Kinh tế học - Elasticity / sensitivity analysis

1 of 42Elasticity/sensitivity analysisLearning ObjectivesAt the end of this lecture, students should be able toDefine ElasticityDefine Price Elasticity of Demand/Supply and Its DeterminantsCompute the Price Elasticity of Demand/ SupplyKnow the Variety of Demand/supply CurvesTo know the relationship between Total Revenue and the Price Elasticity of DemandDefine and compute Income Elasticity of DemandDefine and compute Cross-Price Elasticity of Demand3 of 42ElasticityElasticity is a general concept that can be used to quantify the response in one variable when another variable changes.The Elasticity of DemandPrice Elasticity of DemandPrice-Cross Elasticity of DemandIncome Elasticity of Demand4 of 425 of 42Price Elasticity of DemandA popular measure of elasticity is price elasticity of demand measures how responsive consumers are to changes in the price of a product.Sign of Price ElasticityAccording to the law of demand, whenever the price rises, the quantity demanded falls. Thus the value of demand elasticity is always negative, but it is stated in absolute terms.6 of 427 of 42What Information Price Elasticity ProvidesPrice elasticity of demand and supply gives the exact quantity response to a change in price.8 of 42Slope and ElasticityChanging the units of measure yields a very different value of the slope, yet the behavior of buyers in both diagrams is identical.9 of 42Types of ElasticityHypothetical Demand Elasticities for Four ProductsPRODUCT% CHANGE IN PRICE (%DP)% CHANGE IN QUANTITY DEMANDED (%DQD)ELASTICITY(%DQD d %DP)Insulin+10%0%0.0Perfectly inelasticBasic telephone service+10%-1%-0.1InelasticBeef+10%-10%-1.0Unitarily elasticBananas+10%-30%-3.0Elastic10 of 42Perfectly Elastic andPerfectly Inelastic Demand CurvesWhen demand does not respond at all to a change in price, demand is perfectly inelastic. E= zeroDemand is perfectly elastic when quantity demanded drops to zero at the slightest increase in price. E= infinityElastic DemandDemand is elastic if the percentage change in quantity is greater than the percentage change in price.E > 1Elastic ddPQP1Q1Q2P2DDA small % change in price leads to a greater % change in quantity demandedInelastic DemandInelastic Demand means that quantity doesn't change much with a change in price.E 117 of 42Calculating ElasticitiesCalculating percentage changes:According to the law of demand, whenever the price rises, the quantity demanded falls.18 of 4219 of 42Calculating ElasticitiesElasticity is a ratio of percentages.Using the values on the graph to compute elasticity, using percentage changes yields the following result:20 of 42Calculating ElasticitiesA more accurate way of computing elasticity than percentage changes is the midpoint formula:21 of 42Calculating ElasticitiesHere is how to interpret two different values of elasticity:When e = 0.2, a 10% increase in price leads to a 2% decrease in quantity demanded.When e = 2.0, a 10% increase in price leads to a 20% decrease in quantity demanded.Elasticity Changes along aStraight-Line Demand CurveElasticity along any straight line varies unless it is completely rectangular hyperbola, perfectly elastic or perfectly inelastic.23 of 42Elasticity Changes along aStraight-Line Demand CurvePrice elasticity of demand decreases as we move downward along a straight line demand curve.Demand is elastic in the upper range and inelastic in the lower range of the line.Elasticity Changes Along Straight-Line CurvesElasticity is not the same as slope.Elasticity changes along straight line supply and demand curves–slope does not.24 of 42Elasticity Along a Demand CurvePrice$10987654321012345678910QuantityElasticity declines along demand curve as we move toward the quantity axisEd = 1Ed = 0Ed 1Ed = ∞The Price Elasticity of Demand Along a Straight-line Demand CurveDefining elasticitiesWhen price elasticity is between zero and -1 we say demand is inelastic.When price elasticity is between -1 and - infinity, we say demand is elastic. When price elasticity is -1, we say demand is unit elastic. conclusionA straight line dd curve with a constant slope does not have a constant elasticityWith three exceptions, elasticity varies at every point on a straight line dd curve. The exceptions are perfectly elastic, perfectly inelastic and unit elastic dd curves.The numerical value of elasticity on a straight line dd curve ranges from ∞ (infinity) at price axis to zero (0) at the qty axis.The numerical value of elasticity at mid-point of a straight line dd curve is =1Point to the left of the mid point of a straight line dd curve has elasticity greater than 1 and point to the right has elasticity less than 1The Use of Price Elasticity of DemandWhy Elasticity matters?Elasticity, Total Revenue, and DemandThe elasticity of demand tells suppliers how their total revenue will change if their price changes.Total revenue equals total quantity sold multiplied by price of good.Elasticity, Total Revenue, and DemandIf ED is elastic (ED > 1), a rise in price lowers total revenue.Price and total revenue move in opposite directions.Elasticity, Total Revenue, and DemandIf ED is unit elastic (ED = 1), a rise in price leaves total revenue unchanged.Elasticity, Total Revenue, and DemandIf ED is inelastic (ED 1Quantity$1086420123456789TR falls if price increases.KJLost revenue Gained revenueTRJ = $8 x 2 = $16TRK = $9 x 1 = $9Total Revenue Along a Demand CurveWith elastic demand – a rise in price lowers total revenue.With inelastic demand – a rise in price increases total revenue.Total Revenue Along a Demand CurveElastic ED > 1 ED = 1Inelastic ED 0, normal goods- income increases, dd increasesIED<0, inferior goods- income increases, dd decreasesIncidence and TaxesIncidence is the measure of who actually pays for a cost increase or a tax. In general, the more elastic the demand and the less elastic the supply the more the incidence of a tax falls on businesses and the less it falls on consumers. akpe na mi!