340topic3-elasticity.ppt - Econ340 Topic 3 Elasticity Chapter 4 Demand Elasticity Keat Young Managerial Eco Adapted by Dr M A Abdalla 1 Demand

340topic3-elasticity.ppt - Econ340 Topic 3 Elasticity...

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Keat & Young: Managerial Eco. Adapted by Dr. M. A. Abdalla 1 Econ340: Topic # 3: Elasticity Chapter 4 Demand Elasticity
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Keat & Young: Managerial Eco. Adapted by Dr. M. A. Abdalla 2 Demand Elasticity The Economic Concept of Elasticity The Price Elasticity of Demand The Cross-Elasticity of Demand Income Elasticity Other Elasticity Measures Elasticity of Supply
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Keat & Young: Managerial Eco. Adapted by Dr. M. A. Abdalla 3 The Economic Concept of Elasticity The response of a change of a variable to change in an other variable is measured by elasticity. Elasticity : Mathematically elasticity is the percentage change in one variable relative to a percentage change in another. B in change percent A in change percent Elasticity of t Coefficien
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Keat & Young: Managerial Eco. Adapted by Dr. M. A. Abdalla 4 The Price Elasticity of Demand Price elasticity of demand : The percentage change in quantity demanded caused by percentage change in price. Price % Quantity % E p
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Keat & Young: Managerial Eco. Adapted by Dr. M. A. Abdalla 5 The Price Elasticity of Demand If P from 8 to7, E P = -0.8 If P from 7 to 8, E P = -0.64 Value of E P is different depending on direction of change in P. To solve this problem we use Arc elasticity P Qd 12 6 11 7 10 8 9 9 8 10 7 11 6 12 5 13
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Keat & Young: Managerial Eco. Adapted by Dr. M. A. Abdalla 6 The Price Elasticity of Demand Arc elasticity : Elasticity which is measured over a discrete interval of a demand (or a supply) curve. E p = Coefficient of arc price elasticity Q 1 = Original quantity demanded Q 2 = New quantity demanded P 1 = Original price P 2 = New price 2 / ) ( 2 / ) ( 2 1 1 2 2 1 1 2 P P P P Q Q Q Q E p
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Keat & Young: Managerial Eco. Adapted by Dr. M. A. Abdalla 7 The Price Elasticity of Demand If P from 7 to 8, or P from 8 to7 E P = -0.714 But again there are two problems: a. Value of E P vary depending on the new price distance from the initial (original) price. b. What if we want to measure Ep at a single point rather than between two points.
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