Download Perfectly Elastic

The Concepts of Demand
and Elasticity
Assistant Professor Dr. Chanin Yoopetch
Learning outcomes
By studying the end of this section students will be able to:
 evaluate the work/leisure trade-off
 evaluate the notion of a “leisure society”
 understand and apply the concept of price elasticity of
demand
 understand and apply the concept of income elasticity of
demand
 understand and apply the concept of cross price elasticity of
demand
 describe simple methods of demand forecasting
 evaluate techniques of demand forecasting
The demand for leisure

Two potential effects of an increase in
income on the demand for leisure time


The substitution effect: First, an increase in income
means an increase in the opportunity cost of
leisure time. In this case we may expect
consumers to demand less leisure time.
The income effect: Leisure time can be classed as
a ‘normal service’, and in common with other
‘normal’ goods and services, as income increases
more will be demanded.
Elasticity . . .
… is a measure of how much buyers and
sellers respond to changes in market
conditions. . .
… allows us to analyze supply and demand
with greater precision.
Elasticity: A General Definition:
The percentage (%) change in something .
..
. . . given a one percent (1%) change in
something else.
Three Types of Elasticities. . .
Price
Price Elasticity of
Demand
 Income Elasticity
Price Elasticity of Supply


Quantity
Price Elasticity of Demand
P
Demand
The percentage change in
the quantity demanded
given. . .
. . . a one percent
change in the price.
A
B
Q
Ranges of Elasticity . . .

Perfectly Inelastic
Consumers are “extremely
unresponsive” to price changes.

Perfectly Elastic
Consumers are “extremely
responsive” to price changes.

Unit Elastic
Response is “equal to” change in price.
Elasticity of Demand Illustrated
Perfectly Inelastic
Perfectly Elastic
Elasticity of Demand Illustrated
At any price above 4, quantity
demanded = 0
4
Q
At any price under 4, quantity
demanded = infinity
Perfectly Elastic
Determinants of
Price Elasticity of Demand
Demand tends to be more elastic:




if the good is a luxury;
the longer the time period;
the greater the number of close
substitutes; and
the more narrowly defined the
market.
Determinants of
Price Elasticity of Demand
Demand tends to be more inelastic:
if the good is a necessity;
 the shorter the adjustment time;
 if there are few good substitutes; and
 the more broadly defined the market.

Computing Elasticity Coefficient
Price Elasticity =
of Demand

Percentage Change in
Quantity Demanded
Percentage Change
in Price
Computed as the percentage change in the
quantity demanded divided by the percentage
change in price.
Income Elasticity... Types
 Goods
consumers regard as
“necessities” tend to be
income inelastic...
 Examples
include: food, fuel,
clothing, utilities, & medical
services.
Price elasticity of demand

Factors affecting price elasticity of demand







necessity of good or service
number of substitutes
addictiveness
price and usefulness
time period
consumer awareness
Elasticity of demand and total revenue
Elasticity and Total Revenue(TR)
Over the Elastic Range of
prices and quantity
the relationship between price and total
revenue is
INDIRECT or OPPOSITE
Elasticity and Total Revenue
ED > 1 then
P Q
and
TR
What if the price declines in different direction?
3.00
2.00
TR 1 = 15
(3.00x5)
TR 2 = 20
5
10
(2.00x10)
Elasticity and Total Revenue
Over the Inelastic Range of
prices and quantity
the relationship between price
and total revenue is
DIRECT or THE SAME
Elasticity and Total Revenue
ED < 1 then
P Q
and
TR
What if the price declines in different direction?
3.00
2.00
TR 1 = 15
(3.00x5)
TR 2 = 12
5 6
(2.00x6)
Income Elasticity of Demand
The percentage change in the
quantity demanded
given a one percent change in
income.
(Higher income  higher demand)
Computing Income Elasticity
Income Elasticity =
of Demand

Percentage Change in
Quantity Demanded
Percentage Change
in Income
Computed as the percentage change in the
quantity demanded divided by the percentage
change in Income.
Income Elasticity... Types
 Goods
consumers regard as
“luxuries” tend to be income
elastic...
 Examples
include: expensive hotel
rooms, luxurious spa services,
sports cars, furs, and expensive
foods.
Demand forecasting

Methods for forecasting demand (Frechtling,
2001) include:

naive forecasting


qualitative forecasts


Making simple assumptions about the future (assume the
3% increase for demand)
‘Ranking’ the importance of factors affecting future trends
(no mathematic models)
time-series extrapolation
Using a series of data (e.g. monthly data of international
visitors
from 1990-2009 to forecast the future arrivals of tourists in the
next five years.)

Demand forecasting

Methods for forecasting demand (Frechtling,
2001) include:

Surveys


Delphi technique


Where no time series data exist. Surveys can be used by
acquiring data from respondents to forecast demand.
Using expert opinion to forecast with the aim of reaching a
consensus among the experts
Models

Complex methods involving statistical or econometric
techniques to construct a comprehensive model with
economic variables, such as interest rates, inflation rates,
and growth rates.