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kf004 - Elasticity Ka-fu Wong Unive rsity of Hong Kong 1...

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1 Ka-fu Wong University of Hong Kong Elasticity
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2 Example 4.1 Will the China’s trade balance (export – import)  deteriorate if RMB appreciates (say, from  1USD=8.1RMB to 1USD=7.8RMB)? 1. China’s imports become less expensive.  Quantity  demanded for import may increase. 2. China’s Exports become more expensive.  Quantity  demanded for export may decrease.  The impact of RMB appreciation on the trade balance  depends on the  responsiveness of import demand and   export demand to the appreciation .  
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3 Price Elasticity of Demand The Price Elasticity of Demand  is a measure of the  responsiveness of the quantity demanded of a good to  a change in the price of that good. Formally, it is the percentage change in the quantity  demanded that results from a 1 percent change in its  price. Percentage change in quantity demanded Percentage change in price
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4 Elasticity Generally,  elasticity  is a measure of the responsiveness  of the quantity demanded of a good to a change in the  price of that good
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5 Example 4.2 The price of pork falls by 2% and the quantity  demanded increases by 6% Then the price elasticity of demand for pork is Percentage change in quantity demanded Percentage change in price 6% -2% = - 3
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6 Example 4.3. If a 1 percent rise in the price of shelter caused a 2  percent reduction in the quantity of shelter demanded,  the price elasticity of demand for shelter would be  -2% 1% = - 2
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7 Price Elasticity of Demand Measuring Price Elasticity of Demand Observations  Price elasticity of demand will always be negative  (i.e., an  inverse relationship between price and quantity). For convenience sometimes we drop the negative sign. Percentage change in quantity demanded Percentage change in price
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8 Price Elasticity of Demand 0 Price elasticity of demand Elastic Unit elastic inelastic -1 -2 -3 Price in Change Percentage Demanded Quantity in Change Percentage
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9 Example 4.4.   What is the elasticity of demand for sushi? Originally  Price = $10/piece  Quantity demanded = 400 pieces/day New  Price = $9.7/piece Quantity demanded = 404 pieces/day, then Inelastic! (404 - 400)/400 (9.7 - 10)/10 = 1% -3% = - 1 3
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10 Example 4.5.  What is the elasticity of Hong  Kong Disney passes? Originally  Price = $1600 Quantity demanded = 10,000 passes/year New  Price = $1520 Quantity demanded = 12,000 passes/year, then  Elastic! (12000 - 10000)/10000 (1520 - 1600)/1600 = 20% -5% = -4
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11 Determinants of Price Elasticity of Demand 1. Availability of substitutes - the higher the number of substitutes,  the more responsive people are to price changes. Elasticity  increases with availability of substitutes.  2. Proportion of income used to buy the good - the higher the  fraction of income spent on a good, the higher is elasticity. 
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