The Concepts of Demand and Elasticity Assistant Professor Chanin Yoopetch.
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Transcript of The Concepts of Demand and Elasticity Assistant Professor Chanin Yoopetch.
The Concepts of Demand and Elasticity
Assistant Professor Chanin YoopetchAssistant Professor Chanin Yoopetch
Learning outcomes
By studying the end of this section students will be able to: evaluate the work/leisure trade-off evaluate the notion of a “leisure society” understand and apply the concept of price elasticity of
demand understand and apply the concept of income elasticity of
demand understand and apply the concept of cross price elasticity of
demand describe simple methods of demand forecasting evaluate techniques of demand forecasting
The demand for leisure Two potential effects of an increase in
income on the demand for leisure time The substitution effect: First, an increase in income
means an increase in the opportunity cost of leisure time. In this case we may expect consumers to demand less leisure time.
The income effect: Leisure time can be classed as a ‘normal service’, and in common with other ‘normal’ goods and services, as income increases more will be demanded.
Elasticity . . .
… 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: A General Definition:
The percentage (%) change in
something . . .
. . . given a one percent (1%) change in
something else.
Three Types of Elasticities. . .
Price Elasticity of Demand
Income Elasticity Price Elasticity of Supply
Price
Quantity
Price Elasticity of Demand
The percentage change in the quantity demanded
given. . .
. . . a one percent change in the price.
A
B
DemandP
Q
Ranges of Elasticity . . .
Perfectly Inelastic Consumers are “extremely
unresponsive” to price changes.
Perfectly Elastic Consumers are “extremely
responsive” to price changes.
Unit Elastic Response is “equal to” change in price.
Elasticity of Demand Illustrated
Perfectly Inelastic
Perfectly Elastic
Elasticity of Demand Illustrated
Perfectly Inelastic
4
5
Q
Elasticity of Demand Illustrated
Perfectly Elastic
4 Q
At any price above 4, quantity demanded = 0
At any price under 4, quantity demanded = infinity
Determinants of Price Elasticity of Demand
Demand tends to be more elastic: if the good is a luxury; the longer the time period; the greater the number of close
substitutes; and the more narrowly defined the
market.
Determinants of Price Elasticity of Demand
Demand tends to be more inelastic: if the good is a necessity; the shorter the adjustment time; if there are few good substitutes; and the more broadly defined the market.
Computing Elasticity Coefficient
Computed as the percentage change in the quantity demanded divided by the percentage change in price.
Price Elasticityof Demand
=
Percentage Change in Quantity Demanded
Percentage Change in Price
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED
($2.20 - $2.00) / $2.00
(8 - 10) / 10
=
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED
(10%)
(20%)
=
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED= 2
Computing Elasticity Coefficient
Demand forIce Cream
2.20
2.00
108
ED= 2
Demand is Elastic
> 1
Price changes a little, but quantity changes a lot.
Demand for Ice Cream
2.20
2.00
108
What if the price declines in different direction? What is Price Elasticity of Demand?
Income Elasticity... Types
Goods consumers regard as “necessities” tend to be income inelastic...Examples include: food, fuel,
clothing, utilities, & medical services.
Price elasticity of demand Example
Price elasticity of demand Practice
1. The price of air ticket from Bangkok to Tokyo rose from 20,000 to 28,000 Baht and demand falls from 4,500 – 3,800 tickets sold per week. Calculate elasticity of demand
2. The price of air ticket from Bangkok to Seoul rose from 20,000 to 28,000 Baht and demand falls from 3,800 to 3,700 tickets sold per week. Calculate elasticity of demand
Which one has higher elasticity of demand?
Price elasticity of demand Factors affecting price elasticity of demand
necessity of good or service number of substitutes addictiveness price and usefulness time period consumer awareness
Elasticity of demand and total revenue
Elasticity and Total Revenue(TR)
Over the Elastic Range of
prices and quantity the relationship between price and total
revenue is
INDIRECT or OPPOSITE
Elasticity and Total Revenue
ED > 1 then
P Q TRand
Elasticity and Total Revenue
Over the Inelastic Range of prices and quantity
the relationship between price and total revenue is
DIRECT or THE SAME
Elasticity and Total Revenue
ED < 1 then
P Q TRand
Income Elasticity of Demand
The percentage change in the quantity demanded
given a one percent change in income.
Computing Income Elasticity
Computed as the percentage change in the quantity demanded divided by the percentage change in Income.
Income Elasticityof Demand
=
Percentage Change in Quantity Demanded
Percentage Change in Income
Income Elasticity of Demand... Types
YD > 0 Normal Goods(Clothes)
YD < 0 Inferior Goods(Bus rides)
YD = 0 Income-neutral
Goods(Medicines)
Income Elasticity... Types
Goods consumers regard as “luxuries” tend to be income elastic...Examples include: Sports cars,
furs, and expensive foods.
Cross-price elasticity of demand Definition
Percentage change in quantity demanded of good A ÷ Percentage change in price of good B
This is to see when price of B changes, how price of good A will change.
Cross-price elasticity of demand measures the relationship between different goods and services. It therefore reveals whether goods are Substitutes
Having positive cross-price elasticity (+/+ =+) Complements
Negative cross-price elasticity (-/+ = -) unrelated.
Cross-price elasticity is zero (0/+= 0)
Demand forecasting Methods for forecasting demand (Frechtling,
2001) include: naive forecasting
Making simple assumptions about the future (assume the 3% increase for demand)
qualitative forecasts ‘Ranking’ the importance of factors affecting future trends
(no mathematic models) time-series extrapolation
Using a series of data (e.g. monthly data of international visitors
from 1990-2009 to forecast the future arrivals of tourists in the next five years.)
Demand forecasting Methods for forecasting demand (Frechtling,
2001) include: Surveys
Where no time series data exist. Surveys can be used by acquiring data from respondents to forecast demand.
Delphi technique Using expert opinion to forecast with the aim of reaching a
consensus among the experts Models
Complex methods involving statistical or econometric techniques to construct a comprehensive model with economic variables, such as interest rates, inflation rates, and growth rates.