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.