Matakuliah
Tahun
: J0114-Teori Ekonomi
: 2009
EXTENSIONS OF DEMAND AND SUPPLY
ANALYSIS
Pertemuan 16
Price Elasticity of Demand
• Measuring Responsiveness to Price
Changes
• Relatively Elastic or Inelastic
• Price-Elasticity Coefficient and Formula
Ed =
Percentage Change in Quantity
Demanded of Product X
Percentage Change in Price
of Product X
Bina Nusantara University
3
Price Elasticity of Demand
• Formula Restated
Ed =
Change in Quantity Demanded of X
Original Quantity Demanded of X
÷
Change in Price of X
Original Price of X
• Using Averages
• Midpoint Formula
Ed =
Bina Nusantara University
Change in Quantity
Sum of Quantities/2
÷
Change in Price
Sum of Prices/2
4
Price Elasticity of Demand
• Why Use Percentages?
• Elimination of the Minus Sign
• Interpretations of Ed
Elastic Demand
Ed =
Inelastic Demand
Ed =
Bina Nusantara University
Unit Elasticity
Ed =
.04
.02
=2
.01
.02
= .5
.02
.02
=1
5
Price Elasticity of Demand
Extreme Cases
Perfectly Inelastic Demand
P
D1
Perfectly
Inelastic
Demand
(Ed = 0)
Q
0
Perfectly Elastic Demand
P
Bina Nusantara University
0
Perfectly
Elastic
Demand
(Ed = ∞)
D2
6
Q
The Total Revenue Test
• Total Revenue (TR)
TR = P x Q
Elastic Demand
P
$3
a
2
b
1
D1
Bina Nusantara University
0
10
20
30
40
Q
7
The Total Revenue Test
• Total Revenue (TR)
TR = P x Q
Inelastic Demand
P
c
$4
3
2
d
1
D2
Bina Nusantara University
0
10
20
8
Q
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
1
8
2
7
3
4
5
6
7
Bina Nusantara University
(2)
Price Per Ticket
8
]
6]
5]
4]
3]
2]
1]
(3)
Elasticity
Coefficient (Ed)
(4)
Total Revenue
(1) X (2)
(5)
Total-Revenue
Test
$8,000
5.00
2.60
1.57
1.00
0.64
0.38
0.20
]
18,000 ]
20,000 ]
]
20,000
]
18,000
]
14,000
]
8,000
14,000
Elastic
Elastic
Elastic
Unit Elastic
Inelastic
Inelastic
Inelastic
9
Graphically…
Price Elasticity and the Total-Revenue Curve
Price
$8
7
6
5
4
3
2
1
Elastic
Ed > 1
a
b
Unit Elastic
Ed = 1
Inelastic
Ed < 1
c
d
e
f
g
h D
0 1 2 3 4 5 6 7 8
Quantity Demanded
Total Revenue
(Thousands of Dollars)
$20
18
16
14
12
10
8
6
4
2
Elastic
Ed > 1
Unit Elastic
Ed = 1
TR
Bina Nusantara University
0 1 2 3 4 5 6 7 8
Quantity Demanded
Inelastic
Ed < 1
10
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
11
Price Elasticity of Supply
Percentage Change in Quantity
Supplied of Product X
Es =
Percentage Change in Price
of Product X
Unit Elastic Supply
Market Period:
Not Enough Time to Shift Resources
P
Greatest
Price
Impact
Es = 1
Sm
Pm
P0
D1 D2
Bina Nusantara University
12
Q0
Q
Price Elasticity of Supply
Percentage Change in Quantity
Supplied of Product X
Es =
Percentage Change in Price
of Product X
Inelastic Supply
Es < 1
Short Run:
Resources Not Easily Shifted to Alternative
Ss Uses
P
Lower
Price
Impact
Ps
P0
D1 D2
Bina Nusantara University
Q0 Qs
13
Q
Price Elasticity of Supply
Percentage Change in Quantity
Supplied of Product X
Percentage Change in Price
of Product X
Es =
Elastic Supply
Es > 1
Long Run:
Resources Easily Shifted to Alternative Uses
P
Sl
Least
Price
Impact
Pl
P0
Bina Nusantara University
14
D1 D2
Q0 Ql
Q
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
15
Income Elasticity of Demand
Ei =
Percentage Change in Quantity
Demanded
Percentage Change in Income
• Normal Goods –
• Inferior Goods• Insights into the Economy
Bina Nusantara University
Positive Sign
Negative Sign
16
Income Elasticity of Demand
Ei =
Percentage Change in Quantity
Demanded
Percentage Change in Income
• Normal Goods – Positive Sign
• Inferior Goods – Negative Sign
• Insights into the Economy
Bina Nusantara University
17
Consumer and Producer Surplus
Consumer Surplus
Price (Per Bag)
Consumer
Surplus
Bina Nusantara University
Equilibrium
Price = $8
P1
Q1
Quantity (Bags)
D
18
Consumer and Producer Surplus
Producer Surplus
Price (Per Bag)
S
Equilibrium
Price = $8
P1
Producer
Surplus
Bina Nusantara University
Q1
Quantity (Bags)
19
Consumer and Producer Surplus
Efficiency Revisited
S
Price (Per Bag)
Consumer
Surplus
Equilibrium
Price = $8
P1
Producer
Surplus
D
Bina Nusantara University
Q1
Quantity (Bags)
20
Consumer and Producer Surplus
Efficiency Revisited
Efficiency Losses (Deadweight Losses)
S
Price (Per Bag)
Efficiency
Losses
P1
D
Bina Nusantara University
Q2
Q1
Q3
Quantity (Bags)
21