BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen CHAPTER 6 ELASTICITY ANALYSIS 2 nd Semester, S.Y 2013 – 2014

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen The Concept of Elasticity Elasticity is a measure of the degree of responsiveness or sensitivity of one variable to changes in another variable. The greater the elasticity, the greater the responsiveness.

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Importance of Elasticity  Relationship between changes in price and total revenue  Importance in determining what goods to tax (tax revenue)  Importance in analysing time lags in production.  Influences the behaviour of a firm.

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Elasticity The responsiveness of one variable to changes in another. When price rises, what happens to demand? Demand falls. BUT! How much does demand fall?

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen If price decreases by 10% - what happens to demand? We know demand will increase By more than 10%? By less than 10%? Elasticity measures the extent to which demand will change Elasticity

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Four Types of Elasticity  Price Elasticity of Demand  Income Elasticity of Demand  Cross-price Elasticity  Price Elasticity of supply

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Four Types of Elasticity Price Elasticity of Demand  The responsiveness of demand to changes in price Income Elasticity of Demand  The responsiveness of demand to changes in incomes Cross-price Elasticity  The responsiveness of demand of one good to changes in the price of a related good – either a substitute or a complement Price Elasticity of Supply  The responsiveness of demand to changes in price

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Price Elasticity of Demand  the responsiveness of demand to changes in price  the percentage change in quantity demanded divided by the percentage change in price.  % change in quantity demanded is greater than % change in price – elastic  % change in quantity demanded is less than % change in price - inelastic

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen The Formula: % Change in Quantity Demanded ___________________________ % Change in Price Price Elasticity of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Interpreting the Price Elasticity of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Elastic Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Inelastic Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Unit Elastic Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Perfectly Elastic Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Perfectly Inelastic Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Price Elasticity of Demand - Summary

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Selected Goods – Price Elasticities of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Let’s Check Your Understanding 1.When the price of gasoline per liter rises from P40 to P50, a taxi driver reduces it demand from 90 liters to 85 liters a week. Based on the data, compute for the price elasticity of demand. Interpret the computed elasticity value. 2. The price of Baguio strawberries falls from P150 to P100 per carton and the quantity demanded goes from 1,000 to 2,000 cartons. Compute for the price elasticity of demand. Interpret the computed elasticity value.

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Identify the following goods as either elastic or inelastic. 1. Pandesal 2. Mango 3.Grapes 4. Detergent 5. Tide Detergent 6. Coffee 7. LPG 8. Digital camera 9. Condominiums 10. Household appliances Let’s Check Your Understanding

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Total Revenue and the Price Elasticity of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Graphical Illustration – Total Revenue

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Total Revenue Test

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Total Revenue Test

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Price Change Impact on Total Revenue

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Price Elasticity and the Total-Revenue Curve

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen The Price Elasticity of Demand Changes Along the Demand Curve

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Income Elasticity of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Interpreting the Income Elasticity of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Interpreting the Income Elasticity of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Let’s Check Your Understanding! Income (per month) Quantity Demanded (No. of Meals) P8,0006 P12,0005 Given the demand data for carinderia meals subject to the change in income, calculate the income elasticity for carinderia meals. Is demand elastic, inelastic or unitary? Is the good normal or inferior?

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Cross Elasticity Of Demand  The responsiveness of demand of one good to changes in the price of a related good – either a substitute or a complement/  Measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y). It is expressed by the formula. Cross Price Elasticity of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Cross-Price Elasticity of Demand Goods which are complements:  Cross Elasticity will have negative sign (inverse relationship between the two) Goods which are substitutes:  Cross Elasticity will have a positive sign (positive relationship between the two)

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Interpreting the Cross-Price Elasticity of Demand

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Price Elasticity of Supply

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Elastic Supply

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Inelastic Supply

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Unit Elastic Supply

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Perfectly Elastic Supply

BACHELOR OF ARTS IN ECONOMICSEcon 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Department – PSU Lingayen Perfectly Inelastic Supply