Elasticity

Definition

measure the sensitivity of one variables (qty demand) to change in another variable (price)

Type of elasticity

Demand

Supply

Price (PEd)

Income (PEi)

Cross (PExy)

measure responsiveness of qty demand to a change in price

Ad = % change in qty / % chnage in price

% change in qty = Q1 - Q0 / Q0 x 100

% change in price = P1 - P0 / P0 x 100

GRAF DALAM SLIDE

RELATIONSHIP TOTAL REVENUE (TR) and PEd

TR = price x qty

Profit = TR - TC

If demand is elastic

Then, % change in P less than % change in Dd

Therefore, small % rise in P, Larger % fall in Dd = TR decrease

Therefore, small % fall in P, Larger % rise in Qd = TR increase

If demand is Inelastic

Then, % change in P more than % change in Qd

Therefore, Large % rise in P, small fall in Qd = TR increase

Therefore, large % fall in P, smaller % rise in Qd = TR decrease

Measurement of Interpretation

Inelastic

Elastic

Unitary Elastic

Perfectly Elastic

Perfectly Inelastic

0<Ed<1

An increase in price causes a smaller % fall in demand

The curve will be steeper

People dont react to the price change/ demand are inelasticity

Ed>1

An increase in prices causes a bigger % fall in demand

The curve will be flatter

E.g: Luxury good or goods which has many substitute

People react much to the change of price/ demand are elastic

Ed=1

Unitary Elasticity is when there is an equally proportional change in demand, following a change in price. Eg: Normal goods.

Ed = infinity ( 9.999999)

The price will affect the quantity demanded

Ed=0

Any changes in price will not affect the quantity demanded.