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Economics

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Pineda, Loretta Maria A. BSN-IV Economics I.
Elasticity
A measure a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.
Is a measure of how much buyers and sellers respond to changes in market conditions
Allows us to analyze supply and demand with greater precision.
Elasticity allows economists to quantify the differences among market without standardizing the units of measurement.
Types of Elasticity 1.
Price Elasticity of Demand
o
Is the percentage change in quantity demanded given a change in the price.
o
It is a measure of how much the quantity demanded of a good responds to a change in the price of that good
o
Determinants of Price Elasticity of Demand:
Availability of Close Substitutes
Necessities versus Luxuries
Definition of the Market
Time Horizon
o
Demand tends to be more elastic :
the larger the number of close substitutes.
if the good is a luxury.
the more narrowly defined the market.
the longer the time period.
o
Computing the price elasticity of demand
The price elasticity of demand is computed as the percentage change in price.
Price Elasticity of Demand = %Change in Quantity Demand %Change in the Price
o
Example:
If the price of an ice cream cone increases from P2.00 to P2.20 and the amount you buy falls from 10 to 8 cones then the elasticity demand would be calculated as:
2102010000.2)00.220.2(
10010)810(
percent percent
o
Computing the Price Elasticity of Demand Using the Midpoint Formula
The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.
o
Example:
If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones the your elasticity of demand, using the midpoint formula, would be calculated as:
o
Variety of Demand Curves
Inelastic Demand
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one.
Elastic Demand
Quantity demanded responds strongly to changes in price.
Price elasticity of demand is greater than one.
)/2]P)/[(PP(P
)/2]Q)/[(QQ(Q
=Demandof ElasticityPrice
1212
1212
32.25.9222/)20.200.2(
)00.220.2(
2/)810(
)810(
percent percent
Unit Elastic
Quantity demanded changes by the same percentage as the price.
Perfectly Inelastic
Quantity demanded does not respond to price changes.
Perfectly Elastic
Quantity demanded changes infinitely with any change in price.
o
Other Demand Elasticities
Income Elasticity of Demand
The income elasticity of demand
measures how the quantity demanded changes as consumer income changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
Cross-Price Elasticity of Demand
The
cross-price elasticity of demand
measures how the quantity demanded of one good responds to a change in the price of another good. It is calculated as the percentage change in quantity demanded of good 1 divided by the percentage change in the price of good 2.
2.
Elasticity of supply
measures how much the quantity supplied responds to changes in the price
o
Computing the price elasticity of supply
The price elasticity of demand is computed as the percentage change in price.
Price Elasticity of Supply = %Change in Quantity Supplied %Change in the Price
o
Example:
Suppose that an increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produce from 9,000 to 11,000 gallons per month. Using the midpoint method, we calculate the percentage change in price as Percentage change in price = (3.15
–
2.85) / 3.00 × 100 = 10 percent
Similarly, we calculate the percentage change in quantity supplied as Percentage change in quantity supplied =(11,000
–
9,000)/10,000×100=20 %
In this case, the price elasticity of supply is

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