Ec2204 tutorial 3(1)
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CENTRE FOR POLICY STUDIES UNIVERSITY COLLEGE CORK EC2204 TUTORIAL 3 W\S 29\10\2012 Academic Year: 2012/2013 Instructors: Brenda Lynch and P.J. Hunt Contact: [email protected] or [email protected]
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Transcript of Ec2204 tutorial 3(1)
CENTRE FOR POLICY STUDIESUNIVERSITY COLLEGE CORK
EC2204TUTORIAL 3
W\S 29\10\2012
Academic Year: 2012/2013 Instructors: Brenda Lynch and P.J. Hunt
Contact:[email protected] or [email protected]
ElasticityElasticity is a measures of responsiveness.
Some DefinitionsPrice elasticity of Demand (Ep). The
responsiveness in demand for a good to a change in price of that good.
Income elasticity (Ei). The responsiveness in demand and supply for a good to a change in
income. (Inferior / normal good).
Cross price elasticity. The responsiveness in demand for one good caused by a change in price of another good. (Complement / Substitute good).
Price elasticity of Demand (Ep)Ep is calculated using the average change in price
and demand.Formula: Ep is measured by the formula% ∆ QD % ∆ P• Example:• A small hot-dog stand charges €3.10 per hot-
dog and sell 9 per hour (the original point on the demand curve). The price falls to €2.90 and demand rises to 11 per hour (the new point on the demand curve).
(-€0.20 / €3.10) * 100 = - 6.45% = % ∆ P(2/9) * 100 = 22.2%
So using the Ep formula % ∆ QD % ∆ P = 22.2%/ - 6.45% = - 3.44%In English; A 1% change in P causes a 3.44%
change in Qd
Three categories:Ep > -1 (demand is elastic, big response)
Ep < -1 (demand is inelastic, small response) Ep = -1 (demand is unit elastic)
What affects elasticity?Substitutes: The closer the substitute for a good or service, the more elastic the demand for it. Is petrol elastic or inelastic?
Necessities tend to have inelastic demand (bread, heating oil, electricity) luxury goods tend to be elastic (4 by 4’s, long haul holidays, private swimming pools)
Total expenditure on the good: How much is it worth looking for substitutes? Example; a new car and a packet of crisps. If the price of both doubled which item would most likely suffer a sizeable drop in demand?
Adjustment time (short run and the long run). The greater the time lapse since a price change the greater
the chance of finding effectives substitutes and the more elastic is demand. Home heating oil.
Total Revenue (TR) and Price ElasticitiesTR from the sale of a good equals the price of
the good multiplied by the quantity sold or.... TR = P * Q
Questions
If a price cut increases TR demand is __________. Why?
If a price cut decreases TR demand is __________. Why?
If a price cut leaves TR unchanged demand is __________. Why?
