Dr. Mohamed El Ashery Basic economic concepts .ppt principles of Economics elasticity.ppt

Dr. Mohamed El Ashery Basic economic concepts .ppt principles of Economics elasticity.ppt

1. Elasticity and Its
Application
Chapter 6
Dr. Mohamed Elashery

2. Demand elasticity
the price elasticity of demand;
Types of elasticity
Conditions of elasticity:

3. Elasticity . . .
Demand elasticity is a measure of
how much the quantity demanded
will change if another factor changes.
 … is a measure of how much
buyers and sellers respond to
changes in market conditions

4. Price Elasticity of Demand
Price elasticity of demand is the percentage
change in quantity demanded given a percent
change in the price.
It is a measure of how much the quantity
demanded of a good responds to a change in
the price of that good.
the price elasticity of demand; this measures
how the quantity demanded changes with price.

5. Computing the Price Elasticity
of Demand
The price elasticity of demand is computed
as the percentage change in the quantity
demanded divided by the percentage
change in price.
Price Elasticity =Percentage Change in Qd
Of Demand Percentage Change in Price

6. Elasticity, Percentage Change
and Slope

7. Conditions of elasticity:
Perfectly Elastic demand: elasticity = ∞

8. Conditions of elasticity:
perfectly inelastic demand: elasticity = 0

9. Conditions of elasticity:
Relatively Elastic Demand elasticity > 1

10. Conditions of elasticity:
Relatively inelastic Demand elasticity < 1

11. Conditions of elasticity:
Unitary Elastic Demand =1

12. Conditions of elasticity:

13. Types of elasticity
Cross elasticity of demand
refers to the change in
demand for a good as a
result of change in the price
of other goods.

14. Types of elasticity
 the income elasticity of
demand means the change
in demand which occurs as
a result of change in income

15. Ranges of Elasticity
Inelastic Demand
Percentage change in price is greater than
percentage change in quantity demand.
Price elasticity of demand is less than one.
Elastic Demand
Percentage change in quantity demand is
greater than percentage change in price.
Price elasticity of demand is greater than one.

16. Perfectly Inelastic Demand
- Elasticity equals 0
Quantity
Price
4
$5
Demand
100
2. ...leaves the quantity demanded unchanged.
1. An
increase
in price...

17. Inelastic Demand
- Elasticity is less than 1
Quantity
Price
4
$51. A 25%
increase
in price...
Demand
10090
2. ...leads to a 10% decrease in quantity.

18. Unit Elastic Demand
- Elasticity equals 1
Quantity
Price
4
$51. A 25%
increase
in price...
Demand
10075
2. ...leads to a 25% decrease in quantity.

19. Elastic Demand
- Elasticity is greater than 1
Quantity
Price
4
$5
1. A 25%
increase
in price...
Demand
10050
2. ...leads to a 50% decrease in quantity.

20. Determinants of
Price Elasticity of Demand

Necessities versus Luxuries

Availability of Close Substitutes

Definition of the Market

Time Horizon

21. Determinants of Price
Elasticity of Demand
Demand tends to be more inelastic
If the good is a necessity.
If the time period is shorter.
The smaller the number of close substitutes.
The more broadly defined the market.

22. Determinants of
Price Elasticity of Demand
Demand tends to be more elastic :
if the good is a luxury.
the longer the time period.
the larger the number of close
substitutes.
the more narrowly defined the market.

23. Income Elasticity of Demand
Income elasticity of demand measures
how much the quantity demanded of a
good responds to a change in consumers’
income.
It is computed as the percentage change
in the quantity demanded divided by the
percentage change in income.

24. Computing Income Elasticity
Income Elasticity
of Demand
Percentage Change
in Quantity Demanded
Percentage Change
in Income
=

25. Income Elasticity
- Types of Goods -
Normal Goods
Income Elasticity is positive.
Inferior Goods
Income Elasticity is negative.
Higher income raises the quantity demanded
for normal goods but lowers the quantity
demanded for inferior goods.

26. Cross Price Elasticity of
Demand
Elasticity measure that looks at the
impact a change in the price of one good
has on the demand of another good.
% change in demand Q1/% change in
price of Q2.
Positive-Substitutes
Negative-Complements.

27. The demand schedule for
coffee is shown in table:
Price of Coffee : 20 22
Quantity Demanded 10 9
Calculate the price elasticity
of demand for coffee.

28. Price elasticity of demand
for coffee is:
ep
 = ∆Q/Q
÷∆P /P = (Q2-Q1)/
Q1 ÷ (P2-P1)/P1
ep
 = (9-10) /10
÷ (22-20)/20 =
-1/10 ÷ 2/10 = -1/10 * 10/2
ep
 = - 0.5
inelastic

29. : You are given the Demand
curve and supply curve as a
following:
Qd
 =50 – 2P
Qs
 = 20 + 4P

30. Required:
* Equilibrium price & Quantity.
* Draw the demand curve & and the
supply curve and determine the
Equilibrium.
* Find the slope of the Demand
curve & the supply curve.
* If the price increase from 3 £ to 8
£. Calculate the Price elasticity of
demand.