What do you mean by elasticity in managerial economics silde share?
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1. THE CONCEPT OF ELASTICITY
2. THE CONCEPT OF ELASTICITY • • • • Sellers are manually expected to hope for more demand for their products Higher revenues The buyer, ever anxious in getting the best value for his money The same predicament as the seller WHAT IS ELASTICITY? Changes in price may or may not affect the demand or supply of any good or service. A definition of elasticity is provided as follows: • It is the measure of the sensitivity or responsiveness of quantity demanded or quantity supplied to changes in prices. • The definition indicates that elasticity concerns both supply and demand.
3. ELASTICITY OF DEMAND Demand elasticity indicates the extent to which changes in price or other factors cause changes in the quantity demanded. Demand elasticity may be classified as follows: 1. Price elasticity of demand 2. Income elasticity of demand 3. Cross elasticity of demand Ep = percentage change in quantity demanded Percentage change in price = QD2 – QD1 / QD1 P2 – P1/ P1 Where Ep = price elasticity of demand QD2 = new quantity demanded QD1 = original quantity demanded P2 = the new price P1 = the original price Price elasticity of Demand Price elasticity is used to determine the responsiveness of demand to changes in the price of the commodity. It may be classified with the use of formula below:
4. Sample problem: Demand elasticity given as following: •Original quantity demanded = 10,000 kg Price elasticity of demand Classified. As to •Original price = P5.00 per kilo price elasticity, demand may be classified into •New quantity demanded = 16,000 kg the following types: •New price = P4.00 per kilo Answer: 16,000 – 10,000 / 10,000 = 3 Elastic Demand – is that type of demand where 1.– 5.00 / 5.00 the quantity that will be bought is affected greatly by changes in the price. The change must be greater than elasticity coefficient of 1. The demand for common luxuries (like most household appliances) and goods capable of many uses (like paper) is elastic. Inelastic demand – refers to the demand where a percentage change in price creates a lesser change in quantity demanded. An example is when a 20% reduction in price caused only a 10% increase in demand. The elasticity coefficient in this type is less than 1. The demand for necessities like food, clothing, and shelter is inelastic. Unitary demand – a change in price creates as equal change in quantity demanded. When a 20% price reduction resulted to a 20% increase in demand. The unitary demand is equal to the coefficient of 1 Semi-luxury items are goods considered with unitary elasticity. Examples are designer clothes, watches, and bath soap.
5. Implications of Price Elasticity of Demand Determining demand elasticity serves a certain purpose. When elasticity is known. The seller in making decisions about price “If the price elasticity of demand is greater than one, the price should be lowered; if less than one, the price should be increased.“ Income elasticity of Demand The demand for a product or service is affected not only by its price but also by other factors like consumer income. The effect of consumer income on demand, the elasticity concept may be used. Ey = percentage change in quantity demanded Percentage change in income = QD2 – QD1 / QD1 Y2 – Y1 / Y 1 Where Ey = income elasticity of demand Y2 = the new income Y1 = the original income When elasticity is greater than 1, demand is said to be income elastic; when less than 1, it is income inelastic; and when equal to 1, it is unitary elastic.
6. Cross Elasticity of Demand The demand for a certain good may be affected also by a change in the price of another good. The responsiveness of the quality demanded of a particular good to changes in the price of another good is referred to as cross elasticity of demand. The percentage change in the quantity demanded of the first good and dividing it by the percentage change in the price of the second good. Representation of this relationship is as follows: Percentage change in the quantity demanded of the first good and dividing it by the percentage change in the price of the second good. Representation of this relationship is as follows: QA2 – QA1 / QA1 If cross elasticity is positive, the goods are substitutes. An example is the 2% increase in the price of rice which causes a 0.66% increase in the demand for pan de sal. If cross elasticity is negative, the goods are complements. If tuition fee increases results to a decrease in the demand for dormitories, school dormitories are complements. Where: Ec = cross elasticity of demand QA2 = new demand for product A QA1 = original demand for product A PB2 = new price of product B PB1 = original price of product B PB2 – PB1 / PB1