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Elasticity
Kaiya Yamada
Definition
Elasticity is the measure of the responsiveness
or sensitivity of one factor to a change in
another factor. This means that if factor
A(the one that is being measured) is sensitive
to a change in factor B(the one that is being
changed), then factor A will show a great
change. If, however, factor A is insensitive to
a change in factor B, then factor A will show
little change. Sensitivity, in economic
terms, refers to elasticity.
Elastic Versus Inelastic
Example of each
Elastic(sensitive to change):
If Mr. Nguyen raises the price of his yakitori by a small
amount at his yakitori stand, the quantity demanded
will fall greatly. Many of his customers will disappear.
However, if he lowers his price by a small amount, the
quantity demanded will rise greatly and he will have
tons of customers.
Inelastic(insensitive to change):
Even if the price of rice falls or rises to a great extent, the
quantity demanded will only vary a small amount.
Quantity demanded will vary to a lesser extent
compared to the price.
A way to differentiate elasticity on a graph
Types of Elasticity:
Elasticity of Demand:
Price Elasticity of Demand(PED)
Cross-price Elasticity of Demand(XED)
Income Elasticity of Demand(YED)
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Elasticity of Supply:
Price Elasticity of Supply
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Price Elasticity of Demand(PED)
"The price elasticity of demand is the measure
of the responsiveness or sensitivity of
consumers to a change in the price of a
particular product." -Economics textbook
Elastic: When there is a small change in price,
there is a significant change in the quantity
demanded.
Inelastic: When there is a significant change in
price, there is only a small change in the
quantity demanded.
Determinants of PED
The determinants are SPLAT!
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Substitutes
Proportion of Income
Luxury or Necessity
Addictive or not
Time to respond
Elastic PED (Individual ex.)
The slope is very shallow or gentle. The rise over run
ratio is small. This is a good indicator that ice cream is
elastic in price elasticity of demand..
Explanation:
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There are many substitutes for ice cream.
Example are sherbet, fruit bars, frozen
yogurt, etc.
And although opinions may differ, ice cream
is not a necessity to life. It is a luxury. That is
why it is elastic.
Inelastic PED (Larger ex.)
Although some people may not agree...
The slope is very steep. The rise over run
ratio is great. This is a good indicator that
food(Cezar's Kitchen's lunch) is inelastic in
price elasticity of demand.
Explanation
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Although there definitely are substitutes to Cezar's
lunches like bringing homemade lunches, buying food
from the convenient store, ordering Hotto Motto food,
etc., these options all involve putting in extra effort and
time. It is much easier to just plug in four numbers at
the register and get food. This makes the price elasticity
of demand inelastic.
Food is a necessity especially for high school students
who are going to classes all day.
Even if the price rises, it will take time to respond and
find other methods of obtaining food. This also makes
the PED inelastic.
The Math Behind PED
Explained on the Board:
∆ = change QD=quantity demanded P=price
PED=%∆QD/%∆P
PED= (QD2-QD1)÷QD1
(P2-P1)÷P1
This gives you the PED coefficient.
Positive and Negative PED
Although we usually ignore the negative and
positive sign with the PED coefficient, it is
important to note that the sign indicates
whether a good is a normal good or is one of
the anomalies to the law of demand. As we
learned previously, anomalies to the law of
demand include Veblen goods(ex. RollsRoyce Phantom), Giffen goods, and
speculative goods(expectations). Normal
goods have a negative PED coefficient, and
anomalies have a positive PED coefficient.
Interpreting the PED coefficient
PED = 0
PED < 1
PED = 1
PED > 1
PED = ∞
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Absolutely Inelastic
Relatively Inelastic
Unit Elastic
Relatively Elastic
Absolutely Elastic
Elasticity Along the Curve
What this implies:
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When a good is absolutely inelastic, no matter what the price
change is, the quantity demanded will remain constant.
When a good is relatively inelastic, a price change will cause a
change in the quantity demanded that is proportionally
smaller.
When a good is unit elastic, the price and the quantity
demanded are indirectly proportional.
When a good is relatively elastic, a price change will cause a
change in the quantity demanded that is proportionally
larger.
When a good is absolutely elastic, any price change will cause
the quantity demanded to either fall to 0 or rise to infinity.
Why is this important?
It is important for many groups of people:
Businesses as they have to make good decisions. For
example, if a company's goods are elastic, they will want
to lower the price slightly below the prices of
competitors. They definitely don't want to change the
price by a great quantity. Why?
Government as they have to make the right decisions. If
they tax an elastic good, that good's demand will fall
drastically.
Consumers as they are influenced by the decisions of the
businesses and governments. If the government or
businesses raise the price of an inelastic good, the
consumer suffers as they have to pay more. This gets
into taxes which will be discussed further in chapter 5.
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Cross-price Elasticity of
Demand(XED)
Cross-price Elasticity of Demand refers to the
"measure of the responsiveness of consumers to
a change in the price of a related good. "
- Economics textbook
Elastic: There is a significant change in the
quantity demanded of a good when there is a
small change in price of a related good.
Inelastic: There is a small change in quantity
demanded of a good when there is a significant
change in the price of a related good.
Math Behind the XED
Explained on the Board:
∆=change QA=quantity of good A
PB=Price of good B
XED=%∆QA/%∆PB
XED= (QB2-QB1)÷QB1
(PC2-PC1)÷PC1
This gives you the XED coefficient.
Interpreting the XED coefficient
XED = 0
XED < 1
XED = 1
XED > 1
XED = ∞
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Absolutely Inelastic
Relatively Inelastic
Unit Elastic
Relatively Elastic
Absolutely Elastic
The difference between PED and XED
coefficient
With PED, there is nothing more to the coefficient aside
from being an indicator of elasticity and indicating
whether the good is an anomaly or a normal good
With XED, the coefficient indicates something more than
the elasticity. If the coefficient is zero, it means the two
goods have nothing to do with each other. If the
coefficient is negative, it means the goods are
complementary. If the coefficient is positive, the goods
are substitutes.
The signs(+/-) are more important with XED than PED.
Complementary Good: Negative XED
Toothpaste and Toothbrushes are complementary goods. If the price of
toothpaste increases, then the quantity demanded of toothbrushes
decreases. As we learned, XED looks at the percent change in
quantity demanded of toothbrushes over percent change in the price
of toothpaste. This would be a negative relationship.
The XED measures to what extent the two goods are related. The higher
the coefficient, the greater the relation.
Example of Inelastic Coefficient showing a complementary
relationship: -0.3
Example of Elastic Coefficient showing a complementary relationship: 15
Can you guess if XED of toothpaste and toothbrushes are
elastic or inelastic? This is a complementary good with
negative XED. The quantity decreases as the price of the
complement increases.
Substitute Good: Positive XED
Coffee and tea are substitute goods. If the price of tea increases, the
quantity demanded of coffee increases. As we learned, XED
looks at the percent change in quantity demanded of coffee over
percent change in the price of tea. This would be a positive
relationship.
The XED measures to what extent the two goods are related. The
higher the coefficient, the greater the relation.
Example of Inelastic Coefficient showing a substitute relationship:
0.3
Example of Elastic Coefficient showing a substitute relationship: 15
How about this one? Is this elastic or inelastic? This is a
substitute good with a positive XED. The quantity
demanded increases as the price of the substitute increases.
Income Elasticity of Demand(YED)
The Income Elasticity of Demand is the measure of
the responsiveness or sensitivity of consumers to
a change in the income of the people demanding
the good.
Elastic: There is a significant change in the
quantity demanded of a good when there is a
small change in the income.
Inelastic: There is a small change in quantity
demanded of a good when there is a significant
change in the income.
The Math Behind the YED
Explained on the Board:
∆=change QA=quantity of good A
Y=Income of the people demanding the object
YED=%∆Q/%∆Y
YED= (Q2-Q1)÷Q1
(Y2-Y1)÷Y1
This gives you the YED coefficient.
Interpreting the YED coefficient
YED = 0
YED < 1
YED = 1
YED > 1
YED = ∞
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Absolutely inelastic
Relatively Inelastic
Unit Elastic
Relatively Elastic
Absolutely Elastic
Positive or Negative YED
Positive YED means that as the income
increases, the demand increases as well. This
is the case with superior or normal goods. A
positive YED is a good indicator that a good is
a normal good.
Negative YED means that as the income
increases, the demand decreases. This is the
case with inferior goods. A negative YED is a
good indicator that a good is an inferior good.
Graph of Positive YED
If Kohei's income increases: Cars
Graph of Negative YED
If my income increases: Cup Ramen
Price Elasticity of Supply
We will look at this as a class with Mr. Nguyen.
Relative Elasticity
Relative Elasticity is the elasticity of a good
compared to the elasticity of other goods.
This can be compared using the slopes of the
different curves of demand.
Relative Elasticity Graph
Thank you for participating!
Sources:
Pearson Baccalaureate Economics Textbook
http://faculty.pepperdine.edu/jburke2/ba210/
PowerP1/Set6Answers.pdf
OSC IB Revision Guides