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• Concept of elasticity
• Various types of elasticity
• Total revenue and elasticity
• Tax revenue and elasticity
∆Q P
×
∆P Q
10000 30
= ×
− 5 10000
=− 2000 ×0.003
=− 6
6 6 © AUT Faculty of Business 2008
Point elasticity of demand
Globalisation and Business Enterprise
∆Q P
×
∆P Q
∆Q ΣP
×
∆P ΣQ
8 © AUT Faculty of Business 2008
Demand Curves and Elasticity
Globalisation and Business Enterprise
Revenue gain
$10
Revenue loss
$5
Demand
3 10 Quantity
cont..
(ii) Inelastic Demand - if total revenue increases from $50 to
$60 when the price of the good increases, demand for the
good is inelastic.
Inelastic Demand
Price
Revenue gain
$10
Revenue loss
$5
Demand
6 10 Quantity
17 © AUT Faculty of Business 2008
What is cross-elasticity of
Globalisation and Business Enterprise
demand?
• The ratio of the percentage change in quantity demanded of a good to a given
percentage change in price of another good:
• Cross elasticity calculations reveal whether goods are substitutes or
complements in use.
• When your answer is positive it means that a rise in the price of let’s say lamb will
lead to an increase in the quantity demanded of beef – substitutes.
• When your answer is negative it means that a rise in the price of let’s say cars will
lead to a decrease in the quantity demanded of petrol – complements.
demand?
• The concept of income elasticity of demand relates the quantity
demanded of any good or service to a change in income.
% ∆Q
ey =
%∆
• If income increases and quantity Y
demanded increases
normal good (such as luxury - and necessity goods).
• If income increases and quantity demanded decreases
inferior good (such as low quality clothing and food).
P
S1
S
2.70
2.00 Tax = $1 per can
78 Q
Incidence on buyer
21 Incidence on seller
© AUT Faculty of Business 2008
Tax and elastic demand
Globalisation and Business Enterprise
P S1
S
Q
70 100
Incidence on buyer
Incidence on seller
22 © AUT Faculty of Business 2008