ZURONI MD. JUSOH

JPSPP, FEM

ObjectivesObjectivesIn this chapter you will…In this chapter you will…

Learn the meaning of the elasticity of demand.

Examine what determines the elasticity of demand.

Apply the concept of elasticity in three types of elasticity to determine the goods.

THE ELASTICITY OF DEMANDMeasuring the impact

of price changes on quantity demanded as a result of changes in a variable.

variables:The price of the own goods consumers income Other prices – substitutes or complements

TYPES OF DEMAND ELASTICITY

Price elasticity of demand (Ed)Income elasticity of demand  (Ey)

Cross price elasticity of demand (Ec)

Price Elasticity of Demand (Ed)measures the percentage change in

quantity demanded caused by a percent change in price.

Formula :Ed = % Quantity demanded

% Price = (-) Q X P

Q P

Cont.Ed = (-) Q1 – Q0 X P0

Q0 P1 – P0

where: Q0= The original quantity demanded

Q1 = New quantity demanded

P0 = Original Price

P1 = New Price

Interpreting values of price elasticity coefficients (Ed)

Ed = 0 –Perfectly inelastic demand

Ed < 1 – inelastic demandEd = 1 –Unit elastic, unit

elasticity, unitary elasticity, or unitarily elastic demand

Ed > 1 – elastic demandEd = - perfectly elastic

demand

Different Elasticity values along DD curve

P A

Ed > 1 Ed = 1 E Ed < 1 B Qty

FACTORS INFLUENCE on EdSubstitute goods

If a lot of substitutes, the DD is elasticRatio of income spent on goods

The larger the income spent on goods, the more elastic DD.

Interests / Needs ProductsFlexible if the goods do not have toNot flexible if the goods have

use of goodsElastic where goods have many uses

FavoriteElastic if less fond on stuff/goods

Cont.Timeline

Short  term- DD is not elasticLong term– DD elastic

New Consumerelastic if have many new consumer

Number of firmElastic where many sellers / producers

Total revenue TR = P x QPrice changes affect sales and depends

on the elasticity of the demand involved.

Cont.

Income Elasticity of Demand (Ey)measures the percentage change in demand

caused by a percent change in income.Formula :

Ey = % Quantity demand

% Income = (-) Q X Y

Q Y

Cont.Ey = (-) Q1 – Q0 X Y0

Q0 Y1 – Y0

Di mana : Q0 =The original quantity demanded

Q1 = New quantity demanded

Y0 = Original income

Y1 = New Income

DEGREES OF INCOME ELASTICITY OF DEMAND Engel curve - the curve I describe the relationship

between changes in income (Y) with the change in quantity demanded (Qd).

A) Ey = 1 Y KE

Y1

Y0 10%

10%

Q0 Q1 Qty Example : Clothes

Cont.B) Ey > 1 Y KE

Y1

10%

Y0

20%

Q0 Q1 Qty Example : luxurious stuff

Cont.C) 1>Ey > 0

Y KE

Y1

Y0 20%

10%

Q0 Q1 Qty Example : Common necessities

Cont.

D) Ey = 0 Y KE

Y1

Y0

Q0 Qty

Example : compulsory stuff

Cont.E) Ey < 0 (-ve) Y

Y1

Y0

KE

Q0 Qty Example : Inferior goods

Cross Price Elasticity of Demand (Ec)

measures the percentage change in demand for a particular good caused by a percent change in the price of another good.

Formula :Ec = % Quantity demanded for A

% price of B = (-) QA X PB

QA PB

Cont.Ec = (-) QA1 – QA0 X PB0

QA0 PB1 – PB0

Where: QA0 = Original quantity demanded for  product A

QA1 = New quantity demanded for  product A

PB0 = The original price of the product B

PB1 = The new prices of product B

Types of Cross Price Elasticity of Demand (Ec)

1) Ec = value +ve (substitute goods) P

D

PB1

PB0

QA0 QA1 QtyRelations + ve (continued) between P and Qd.

Cont.2) Ec = -ve values 

(complementary goods)P

PB0

PB1

D QA0 QA1 Qty

Relationship -ve (inverse) of P with Qd 

Cont.3) Ec = 0 (unrelated goods)

P D

P1

P0

Q0 Qty Price change does not affect the quantity

demanded of other goods.

Summary Price elasticity of demand is influenced

by their price of own goods, income  & other prices. 3 types of the elasticity of

demand Ed, Ey, Ec 5 values of Ed:

not perfectly elastic (Ed = 0), not elastic (Ed <1), unity (Ed = 1), elastic (Ed>1),perfectly elastic (Ed = ∞)

Cont. 5 types of Ey 

Ey = 0 (necessities goods), 1> Ey> 0 (the ordinary necessities), Ey = 1 (normal goods), Ey>1 (luxury goods), Ey <0 (inferior or giffen)

 3 types of EcEc = + ve (substitute goods) Ec =-ve (complementary goods) and Ec = 0 (unrelated goods)

Thank You