MICRO ECONOMICS(PPT 3)

• Elasticity


  The responsiveness of demand and/or supply to a change in its determinants
• Types of Elasticities


  • Price Elasticity of Demand
  • Income Elasticity of Demand
  • Cross-Price Elasticity of Demand

  
• Price Elasticity of Demand (PEoD)


  The degree of responsiveness of quantity demanded to a change in price

  
• Characteristics of PEoD


  • Elastic Demand
  • Perfectly Elastic Demand
  • Inelastic Demand
  • Perfectly Inelastic Demand
  • Unitary Elastic Demand

  
• Elastic Demand


  Quantity demanded changes larger percentage than does the price (PEoD > 1)

  
• Perfectly Elastic Demand


  Any price above the original price, quantity demanded will become 0 (PEoD = ∞)

  
• Inelastic Demand


  Quantity demanded changes smaller percentage than does the price (PEoD < 1)

  
• Perfectly Inelastic Demand


  An increase in price leaves the quantity demanded unchanged (PEoD = 0)

  
• Unitary Elastic Demand


  The percentage change in quantity demanded is equal to the percentage change in price (PEoD = 1)

  
• Formula for PEoD


  PEoD = % ∆ Qd / % ∆ P or (Qd2 - Qd1) / [(Qd2 + Qd1) / 2] / (P2 - P1) / [(P2 + P1) / 2]
• Income Elasticity of Demand (IEoD)


  Measures how the quantity demanded of a good responds to a change in consumer's income

  
• Types of IEoD


  • Elastic Income (Normal Good)
  • Inelastic Income (Normal Good)
  • Inferior Goods
  • Unitary (Normal Good)
  • Necessity
• Elastic Income (Normal Good)


  Quantity demanded changes larger percentage than does the level of income (IEoD > 1)

  
• Inelastic Income (Normal Good)


  Quantity demanded changes smaller percentage than does the level of income (0 < IEoD < 1)
• Inferior Goods


  As the level of income increases, the quantity demanded decreases (IEoD < 0)
• Unitary (Normal Good)


  Percentage change in the level of income is the same with the percentage change in the quantity demanded (IEoD = 1)
• Necessity


  As the level of income increases or decreases, quantity demanded does not affected (IEoD = 0)
• Formula for IEoD


  IEoD = % ∆ Qd / % ∆ I or (Qd2 - Qd1) / [(Qd2 + Qd1) / 2] / (I2 - I1) / [(I2 + I1) / 2]
• Cross-Price Elasticity of Demand (CPEoD)


  The quantity demanded for a particular good varies according to the price of the other goods

  
• Types of CPEoD


  • Substitute Goods
  • Complementary Goods
  • Not Related
• Substitute Goods


  Goods used in place of each other, price of good y and quantity demanded of good x move in the same direction (CPEoD > 0)
• Complementary Goods


  Goods that supplement each other and are used together, price of good y and quantity demanded of good x move in opposite directions (CPEoD < 0)
• Not Related


  As the price of Product A increases, quantity demanded of Product B does not affected (CPEoD = 0)
• INFERIOR GOODS


  As the level of income increases, the Qd decreases.
• Types of Elasticities


  • CROSS-PRICE ELASTICITY OF DEMAND
  • The quantity demanded for a particular good varies according to the price of the other goods.

  
• Types of Elasticities


  • CROSS-PRICE ELASTICITY OF DEMAND
  • Substitute goods – goods used in place of each other. Because the price of good 𝑦 and the Qd of good 𝑥 move in the same direction, the 𝐶𝑃𝐸��𝐷 is positive.
  • Complementary goods – are goods that supplement each other and are therefore used together. In this case, the 𝐶𝑃𝐸𝑜�� is negative, indicating that an increase in the price of good 𝑦 reduces the Qd of good 𝑥.

  
• CHARACTERISTICS


  • Substitute Goods
  • Not related
  • Complementary Goods
• DEGREE


  • 𝑪𝑷𝑬𝒐𝑫 > 𝟎
  • 𝑪𝑷𝑬𝒐𝑫 = 𝟎
  • 𝑪𝑷𝑬𝒐𝑫 < 𝟎
• DEFINITION


  • As the price of Product A increases, Qd of Product B increases also (directly related).
  • As the price of Product A increases, Qd of Product B does not affected at all.
  • As the price of Product A increases, Qd of Product B decreases (inversely related).

  
• Types of Elasticities


  • PRICE ELASTICITY OF SUPPLY
  • Law of supply tell us that producer's will respond to a price drop by producing less, but it does not tell us how much less. It is the degree of sensitivity of producer's to a change in price.

  
• CHARACTERISTICS


  • Elastic Supply
  • Perfectly Elastic Supply
  • Inelastic Supply
  • Perfectly Inelastic Supply
  • Unitary Elastic Supply
• DEGREE


  • 𝑷𝑬𝒐𝑺 > 𝟏
  • 𝑷𝑬𝒐𝑺 = ∞
  • 𝑷𝑬𝒐𝑺 < 𝟏
  • 𝑷𝑬𝒐𝑺 = 𝟎
  • 𝑷𝑬𝒐𝑺 = 𝟏
• DEFINITION


  • Quantity supplied changes larger percentage than does the price.
  • Any price below the original price, Qs will become 0.
  • Quantity supplied changes smaller percentage than does the price.
  • An increase in price leaves the Qs unchanged.
  • the percentage change in Qs is equal to the percentage change in price.