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ECO162
ELASTICITY
Ms. Tai Nyuk Chin
LEARNING OUTCOMES
• At the end of this lesson, the students
should be able to:
i. Explain the concept of elasticity.
ii. Identify the types of elasticity.
iii. Identify the determinants of elasticity of
demand and supply.
iv. Define and calculate elasticity of demand
(price, income, cross) and supply.
ELASTICITY
Four types of Elasticity:
i. Price Elasticity of Demand
ii. Income Elasticity of Demand
iii. Cross-Price Elasticity of Demand
iv. Price Elasticity of Supply
PRICE ELASTICITY OF DEMAND
1. Definition
• It is a measure of how much the quantity
demanded of a good responds to a change in
the price of that good.
• The percentage change in quantity demanded divided by
the percentage change in a good’s price.
2. Measurement :
percentage change in demand
Ed =
percentage change in price
[(Q1-QO)/QO] x 100
Ed =
[(P1-PO) /PO] x 100
(8 10 )
100
10 20 %
2
( 2.20 2.00 ) 10 %
100
2.00
2
$5
4 Demand
1. A 25%
increase
in price . . .
0 50 100 Quantity
$5
4
1. A 25% Demand
increase
in price . . .
0 90 100 Quantity
2. At exactly $4,
consumers will
buy any quantity.
0 Quantity
3. At a price below $4,
quantity demanded is infinite.
Figure 9: Degree of Elasticity (Perfectly Inelastic)
Price Elasticity, Ed = 0
Demand %∆P, %∆Q = 0
$5
4
1. Any
increase
in price . . .
0 100 Quantity
$5
4
1. A 25% Demand
increase
in price . . .
0 80 100 Quantity
Price
$4
P × Q = $400
P
(revenue) Demand
0 100 Quantity
Q
Elasticity and Total Revenue along a
Linear Demand Curve
• With an inelastic demand curve, an
increase in price leads to a decrease in
quantity that is proportionately smaller.
Thus, total revenue increases.
Figure 12 How Total Revenue Changes When Price
Changes: Inelastic Demand
Price Price
An Increase in price from $1 … leads to an Increase in
to $3 … total revenue from $100 to
$240
$3
Revenue = $240
$1
Revenue = $100 Demand Demand
Price Price
$5
$4
Demand
Demand
0 50 Quantity 0 20 Quantity
Cross Price Elasticity of Demand
Ec = % change in demand Qx
% change in price of Qy
Ec = [(Q1x-Q0x/Q0x)]
[(P1y-P0y/P0y)]
Ey = % change in demand Q
% change in Income
Ey =
[(Q1-Q0/Q0)]
[(Y1-Y0/Y0)]
The income elasticity of demand for good X if The income elasticity of demand for good Y if
income increase from RM100 to RM150: income increase from RM100 to RM150:
[(Q1-Q0/Q0)] x 100
Es = x 100
[(P1-P0/P0)]
Q1 = Current quantity P1 = Current Price
Qo = base year quantity Po = Price base year
Figure 14 The Price Elasticity of Supply (Elastic Supply)
Supply
$5
4
1. A 25%
%∆P <
increase
%∆Q
in price . . .
Price
Supply
$5
4
1. A 25%
increase
in price . . .
1. At any price
above $4, quantity
supplied is infinite.
$4 Supply
2. At exactly $4,
producers will
supply any quantity.
0 Quantity
3. At a price below $4,
quantity supplied is zero.
$5
4
1. An
increase
in price . . .
0 100 Quantity
Supply
$5
4
1. A 25%
increase
in price . . .