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ELASTICITY AND
ITS
APPLICATIONS
Terminologies
Elasticity - a measure of a variable's sensitivity to a change in
another variable (i.e. demand to price, supply to price)
Elastic - an economic term meant to describe a change in the
behavior of buyers and sellers in response to a price change
for a good or service.
Inelastic - an economic term used to describe the situation in
which the quantity demanded or supplied of a good or service
is unaffected when the price of that good or service changes.
Producer - someone who creates and supplies goods or
services
Terminologies
Supply - a fundamentaleconomicconcept that
describes the total amount of a specific good or
service that is available to consumers.
Price Elasticity of Demand degree of
responsiveness of quantity demanded to a
change in price.
Pricing Decisions decisions made by top
management/ marketing managers on how much
to charge for a product or service.
Interpretation
Unitary elastic
Elastic
Inelastic
Unitary elastic proportional change between change in price and the change in demand
IMPORTANCE OF
TOTAL REVENUE
IN PRICING
DECISIONS
10
IN COMPARING 2 TRS,
WHICHEVER YIELDS A
HIGHER TR, HOLDING
OTHER THINGS CONSTANT,
IT IS THE BEST PRICE FOR
THE GOOD.
11
EXAMPLE:
12
SOLVE FOR Q
= 450-500 / 500+450/2
= -50 / 475
= - 0.11
13
SOLVE FOR P
% change in P = change in P /
average P
= 25 / 112.5
=0.22
14
% change in Qd / % change in P
-0.11 / 0.22
= - |0.5| or 0.5
15
TR= P x Q
16
INCOME ELASTICITY OF
DEMAND
INCOME
INTERPRETATIO
ELASTICITY OF
N
DEMAND
>1
Luxury good
<1
Necessity
>0
Normal good
17
<0
Inferior good
18
CROSS
ELASTICITY
OF DEMAND
degree of responsiveness of a
percentage change in QUANTITY OF A
GOOD with a percentage change in
the PRICE OF OTHER GOODS
19
COMPLEMENTARY
GOODS
-Products which are consumed together
-The benefit of one good will be reduced if
used alone
SUBSTITUTE GOODS
-in the case that a product increases its price,
consumers may opt to find a replacement of
that specific product
-products that can be consumed in
replacement of another product
20
RELATION OF
GOODS
=0
> 0, positive
substitutes
< 0, negative
complements
21
SAMPLE PROBLEMS:
#2
#1
GOOD
GOOD
23
PRICE ELASTICITY OF
SUPPLY
PRICE ELASTICITY OF
SUPPLY
Price Elasticity of Supply
Qa
=1
Unitary elastic
>1
Elastic
<1
Inelastic
Formul
a =
change of Qs
Price
averange in Qs
%
change
of
Q
s
Elasticity =
=
% change in P change of P
of
averange in P
Supply
Example 1
Old price of sardines is PHP 10. At
PHP 10, a producer can supply 100
cans of them. When the sellong price
changes to PHP 12, the producer was
able to increase its production to 120
units. How elastic was the supply?
Example 2
Suppose that the old price of instant
noodles is PHP 5 and a seller can
produce 100 packs of them. When
the price rose by PHP 2, the producer
has doubled his production. How
elastic is his supply of noodles?
Example 3
A 14-inch TV is originally sold at PHP
5,000. At this price, an appliance
store is able to sell 100 TVs in the
market. The following month, the new
price of TV is PHP 7,500. However, the
store ha only increased its output by 5
units. How elastic was the supply?