Transcript Elasticities

Elasticities
Price Elasticity of Demand
Income Elasticity of Demand
Cross Elasticity of Demand
Real world applications of Elasticity…
The economic concept of “Elasticity” is used
primarily by producers to predict changes in
consumer demand.
By how much will demand change if……
- The price of a good increases/decreases
- Consumer incomes increase/decrease
How do I know if a good is a
compliment/substitute………..
A.S 3.2 Response of the Market to
change….
“The description of how a market responds to change will involve a
selection from:
Elasticity
 definitions of price elasticity of demand, cross elasticity of demand,
income elasticity of demand and price elasticity of supply
 calculation of price elasticity of demand, cross elasticity of demand,
income elasticity of demand and price elasticity of supply
 reasons for differing elasticities for different goods and services
 significance for firms in their pricing decisions
 supply responsiveness in the long term compared with the short
term.”
Price Elasticity of Demand
Textbook pp. 48-55
- Read & then make notes on the following
Objectives:
1. Define Price Elasticity of Demand
2. Calculate Price Elasticity
- Percentage Change Method & Mid Point Method
3. Impact on Revenue* Calculation can be used to calculate
elasticity & the relative elasticity of a good will determine the
impact on Revenue
4. Describe the different elasticities of demand
5. Explain the factors that affect elasticity of demand
Price Elasticity of demand
“Measures the responsiveness of the quantity
demanded of a good or service to its change in
price”
In other words if the price is increased or
decreased how
much quantity demanded will change, if at all.
Calculations for Price Elasticity of
Demand
Coefficient = a pure number used to quantify
Elasticity
Depending on the information given there are 3
methods used to calculate elasticity:
- Percentage Change (Arc)
- Mid Point
- Change in Revenue
Percentage Change
E = % QD
% P
p
Mid- Point Method
E=
p
Ed = 0 < 1 Inelastic
Ed => 1 Elastic
Ed = 0 = 1 Unitary
Q
Q1 +Q2
2
P
P1 +P2
2
Revenue Change
Total Revenue 1 – Total Revenue 2
Price ↓ Revenue ↑
Elastic
Price ↑ Revenue ↓
Price ↓ Revenue ↓
Inelastic
Price ↑ Revenue ↑
Demand Curves
What does the shape
of the curve tell you?
So what does this mean?
• What kind of goods or services would have
elastic demand?
• What kind of goods would have inelastic
demand?
Elastic Demand
Are Luxuries
Have many
close
substitutes
Goods &
services
likely to be
elastic...
Involve a
relatively high
proportion of
income
Can be
easily
postponed
Inelastic Demand
Are
Necessities
Have few
close
substitutes
Goods &
services
likely to be
inelastic...
Involve a
relatively low
proportion of
income
Can not be
easily
postponed
Elasticity in application
In class do activities 4.4 & 4.5 in your text book.
For homework do Questions: 3, 4, 7 & 8 in your
workbook.
Income Elasticity of Demand
& Cross Elasticity of Demand
Read pages 58-61
& then make notes which achieve the following
aims/objectives:





Define Income & Cross-Elasticity of Demand
Calculate Income & Cross-Elasticity of Demand *
Describe how the relative elasticity indicates if a good is
Substitute or a Complement
Normal Good, Luxury, Basic Necessity or an Inferior Good
* The text only has one (% ) but the mid point formula also
applies
Cross Elasticity of Demand
“Cross-Elasticity of Demand measures by how
much the quantity demanded of one product
will increase or decrease after a change in
price of another good.”
Put simply it shows if there is a relationship
between goods and or services.
Specifically whether they are complements or
substitutes.
Calculations for Cross-Elasticity
Either
EC = % QB
% PA
Or
EC = QB
QB1 +QB2
2
PA
PA1 +PA2
2
Implications….
A positive coefficient suggests a Substitute
good or service
A perfect substitute will have a very high coefficient
If the coefficient is 0 then there is no
relationship
A negative coefficient suggests a
complementary good.
Complements & Substitutes
Substitutes can be recognised by having a positive coefficient
meaning that an increase in the price of one good will result in
an increase in demand for the other
Complements are recognised by having a negative coefficient,
meaning that an increase in the price of one good will cause a
decrease in demand for the other.
Aggregate Household Spending
Back in year 11 you looked at the overall patterns of household
expenditure. Specifically identifying the pattern of consumption
On Necessities, Luxuries, Savings, Inferior v Normal Goods.
Because Consumers are all different their tastes & preferences
and specifically spending patterns will differ. Sometimes it is not
obvious or clear that a good or service is a luxury or a necessity.
The Economic Concept of Elasticity helps to identify
patterns between income & demand for specific
types of goods & services
Calculations for Income Elasticity of
Demand
Either
Ey = % QD
% Y
Or
Ey = Q
Q1 +Q2
2
Y
Y1 +Y2
2
Implications…
A positive coefficient suggests a Normal Good
A very high coefficient suggests a luxury good
A coefficient which is less than one suggests a
good is a necessity
A negative coefficient suggests an inferior
good, sometimes known as a Giffen Good.
Types of Goods & Services….
 Normal. Goods or services that are slightly better quality.
Demand for normal goods will increase as income increases.
 Luxury
Goods or services that are “treats, obtained via discretionary
income. Demand will increase with an increase income
 Necessity
Basic goods or services that vital or needed for survival.
 Inferior (Griffin Goods)
Low quality, budget brand goods. When income increases,
demand will decrease
Applying it….
Do activity 4.6 on p. 57/58 (Good real world
example ;-)
Then also add to homework/do workbook
questions
Income Elasticity – p. 26 Q. 12,13 & 15
Cross Elasticity – p. 28 Q. 19, 20
For fun …. Multiple Choice p. 29/30