...Of Elasticity In economics, elasticity is a measure of the response or sensitivity of one economic variable against change in another. Different elasticities of demand measure the responsiveness of quantity demanded to changes in variables which affect demand. i) Price elasticity of demand - Measures the responsiveness of quantity demanded by changes in the price of the good. This is the most common elasticity measurement. The formula used to determine price elasticity is e = (percentage change in quantity) / (percentage change in price) Demand is inelastic if the coefficient is less than one. Example a large increase/decrease in price produces a small decrease/increase in sales. Demand is elastic if the elasticity coefficient is greater than one. Example a small increase/decrease in price produces a large decrease/increase in sales. ii) Income elasticity of demand - Measures the responsiveness of quantity demanded by changes in consumer incomes. A product is a normal good when its income elasticity is positive (greater than zero) A product is inferior good when its income elasticity is negative. iii) Cross-price elasticity of demand - Measures the responsiveness of quantity demanded by changes in the price of another good. If two goods are substitutes their cross-price elasticity will be positive. If two goods are complements their cross-price elasticity will be negative. The above measures are all with respect to buyers. Likewise we can measure how...
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...Chapter 4 Elasticity • • • • I. The price elasticity of demand measures how strongly demanders respond to a change in the price of a good. The price elasticity of demand can be used to make quantitative predictions of how changes affect the price and quantity demanded of a good. The income elasticity of demand measures how strongly demanders respond to a change in income, and the cross elasticity of demand measures how strongly demanders respond to the change in the price of another good. The price elasticity of supply measures how strongly suppliers respond to a change in the price of a good. Price Elasticity of Demand • In general, elasticity measures responsiveness. The price elasticity of demand measures how responsive demanders are to a change in the price of the good. This information is often useful for both businesses and governments. • The price elasticity of demand is a units-‐free measure of the ...
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...|A Report on | |Elasticity and Related Problems | |A Report on | |Elasticity and Related Problems | Course Title: Microeconomics Course Code: F – 106 Submitted To: Lubna Rahman Lecturer Department of Finance University of Dhaka Submitted By: |Serial No. | | | |Name | | | |ID No. | | | | | | | |01. | | | |Md. Tanvir Ahmed Chy ...
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...School of Economics and Finance University of Tasmania CRICOS Provider Code 00586B 1 1. Elasticity (For details of essential readings and key learning objectives see MyLO and Study Guide 6) 2 Policy-makers: ◦ Need to understand how strong the effects on equilibrium price and quantity will be of various shifts in demand and supply, including policies that rely on changing the incentives that buyers and sellers face in markets. The strength of these effects will determine the welfare effects of such policies (i.e who are the winners and who are the losers?) Business: ◦ What will the effect of a change in price have on revenue and how much will changes in market conditions effect demand and supply for their product? 3 An elasticity is a (unit-free) measure of the responsiveness of a dependent variable to a change in an independent variable, ceteris paribus. 4 Dependent Variable Quantity demanded Quantity demanded Quantity demanded Quantity supplied Independent Variable Price Income Price of related good Price Type of Elasticity Elasticity of demand (Ed) Income elasticity of demand (EI) Cross-price elasticity (EXY) Elasticity of supply (ES) 5 % change in dependent variable % change in independent variable 6 Measures the responsiveness of the quantity demanded of a good per period (dependent variable) to a change in that good’s own price (independent variable), ceteris paribus. ◦ The percentage change in quantity demanded...
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...Microeconomics * Elasticity * Price Elasticity of Demand * a measure of the responsiveness of quantity demanded to changes in price * addresses the percentage change in quantity demanded for a given percentage change in price * Coefficient of price elasticity of demand (E sub d) = Percentage Change in Quantity Demanded/ Percentage change in price * From Perfectly Elastic to Perfectly Inelastic Demand * Ed > 1 = Elastic * Ed <1 = Inelastic * Ed = 1 = Unit Elastic * Ed = Infinity = Perfectly Elastic * Ed = 0 = Perfectly Inelastic * Elastic Demand and Inelastic Demand * Elastic Demand: If the numerator (percentage change in quantity demanded) is greater than the denominator (percentage change in price), the elasticity coefficient is greater than 1 and demand is elastic * Inelastic Demand: If the numerator (percentage change in quantity demanded) is less than the denominator (percentage change in price), the elasticity coefficient is less than 1 and demand is inelastic * Unit Elastic Demand and Perfectly Elastic Demand * Unit Elastic Demand: If the numerator (percentage change in quantity demanded) equals the denominator (percentage change in price), the elasticity coefficient is 1 * Perfectly Elastic Demand: If quantity demanded is extremely responsive to changes in price, the result is perfectly elastic demand * Perfectly Inelastic Demand * Perfectly Inelastic...
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...Elasticity I. Introduction A. Elasticity Defined Elasticity: Elasticity is a measure of the responsiveness of the quantity demanded or quantity supplied to one of their respective determinants (i.e. price, price of related goods, income, etc.) B. Key word: responsiveness A synonym for elasticity would be responsiveness (i.e. how responsive supply or demand is to changes in price, price of related goods, income, etc.) C. Four measures of elasticity 1. Price elasticity of demand 2. Income elasticity of demand 3. Cross price elasticity of demand 4. Price elasticity of supply II. Price Elasticity of Demand A. Definition Price Elasticity of Demand is a measure of how much the quantity demanded of good responds to a change in the price of that good. B. Formula [pic] this value is normally negative. Notes: • Since the demand curve is downward sloping the above fraction will have a negative value. To change the negative value into a positive value the absolute value is taken. • Elasticity is different from slope. Slope is measured by ∆QD/∆P C. Five Classifications 1. Perfectly inelastic demand does not change [pic] % change in QD = 0 2. Inelastic demand little change [pic] % change in QD < % change in P 3. Unit elastic demand [pic] % change in QD = % change in P The only way it can be equal to one is if its...
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...“Kinds Of Elasticity Of Demand” “Factors Influencing Elasticity Of Demand” GROUP 2 ROLL NO | NAME | 7 | PRAVEEN KUMAR K L | 8 | PRAVEEN R | 9 | PRITHVI LINGH HONNESH | 10 | PRITHVI P M | 11 | PRIYA DARSHINI B A | 12 | PRIYANKA JAHAGIRDAR | ------------------------------------------------- ABSTRACT From the managerial point of view, the knowledge of nature of relationship between demand and its determinants alone is not sufficient. What is more important is the extent of relationship or the degree of responsiveness of demand to the changes in its determinants. The degree of responsiveness of demand to the change in its determinants is called elasticity of demand. The concept of elasticity of demand plays a crucial role in business-decisions regarding maneuvering of prices with a view to making larger profits. Almost most businessmen are intuitively aware of the elasticity of demand of the goods they make, however, the use of precise estimates of elasticity of demand will add precision to their business decisions. In this paper we will discuss * The various kinds of elasticity of demand * The nature of change and how it affects the decision taking. * How demand decisions in response to price changes vary for different types of goods? * Factors influencing the elasticity of demand INTRODUCTION Governments, business firms, supermarkets, consumers, and law courts need a way to measure how responsive...
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...a downward sloping. The law of supply indicates that merchants will move more of a product at higher prices and lesser at lower prices. Merchants want to boost their profits, therefore the supply curve is upward sloping. The points where demand and supply curve, the intersection is the point of equilibrium. Demand elasticity and Supply elasticity: Elasticity is a measure of change. It measures the responsiveness of demand and supply to changes in certain variables like price. Demand elasticity: It is the ratio in the change of quantity demanded due to changes in other variables affecting demand.(example - Price). Supply elasticity: It is the percentage change in quantity supplied due to changes in other variables affecting demand.(example - Price). Importance of Demand and Supply analysis: Determination of equilibrium price and quantity. To define the significance of price control and rationing, minimum price fixation, prevalence of taxes, as well as many other economic problems and policies. Importance of Demand and Supply elasticity: To measure the responsiveness of other variables on demand and supply. International trade: A nation may have elastic or inelastic demand for particular products, therefore its imperative to analyze the demand pattern of the products in which the country wants to export and import. Impact of these concepts to the economy, individuals and employers: ...
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...Concepts of Elasticity of Demand – In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. It helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors. Elasticity of Supply – the percentage change in quantity supplied divided by the percentage change in price. It measures the responsiveness of quantity supplied to a change in other economic variables. Price Elasticity of Demand – a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Arc Elasticity – the elasticity of one variable with respect to another between two given points. It is the ratio of the percentage change of one of the variables between the two points to the percentage change of the other variable. Point Elasticity – the relatively responsiveness of a change in one variable to an extremely small change in another variable. The concept of point elasticity comes into play when discussing the elasticity at a specific point on a curve. Income Elasticity – a measure of the relationship between a change in the quantity demanded for a particular good and a change in income. It refers to the sensitivity of the quantity demanded for a certain product in response to a change in consumer incomes. Cross Elasticity – an economic concept that measures the responsiveness in the quantity...
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...b) The objective of airline firms is to maximise profits. This can be achieved by maximising total sales and minimising total costs. The various demand elasticity concepts can be used to by the airline firms to maximise total revenue. Sales revenue refer to the total receipts from sales of a given quantity of goods/service. It is calculated by multiplying the quantity of good or services sold by the price of the good or services. Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity (market for air travel) to a change in the price of the good itself, ceteris paribus. Its formula is given by percentage change in quantity demanded of air travel over the percentage change in price of price of air travel. Ep is useful in helping the airline firms to determine the price that should be set or adopt appropriate pricing policy for its market for air travel, to maximise total revenue earned. For Ep, if the absolute value of the coefficient is greater than 1, this means that a given percentage change in price results in a larger percentage change in quantity demanded, ceteris paribus. The converse is true when demand is price inelastic. In this case, demand for air travel is price elastic. The two determinants affecting Ep for market for air travel are availability of substitutes and size of budget spent on good. The availability of substitutes of airplane is wide. For example, besides the airplane there are other alternatives as well...
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...TYPES OF ELASTICITY Elasticity is a term widely used in economics to denote the “responsiveness of one variable to changes in another.” In proper words, it is the relative response of one variable to changes in another variable. The phrase “relative response” is best interpreted as the percentage change. The quantity of a commodity demanded per unit of time depends upon various factors such as the price of a commodity, the money income of consumers, the prices of related goods, the tastes of the people, etc., etc. Whenever there is a change in any of -the-variables stated above, it brings about a change in the quantity of the commodity purchased over a specified period of time. The elasticity of demand measures the responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant. When the relative responsiveness or sensitiveness of the quantity demanded is measured to changes in its price, the elasticity is said be price elasticity of demand. When the change in demand is the result of the given change in income, it is named income elasticity of demand. Sometimes, a change in the price of one good causes a change in the demand for the other. The elasticity here is called cross electricity of demand. The three Main types of elasticity are now discussed in brief. (1) Price elasticity of demand The concept of price elasticity of demand is commonly used in economic literature. Price elasticity of demand is the degree of responsiveness...
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...Written Paper - 1 MBA 532: Managerial Economics By Taranpreet Singh Jaggi Wagiha Taylor July, 2010 Managerial Economics is branch of economics that apply micro economics tools like demand and cost, monopoly and competition, the allocation of resources, and economic tradeoffs to help managers in taking better decisions. Managerial economics is the science of directing scarce resources to manage effectively. These may be decisions with regard to customers, suppliers, competitors or the internal working of the organization. It does not matter whether the setting is a business, non profit organization or a home. It is the application of micro economics to the managerial issues (Wikipedia, 2010) Written Paper on — Demand Analysis and Optimal Pricing The term demand signifies the ability or the willingness to buy a particular commodity at a given point of time. Demand is the desire to own anything and the ability to pay for it. In short, the demand function shows, in equation form, the relationship between the quantity sold of a goods or service and one or more variables (Blogspot, 2010). Q = f (P, P0, Y) The demand function does not indicate the exact quantitative relationship between Q and P, P0, and Y. Q = quantity demanded P = price of the product P0 = price of the other product Y = income of the consumer The demand equation can be used to test the changes in any of the explanatory variables. The demand curve is a special sub case of...
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...at which the amounts supplied and demanded are the same. (intersection of supply and demand curve) CHANGES IN DEMAND OR SUPPLY (a) Increase in demand: demand curve shifts right-up, so the price and the amount bought and sold rise. (b) Decrease in demand: demand curve shifts left-down, so the price and the amount bought and sold fall. (c) Increase in supply: supply curve shifts right-down, so the price falls, but the amount bought and sold rises. (d) Decrease in supply: supply curve shifts left-up, so the price rises, but the amount bought and sold falls. ELASTICITY OF DEMAND AND SUPPLY Elasticity is used to avoid the problem of unit of measure. Elasticity: measures the responsiveness of one variable to changes in another variable. EXY=% change in Y% change in X For both values negative and positive of elasticity, the further they are from zero, the greater responsiveness they indicate. PRICE ELASTICITY OF DEMAND Indicates the percentage change in the amount divided for each 1 percent increase in price. Quantity demanded decreases when the price increases,...
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...demand and supply Section 2 monopolistic competition a market in which there are many buyers and many sellers, with very low barriers to entry and a degree of product differentiation oligopoly an industry where there are a few large firms which take up majority of market share, significant barriers to entry and a very low degree of product differentiation demand the quantity of a product than buyers are willing and able to buy at a given price per unit time supply the quantity of a product suppliers are willing and able to supply at each price per unit time maximum price a price ceiling (market restriction not allowing price of product to rise above it) imposed by the government and set below the equilibrium price / [diagram] price elasticity of demand the...
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...MICROECONOMICS FALL2014 PRACTICE TEST QUESTIONS (Set 01.01) 1. What do economists mean when they say that the economy faces scarcity? A. There are fewer resources available than there were in the 1960s. B. It is quite evident that the world is running out of resources. C. The economy is producing far below its capacity to produce. D. The resources available are not sufficient to produce all that everyone wants. 2. Which of the following terms describes the next best alternative that must be sacrificed as a result of making a particular choice? A. Microeconomics. B. Macroeconomics. C. Scarcity. D. Opportunity costs. E. The law of increasing costs. 3. (p. 12-13) All of the following except one are considered to be among the three fundamental questions in economics? Which one is the exception? A. What to produce? B. How much competition? C. How to produce? D. For whom? 4. (p. 7) All of the following except one are factors of production. Which is the exception? A. Land. B. Labour. C. Capital. D. Money. E. Enterprise. 5. (p. 8) What are the payments made to the owners of land, labour, capital and enterprise respectively? A. Rent, wages, dividends and profits. B. Rent, wages, dividends and interest. C. Rent, profits, wages and interest. D. Rent, wages, interest and profits. E. Rent, wages, profits and interest 6. (p. 7) All of the following except one are microeconomic statements. Which is the exception? A. The price of wheat declined...
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