Download elasticity - Together We Pass

STUDY UNI T 6
ELASTICITY
1
SOME STUDY OBJECTIVES

Define elasticity

Discuss price elasticity of demand

Indicate the relationship between elasticity and total
revenue

Discuss factors that may influence price elasticity of
demand

Discuss income elasticity of demand
2
PRICE ELASTICITY OF DEMAND

Definition of price elasticity

Calculation of price elasticity of demand NOT required in
current curriculum, BUT you need to understand it in order
to master what IS required. [Class discussion/example]

Five elasticity values:
– Perfectly inelastic - Ed = 0
– Relatively elastic - Ed > 1
– Unit elastic
- Ed = 1
– Relatively inelastic - 0 < Ed <1
– Perfectly elastic
- Ed = 
3
PERFECTLY INELASTIC DEMAND CURVE
D
ED = 0
4
RELATIVELY INELASTIC DEMAND
Habit forming products
D
Fashionable Products
Complementary products
Products that are non-durable
Necessities
0 < Ed <1
%∆P > %∆Qd
5
UNIT ELASTIC DEMAND
D
Ed =1
%∆P = %∆Qd
6
RELATIVELY ELASTIC DEMAND
Luxury products
Products that you spend a large
percentage of income on.
D
Substitute products
Durable products
Ed > 1
%∆P < %∆Qd
7
Price/litre
PERFECTLY ELASTIC CURVE
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Ed = ∞
0
8000
8500
9000
9500
Quantity litres/month
8
Figure 9-4 The different categories of price elasticity of
demand (as in textbook)
Chapter 9 Elasticity
© Van Schaik Publishers
9
FACTORS INFLUENCING ELASTICITY OF DEMAND

Luxury or necessity

Availability of substitutes

Portion of monthly income spent on product

Habit forming products

Durability of products

Time period
10
Linear Demand Curve And Elasticity Values
9
8
Ed=  (Perfectly Elastic)
7
Price
6
Ed>1 (Elastic)
5
Ed=1
4
3
0< Ed<1 (Inelastic)
2
1
Ed= 0 (Perfectly Inelastic)
0
0
1000
2000
3000
4000
5000
6000
7000
8000
Qua ntity de ma nde d
11
Price, Quantity and Total Revenue
Price
Quantity
TR = P x Q
ELASTICITY VALUE
(for information only)
8
0
0
ED = 
7
1000
7000
ED > 1
6
2000
12000
ED > 1
5
3000
15000
ED > 1
4
4000
16000
ED = 1
3
5000
15000
0 < ED < 1
2
6000
12000
0 < ED < 1
1
7000
7000
0 < ED < 1
0
8000
0
ED = 0
12
Total Revenue
THE TOTAL REVENUE CURVE
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
0
1000
2000
3000
4000
5000
6000
7000
8000
Quantity
13
DEMAND - CONSUMERS

Price elasticity and total revenue:
– If Ed > 1 – product is elastic
– If Ed < 1 – product inelastic
– If Ed = 1 – product unit elastic

Draw graphs showing relationship between demand curve
and Total revenue. (page 160)
– In elastic section of demand curve – a price decrease leads to
an increase in total revenue
– In inelastic section of demand curve – a price decrease leads
to a decrease in total revenue
14
Figure 9-3 The relationship between price elasticity of
demand and total revenue
Chapter 9 Elasticity
© Van Schaik Publishers
15
Figure 9-5 The impact of an increase in supply
Chapter 9 Elasticity
© Van Schaik Publishers
16
ELASTICITY OF DEMAND - CONSUMERS

Income elasticity of demand:
– Definition
– Purpose:
• To establish how consumers classify products
• Inferior products – Negative income elasticity (Ey < 0)
• Normal products – Positive income elasticity (Ey > 0)
• Normal products can be divided in two categories:
– Necessities
– Luxury products
0 < EY < 1
Ey > 1
17
EXAMINATION QUESTIONS
45
40
35
30
25
20
15
10
5
0
0
25
50
75
100
18
QUESTIONS RELATING TO SLIDE 18

At which prices is the price elasticity larger than one?

At which of the provided prices is the elasticity value smaller
than one?

At which price level is the price elasticity equal to 1?

Suppose the price is R10. What must happen to prices in order
to increase the total revenue?

Suppose the price is R30. What must happen to prices in order
to increase the total revenue?
19
S1
P
50
D
S0
S2
S3
40
30
25
20
0
Q
20
QUESTIONS RELATING TO SLIDE 20

Suppose the supply of maize increases from S0 to S2? What
happens to total revenue?

Suppose the supply of maize decreases from S3 to S2? What
happens to total revenue?

At which price will total revenue be maximised?
21
P
20
D
S0
S1
10
0
Q
22
QUESTIONS RELATING TO SLIDE 22

The quantity of tomatoes sold increases from 2006 to 2007.
What happened to the total revenue of tomato producers?

At which price will the total revenue be maximised?
23
1.2
Draw a perfectly elastic
demand curve?
1
Price
0.8
0.6
0.4
0.2
0
Quantity
24
30
A perfectly elastic demand
curve
25
20
15
10
5
0
0
25
50
75
100
25
45
40
A perfectly inelastic
demand curve.
35
• What happens to TR if
prices increase?
30
•What happens to quantity
demanded?
25
20
15
10
5
0
0
50
26
D1
1
Which curve is relatively
elastic? Explain.
0.9
D2
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
50
100
27
EXAMINATION QUESTION - ELASTICITY
P
100 f
70
S
50
30
20
D
200
Q
28
QUESTIONS TO SLIDE 28

What is the value of price elasticity of demand at Point f?

At which of the specified prices will total revenue be maximised?
29
(a) An elastic demand curve
(b) An inelastic demand curve
30
(a) An elastic demand curve
(b) An inelastic demand curve
31