2. EXTENSIONS OF DEMAND AND SUPPLY ANALYSIS Pertemuan 16
Matakuliah : J0114-Teori Ekonomi
Tahun : 2009
EXTENSIONS OF DEMAND AND SUPPLY ANALYSIS Pertemuan 16

3. Price Elasticity of Demand
Measuring Responsiveness to Price Changes
Relatively Elastic or Inelastic
Price-Elasticity Coefficient and Formula
Percentage Change in Quantity
Demanded of Product X
Ed =
Percentage Change in Price
of Product X
Bina Nusantara University

4. Price Elasticity of Demand
Formula Restated
Change in Quantity Demanded of X
Ed =
Original Quantity Demanded of X
Change in Price of X ÷
Original Price of X
Using Averages
Midpoint Formula
Change in Quantity
Ed =
Sum of Quantities/2 ÷
Change in Price
Sum of Prices/2
Bina Nusantara University

5. Price Elasticity of Demand
Why Use Percentages?
Elimination of the Minus Sign
Interpretations of Ed
Elastic Demand
.04
= 2
Ed =
.02
Inelastic Demand
.01
= .5
Ed =
.02
Unit Elasticity
.02
Ed =
= 1
.02
Bina Nusantara University

6. Price Elasticity of Demand
Extreme Cases
Perfectly Inelastic Demand P D1
Perfectly
Inelastic
Demand
(Ed = 0) Q
Perfectly Elastic Demand P D2
Perfectly
Elastic
Demand
(Ed = ∞)
Bina Nusantara University Q

7. The Total Revenue Test Total Revenue (TR) TR = P x Q Elastic Demand P$3 2 1 a b D1 Q
Bina Nusantara University

8. The Total Revenue Test Total Revenue (TR) TR = P x Q Inelastic Demand$4 3 2 1 c d D2
Bina Nusantara University Q

9. Elasticity on a Linear Demand Curve
Price Elasticity of Demand for Movie
Tickets as Measured by the Elasticity
Coefficient and the Total-Revenue Test
(1)
Total Quantity of
Tickets Demanded
Per Week, Thousands
(3)
Elasticity
Coefficient (Ed)
(4)
Total Revenue
(1) X (2)
(5)
Total-Revenue
Test
(2)
Price Per Ticket 1 2 3 4 5 6 7 8 8 7 6 5 4 3 2 1
$8,000
14,000
18,000
20,000
8,000 ]
5.00
2.60
1.57
1.00
0.64
0.38
0.20 ]
Elastic
Unit Elastic
Inelastic
Bina Nusantara University
Graphically…

10. Price Elasticity and the Total-Revenue Curve
Ed > 1 a b c d e f g h $8 7 6 5 4 3 2 1
Unit Elastic
Ed = 1
Price
Inelastic
Ed < 1 D 1 2 3 4 5 6 7 8
Quantity Demanded
Elastic
Ed > 1
$20 18 16 14 12 10 8 6 4 2
Unit Elastic
Ed = 1
(Thousands of Dollars)
Total Revenue TR
Inelastic
Ed < 1
Bina Nusantara University 1 2 3 4 5 6 7 8
Quantity Demanded

11. Determinants of Price Elasticity of Demand
Substitutability
Proportion of Income
Luxuries versus Necessities
Time
Applications:
Large Crop Yields
Excise Taxes
Decriminalization of Illegal Drugs
Bina Nusantara University

12. Price Elasticity of Supply
Percentage Change in Quantity
Supplied of Product X
Es =
Percentage Change in Price
of Product X
Unit Elastic Supply
Es = 1
Market Period:
Not Enough Time to Shift Resources Sm P
Greatest
Price
Impact Pm P0 D1 D2
Bina Nusantara University Q0 Q

13. Price Elasticity of Supply
Percentage Change in Quantity
Supplied of Product X
Es =
Percentage Change in Price
of Product X
Es < 1
Inelastic Supply
Short Run:
Resources Not Easily Shifted to Alternative Uses Ss P
Lower
Price
Impact Ps P0 D1 D2
Bina Nusantara University Q0 Qs Q

14. Price Elasticity of Supply
Percentage Change in Quantity
Supplied of Product X
Es =
Percentage Change in Price
of Product X
Elastic Supply
Es > 1
Long Run:
Resources Easily Shifted to Alternative Uses P Sl
Least
Price
Impact Pl P0
Bina Nusantara University D1 D2 Q0 Ql Q

15. Cross Elasticity of Demand
Percentage Change in Quantity
Demanded of Product X
Exy =
Percentage Change in Price
of Product Y
Substitute Goods – Positive Sign
Complementary Goods- Negative Sign
Independent Goods – Zero or Near-Zero Value
Bina Nusantara University

16. Income Elasticity of Demand
Percentage Change in Quantity
Demanded
Ei =
Percentage Change in Income
Normal Goods – Positive Sign
Inferior Goods- Negative Sign
Insights into the Economy
Bina Nusantara University

17. Income Elasticity of Demand
Percentage Change in Quantity
Demanded
Ei =
Percentage Change in Income
Normal Goods – Positive Sign
Inferior Goods – Negative Sign
Insights into the Economy
Bina Nusantara University

18. Consumer and Producer Surplus
Consumer Surplus
Consumer
Surplus
Equilibrium
Price = $8 P1
Price (Per Bag) D
Bina Nusantara University Q1
Quantity (Bags)

19. Consumer and Producer Surplus
Equilibrium
Price = $8 P1
Price (Per Bag)
Producer
Surplus
Bina Nusantara University Q1
Quantity (Bags)

20. Consumer and Producer Surplus
Efficiency Revisited S
Consumer
Surplus
Equilibrium
Price = $8 P1
Price (Per Bag)
Producer
Surplus D
Bina Nusantara University Q1
Quantity (Bags)

21. Consumer and Producer Surplus
Efficiency Revisited
Efficiency Losses (Deadweight Losses) S
Efficiency
Losses P1
Price (Per Bag) D
Bina Nusantara University Q2 Q1 Q3
Quantity (Bags)