep = 5 x 2/10 = 1 At point C: Ep = 5 x 1/15 = 1/3 Conclusion: elasticity (Ep) changes from point to point along a demand curve even if the slope of that demand curve does not change.

Price changes, Ep dan TR Px Qx Ep TR = Px. Q 6 5 4 3 2 1 0 0 100 200 300 400 500 600 Infiniti 5 2 1 ½ 1/5 0 0 500 800 900 800 500 0 Conclusion: • If Ep is elastic : P will TR , and • If Ep is inelastic: P will TR , and P will TR - ( P & TR move in different direction) P will TR – ( P & TR move in the same direction)

Factors affecting Ep • Availability of substitutes: the more substitutes available for the good, the more elastic the demand for it many substitutes--elastic (Ep > 1) few substitute---inelastic (Ep < 1) • Necessities verses luxury goods: necessity or essential (brg perlu)-----inelastic luxury goods (brg tak perlu)----- elastic • Income : high income ----Ep inelastic low income ---Ep elastic • Share of budget spent on the product. (% pendapatan yang digunakan) if spend a large portion of income …. elastic if spend a small portion of income …. inelastic • Time dimension: time allows consumer to seek substitutes • Tastes / loyalty: loyal consumer ---Ep inelastic new products ---Ep elastic

Income Elasticity (EI) • EI : measure the % change in dd if income changes by 1%. Rumus: • Goods category: normal goods: 0 < EI < 1 superior goods: EI > 1 necessity goods: EI = +ve hampir 0 inferior goods: EI = -ve. • relate EI with goods category and economic situations (boom/ recession).

Cross Elasticity (Exy) • Exy: measure the % change in quantity of X demanded if price of Y changes by 1%. Formula: • If Exy = +ve, X & Y are substitute goods • Jika Exy = -ve, X & Y are complementary goods