computing for elasticity

8/3/2019 Computing for Elasticity

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COMPUTING FOR ELASTIC(PRICE ELASTICITY OF DEMAND; INCOME ELASTICITYCROSS ELASTICITY; PRICE ELASTICITY OF SUPPLY

By : Dr. Leda C. Celis, Economics Departm

And its application


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Price Elasticity of Demand and PrDecisions

PriceElasticity (Pe)

of Demandisthe degree ofresponsiveness of Qd to achange in

Price.

Price elasticity of Demanchange in Qd

%change in Qd = Average Qd

% change in P Change in P

Average P

Where: =1, means unitary elastic>1, means elastic


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Importance of Total Revenue In PricinDecisions:

TR = PRICE XQUANTITY

Where TR = Total

Revenue;Where P = price

Where Q = Quantity

Note:

- In Comparing two

whichever yields a TR (holding other thconstant), the pricecharged is the best of the good, whethethe old price or the price.


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Example 1=

Cecilia sellsbangus for Php100 and her Qd =500. When shedecides to sell it at

P125, her Qd2becomes 450.Should Cecilia sellher bangus atP100 or P125? IsQd elastic or

inelastic?

First solve for % change in Demand andPrice

% change in P = Change in P = 125-1000.22

Average P = 100 + 125 2

% change in Qd = Change in Qd = 4500.11

Average Qd 500+450

2

% change in Qd / % chan


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Price Elasticity of Demand

Hence, 0.05 is lessthan 1, therefore Qdis inelastic.

Price elasticity ofDemand isexpressed in

Absolute Value

= % change i

% change i

= -0.11

0.22

= -0.05 or 0.5


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Decisions using Total Reven

TR 2 is higher than TR1;hence the new TR, is better.Cecilia should sell herbangus at P 125.

Hence, when Ceciliaincreases her price whiledemand is inelastic, shegets bigger total revenue.She will then maximize her

profit by raising her price toP 125.

TR1 = P = 100

500

= 50,0

TR 2

= P2

= 125 450

= 56,2

E l 2 P i l i i f


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Example 2. Price elasticity ofdemand

If Theresa sellstilapia for P80 perkilo, the demand forit is 200. When sheraises it by P20, the

Qd diminishes to100. At what pricewill Theresamaximize her profit?Is the demand

elastic or inelastic?

% Change in Qd= change in Qd

Average Qd

= 100-200

200 + 100

2

= -0.67

% change in P

= change in P/

= 100 80/ 80

= 0.22

Price Elasticity of Demand = % change0.67

% change in

= -3.045 or 3.045, elastic


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Computing for total Revenue

COMPARING THETWO RESULTS, WECAN OBSERVETHAT AT AN

ELASTIC DEMANDFOR TILAPIA,PROFIT IS

MAXIMIZED AT THEORIGINAL PRICE.

TR1 = P1 x Q1

= 80 x 200 = 1

TR2 = P2 x Q2= 100 x 100 =


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DEMAND

SUMMARY OFINCOMEELASTICITY OFDEMAND:

>1 = LUXURY

GOOD;

0 = NORMALGOOD;


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Example 1 Income Elasticity Demand

Chris earns a monthly salary of P5,000 aconsumes P1,000 worth of chicken per mWhen her income increased by P2,500/mshe started to consume P2,000 worth ofmeat a month. Is Chris demand for chickmeat normal, inferior, necessity or luxury


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DEMAND

= 0.67 = 1.68

0.40

THE RESULT IS

GREATER THAN 1,HENCE THEDEMAND FORCHICKEN ISNORMAL ANDMIGHT BE

CONSIDERED AS ALUXURY GOOD.

% CHANGE IN QD= 2000-1000 = 1,000 =

1000 + 2000/2 1,500

% CHANGE IN Y= 7,500 5,000 = 2,500

5,000 + 7,500/2 6,250


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. ncome e as c y oDemand

= % change in Qd= 50-100 = -50 = -0.67

100+50/2 75

= % change in Y= 7,500-5000 = 2500 = 0.40

5000 + 7500/2 6,250

=-0.67/0.40 = - 1.68

Every month Mang ErneP5,000 as a fishball venDuring this period, he aconsumes 100 tuyo. Wincome increased by P2

began lessening his conof tuyo to 50. From the gtuyo normal, inferior, or good for Mang Ernesto?


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Cross elasticity of demand

good

Qd1 Qd2 P1 P2

x 4 5 4 5

y 2 3 2 3

SUMMARY OF CROELASTICITY:

If:

= 0 (X AND Y ARE RELATED

0 (POSTIIVE) - S

< 0 (NEGATIVE) -COMPLEMENTS


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DEMAND

= % CHANGE INDEMAND

FOR PRODUCT X-----------------------------------

% CHANGE IN THE

PRICE

OF PRODUCT Y

(Qd2 Qd1)(Qd2 + Qd1/2)-----------------------

(P2 P1)(P1 + P2/2)


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% change in demandfor product X

Qd2-Qd1 = 5-4= 1 = 0.22

Qd1 + Qd2/2 4+5 45

2

% change indemand for pY

= P2 P1 = 3 2 =0.40

P1 + P2 2+3

2 2

Cross elasticity of Demand = 0.22/0.40 = 0.55,greater

than 0, hence product X & Y are


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Cross elasticity of Demand

Good

Qd1 Qd2 P1 P2

X 2 5 5 3

Y 2 3 3 1

% change in product X% change in product Y

5-2 = 3 = 0.86

2+5/2 3.5

--------------------------------- 1-3 = -2 = - 1

3+1/2 2

PRODUCTS X & Y ARECOMPLEMENTS


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PRICE ELASTICITY OF SU

(Qs2 Qs1)/(Qs1+Qs(P2 P1)/(P1+P2/2)% CHANGE IN Qs

% change in P

Change in Qs/ AverageQsChange in P/Average P

Summary of Price Elasticity of

= 1 Unitary Elastic1 Elastic< 1 Inelastic


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Price Elasticity of Supply

The old price of sardinesis P10. At P10, aproducer can supply100 cans of them.When the selling price

changes to P12, theproducer was able toincrease its productionto 120 units. Solve forthe price elasticity ofsu l

= % change in % change in

= 20/110

2/11 = 1, the sardin

unitary elasti


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Price elasticity of Supply

Suppose that the oldprice of instantnoodles is P5 and aseller can produce100 packs of them.

When the price roseby P2, the producerhas doubled hisproduction. Howelastic is his supply

for noodles?

% change in Qs/% chan

=change in Qs/Average

=100/150 = 0.67

-------------------------------

=change in P/Average P

= 2/6 = 0.33

--------------------------

0.67/0.33 = 2.03 el


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Price elasticity of Supply

A 14 inch TV is originally soldat P5000. at this price, anappliance store is able to sell100 TVs in the market. Thefollowing month, the newprice of TV is P7,500.However, the store has onlyincreased its output by 5units. How elastic was thesupply of the stores TV?

% change in Qs/% change in

P

Change in Qs = 5 = 0

Average Qs 102.5

Change in P = 2,500 =

Average P 6,250

0.05/ 0.4 = 0.125


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Thank you

16x9

4x3

computing for elasticity

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