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Bachelor in Economics (S.E): Manajemen
Course : Pengantar Ilmu Ekonomi (1506PIE04)
online.uwin.ac.id
Session Topic : Elasticity & Its Application
Course: Pengantar Ilmu Ekonomi
By Tovan Krisdianto, S.E., M.M.
UWIN eLearning Program
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Content
Part 1 Elasticity of Demand
Part 2 Ranges of Elasticity
Part 3 Elasticity of Supply
Part 4 Summary
Part1: Elasticity of Demand
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Elasticity: Definition & Price
Elasticity
Defn:
A measure of how much buyers & sellers respond to changes in market conditions.
Allows us to analyze supply & demand with greater precision.
Price elasticity of demand
Defn: 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.
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Elasticity: Determinants
Determinants of Price Elasticity of Demand
1. Availability of Close Substitutes
2. Necessities versus Luxuries
3. Definition of the Market
4. Time Horizon
Demand tends to be more elastic:
a. If the good is a luxury.
b. The longer the time period.
c. The larger the number of close substitutes.
d. The more narrowly defined the market.
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Elasticity: Computing the Price Elasticity of Demand
The price elasticity of demand
Defn: Computed as the percentage change in the quantity demanded divided
by the percentage change in price.
Price Elasticity of Demand =Percentage Change in Quantity Demanded
Percentage Change in Price
Example:
If the price of an ice cream cone increases from $2.00 to $2.20 & the amount you buy falls from 10 to 8 cones then your elasticity of demand
would be calculated as:
100%
100%
20 percent
10 percent= 2=
(108)
10
(2.20 2.00)
2.00
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Elasticity: Computing the Price Elasticity of Demand (Cont.)
Price Elasticity of Demand =Percentage Change in Quantity Demanded
Percentage Change in Price
Example:
Point A: PRICE =$4 Quantity = 120 Point B: PRICE =$6 Quantity = 80
A to B B to A
(12080)
120
(6.004.00)
4.00
100%
100%
33 %
50 %= 0.66=
(80120)
80
(4.006.00)
6.00
100%
100%
-50 %
-33 %= 1.5=
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Elasticity: Computing the Price Elasticity of Demand Using the Midpoint Formula
The midpoint formula
Defn:
Preferable when calculating the price elasticity of demand because
it gives the same answer regardless of the direction of the change.
Price Elasticity of Demand =(Q2 Q1)/[(Q2 +Q1)/2]
(P2 P1)/[(P2 +P1)/2]
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Elasticity: Computing the Price Elasticity of Demand (Cont.)
Price Elasticity of Demand =Percentage Change in Quantity Demanded
Percentage Change in Price
Example:
Point A: PRICE =$4 Quantity = 120 Point B: PRICE =$6 Quantity = 80
(80120)
A to B B to A
= -2=
(6.00+4.00)/2
(80+120)/2
(6.004.00)
- 40%
20%
(12080)
= -2=
(4.00+6.00)/2
(120+80)/2
(4.006.00)
40
- 20%
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Elasticity: Computing the Price Elasticity of Demand (Cont.)
Demand is price elastic
4 Demand
Quantity1200
Price
$6
80
40 percent
-20 percent= -2=
(120-80)
(120+80)/2
(4.00-6.00)
(4.00+6.00)/2
ED =
Part2: Ranges of Elasticity
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Ranges of Elasticity: The Variety of Demand Curves
a. Inelastic Demand
Quantity demanded does not respond strongly to price changes. Price elasticity of demand is less than one.
b. Elastic Demand
Quantity demanded responds strongly to changes in price. Price elasticity of demand is greater than one.
c. Perfectly Inelastic
Quantity demanded does not respond to price changes.
d. Perfectly Elastic
Quantity demanded changes infinitely with any change in price.
e. Unit Elastic
Quantity demanded changes by the same percentage as the price.
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Ranges of Elasticity: Perfectly Inelastic Demand-Elasticity Equals 0
100
Demand
Quantity
2. ...leaves the quantity demanded unchanged
Price
1. An $5increase
in price... 4
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Ranges of Elasticity: Inelastic Demand-Elasticity is Less than 1
Quantity
Price
1. A 22% $5
increase
in price... 4
Demand
90 1002. ...leads to a 11% decrease in quantity
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Ranges of Elasticity: Unit Elastic Demand-Elasticity Equals 1
Price
1. A 22% $5
increase
in price... 4
Demand
Quantity80 1002. ...leads to a 22% decrease in quantity
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Ranges of Elasticity: Elastic Demand-Elasticity is Greater than 1
Price
1. A 22% $5
increase
in price... 4
Demand
Quantity50 1002. ...leads to a 67% decrease in quantity
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Ranges of Elasticity: Perfectly Elastic Demand-Elasticity Equals Infinity
Demand
Quantity
Price
$4
2. At exactly $4,consumers willbuy any quantity.
3. At a price below $4,quantity demanded is infinite.
1. At any price
above $4, quantitydemanded is zero.
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Ranges of Elasticity: Elasticity & Total Revenue
Total revenue
Defn: The amount paid by buyers & received by sellers of a good. Computed as the price of the good times the quantity sold.
TR = P x Q
Figure
Demand
Quantity
$4
P
0
Price
100
P x Q = $400
(total revenue)
Q
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Ranges of Elasticity: Elasticity & 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.
$3
Quantity0
Price
80
Revenue = $240
Demand$1 Demand
Quantity0
Revenue = $100
100
Price
An increase in price
from $1 to $3...
leads to an increase
in total revenue
from$100 to $240
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Ranges of Elasticity: Elasticity & Total Revenue along a Linear Demand Curve (Cont.)
With an elastic demand curve,
an increase in the price leads to a decrease in quantity demanded that is proportionately larger.
Thus, total revenue decreases.
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
leads to a decreasein total revenue
from$200 to $100
Revenue = $200
An increase in price
from $4 to $5...
Demand
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Ranges of Elasticity: Computing the Elasticity a Linear Demand Curve (Cont.)
Price
(A)
Quantity
(B)
Total
Revenue
(A x B)
Percent
Change in
Price
Percent
Change in
Quantity
Elasticity Description
$0 14 $0 200% 15% 0.1 Inelastic
1 12 12 67 18 0.3 Inelastic
2 10 20 40 22 0.6 Inelastic
3 8 24 29 29 1 Unit Elastic
4 6 24 22 40 1.8 Elastic
5 4 20 18 67 3.7 Elastic
6 2 12 15 200 13 Elastic
7 0 0
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Income Elasticity: Definition
Income Elasticity of Demand
Defn: 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.
Computing Income Elasticity
Income Elasticity of Demand =Percentage Change in Quantity Demanded
Percentage Change in Income
Income Elasticity
Types of Goods
a. Normal Goods
b. Inferior Goods
Higher income raises the quantity demanded for normal goods but lowersthe quantity demanded for inferior goods.
Part3: Elasticity of Supply
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Elasticity of Supply: Price
Price Elasticity of Supply
Defn: The percentage change in quantity supplied resulting from a percent change in price.
It is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
Determinants of Elasticity of Supply
a. Ability of sellers to change the amount of the good they produce.
Beach-front land is inelastic. Books, cars, or manufactured goods are elastic.
b. Time period.
Supply is more elastic in the long run.
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Elasticity of Supply: Computing the Price Elasticity of Supply
Ranges of Elasticity
a. Perfectly Elastic
ES =
b. Relatively Elastic
ES > 1
c. Unit Elastic
ES = 1
Elasticity of Supply =Percentage Change in Quantity Supplied
Percentage Change in Price
The Price Elasticity of Supply is,
computed as the percentage change in the quantity supplied divided by the percentage change in price.
d. Relatively Inelastic
ES < 1
e. Perfectly Inelastic
ES = 0
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Elasticity of Supply: Perfectly Inelastic Supply-Elasticity Equals 0
100
Supply
Quantity
2. ...leaves the quantity supplied unchanged
Price
1. An $5
increase
in price... 4
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Elasticity of Supply: Inelastic Supply-Elasticity is Less than 1
Quantity
Price
1. A 22% $5
increase
in price... 4
Supply
100 1102. ...leads to a 10% increase in quantity
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Elasticity of Supply: Unit Elastic Supply-Elasticity Equals 1
Quantity
Price
$5
4
Supply
100 1252. ...leads to a 22% increase in quantity
1. A 22%
increase in
price
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Elasticity of Supply: Elastic Supply-Elasticity is Greater than 1
Price
1. A 22% $5
increasein price...
4
Supply
100 200Quantity
2. ...leads to a 67% increase in quantity
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Elasticity of Supply: Perfectly Elastic Supply-Elasticity Equals Infinity
Quantity
Supply$4
1. At any price
above $4, quantitysupplied is infinite.
2. At exactly $4,producers willsupply any quantity.
3. At a price below $4,quantity supplied is zero.
Price
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Elasticity of Supply: Application
Application of Elasticity
a. Can good news for farming be bad news for farmers?
b. What happens to wheat farmers & the market for wheat when,
university agronomists discover a new wheat hybrid that is more productive than existing varieties?
The application of supply, demand, & elasticity
1. Examine whether the supply or demand curve shifts.
2. Determine the direction of the shift of the curve.
3. Use the supply-and-demand diagram to see how the market
equilibrium changes.
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Elasticity of Supply: An Increase in Supply in the Market for Wheat
1000
Demand
Quantity of Wheat
Price ofWheat
S1
$3
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Elasticity of Supply: An Increase in Supply in the Market for Wheat (Cont.)
0
Price ofWheat 1. When demand is inelastic,
an increase in supply...
S1S2
2
Demand
100 110 Quantity of Wheat
3. ...and a proportionately smallerincrease in quantity sold. As a result,revenue falls from $300 to $220.
$32. ...leads
to a large
fall in
price...
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Elasticity of Supply: Compute Elassticity
Demand is inelastic
-9.5%
40%
100 - 110
3.00 - 2.00ED =
-0.24=
(100+110)/2
(3.00+2.00)/2
Part4: Summary
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Summary: Short-Term & Long-Term Elasticity
Short-Term Elasticity & Long-Term Elasticity
Demand
NoEffect of Income Increase on
DemandNon Durable
1. Non Durable E Short Term < E Long Term
2. Durable E Short Term > E Long Term
Income
NoEffect of Income Increase on
DemandNon Durable
1. Non Durable E Short Term < E Long Term
2. Durable E Short Term > E Long Term
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Summary: Short-Term & Long-Term Elasticity (Cont.)
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Summary: Elasticity
a. Price elasticity of demand measures how much the quantity
demanded responds to changes in the price.
b. If a demand curve is elastic, total revenue falls when the price
rises.
c. If it is inelastic, total revenue rises as the price rises.
d. The price elasticity of supply measures how much the quantity
supplied responds to changes in the price.
e. In most markets, supply is more elastic in the long run than in the
short
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Graphical Review: Computing the Price Elasticity of Demand
Demand is price elastic
4 Demand
Quantity1000
Price
$5
50
67 percent
-22 percent= -3=
(100-50)
(100+50)/2
(4.00-5.00)
(4.00+5.00)/2
ED =
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Graphical Review: Perfectly Inelastic Demand-Elasticity Equals 0
100
Demand
Quantity
2. ...leaves the quantity demanded unchanged
Price
1. An $5increase
in price... 4
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Graphical Review: Inelastic Demand-Elasticity is Less than 1
Quantity
Price
1. A 22% $5
increase
in price... 4
Demand
90 1002. ...leads to a 11% decrease in quantity
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Graphical Review: Unit Elastic Demand-Elasticity Equals 1
Price
1. A 22% $5
increase
in price... 4
Demand
Quantity80 1002. ...leads to a 22% decrease in quantity
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Graphical Review: Elastic Demand-Elasticity is Greater than 1
Price
1. A 22% $5
increase
in price... 4
Demand
Quantity50 1002. ...leads to a 67% decrease in quantity
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Graphical Review: Perfectly Elastic Demand-Elasticity Equals Infinity
Demand
Quantity
Price
$4
2. At exactly $4,consumers willbuy any quantity.
3. At a price below $4,quantity demanded is infinite.
1. At any price
above $4, quantitydemanded is zero.
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Graphical Review: Elasticity & Total Revenue
Demand
$4
P
0
Price
100
P x Q = $400
(total revenue)
QQuantity
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Graphical Review: Elasticity & Total Revenue along a Linear Demand Curve
$3
Quantity0
Price
80
Revenue = $240
Demand$1 Demand
Quantity0
Revenue = $100
100
Price
An increase in price
from $1 to $3...
leads to an increase
in total revenue
from$100 to $240
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Graphical Review: Elasticity & Total Revenue along a Linear Demand Curve (Cont.)
Quantity0
Price
$4
50
Demand
Quantity0
Price
Revenue = $100
$5
20
leads to a decreasein total revenue
from$200 to $100
Revenue = $200
An increase in price
from $4 to $5...
Demand
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Graphical Review: Perfectly Inelastic Supply-Elasticity Equals 0
100
Supply
Quantity
2. ...leaves the quantity supplied unchanged
Price
1. An $5
increase
in price... 4
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Graphical Review: Inelastic Supply-Elasticity is Less than 1
Quantity
Price
1. A 22% $5
increase
in price... 4
Supply
100 1102. ...leads to a 10% increase in quantity
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Graphical Review: Unit Elastic Supply-Elasticity Equals 1
Quantity
Price
$5
4
Supply
100 1252. ...leads to a 22% increase in quantity
1. A 22%
increase in
price
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Graphical Review: Elastic Supply-Elasticity is Greater than 1
Price
1. A 22% $5
increasein price...
4
Supply
100 200Quantity
2. ...leads to a 67% increase in quantity
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Graphical Review: Perfectly Elastic Supply-Elasticity Equals Infinity
Quantity
Supply$4
1. At any price
above $4, quantitysupplied is infinite.
2. At exactly $4,producers willsupply any quantity.
3. At a price below $4,quantity supplied is zero.
Price
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Graphical Review: An Increase in Supply in the Market for Wheat
1000
Demand
Quantity of Wheat
Price ofWheat
S1
$3
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Graphical Review: An Increase in Supply in the Market for Wheat (Cont.)
0
Price ofWheat 1. When demand is inelastic,
an increase in supply...
S1S2
2
Demand
100 110 Quantity of Wheat
3. ...and a proportionately smallerincrease in quantity sold. As a result,revenue falls from $300 to $220.
$32. ...leads
to a large
fall in
price...
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Reference
1. Mankiw (2004) The Market Forces of Supply and
Demand. Web: mankiw.swlearning.com.
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online.uwin.ac.id
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Course : Pengantar Ilmu Ekonomi (1506PIE04)