ELASTICITY

Elasticity

On the week 7(Wednesday , 10 February 10, 2016), we’d learn Elasticity topic. This is what we got from that session.

·       A measure of the responsiveness of a variable (quantity demandd or supplied) to a change in one its determinants

·       There are four types

-         price elasticity of demand

-         income elasticity of demand

-         cross elasticity of demand

-         price elasticity of supply

Price of elasticity of demand (ᵋᵖ)

ü  Masures the responsiveness of the quantity demanded due to a change in its price

ü  Formula :   % Δ Q

                    % Δ P

               :    Q₁ – Q₀        x   P₀

                     P₁ - P₁                          Q₀

       Degree of Price Elasticity of Demand                 

·         Fairly Elastic demand

%ΔP < %ΔQ

ᵋᵖ >1

·         Fairly Inelastic demand

%ΔP > %ΔQ

ᵋᵖ < 1

·         Unitary Elastic demand

%ΔP = %ΔQ

ᵋᵖ = 1

·         Perfectly Inelastic demand

%ΔP, %ΔQ = 0

ᵋᵖ = 0

·         Perfectly Elastic demand

%ΔP, %ΔQ = ∞

ᵋᵖ = ∞

Income elasticity of demand ( ᵋy)

ü  Income elasticity of demand measures the responsiveness of change in the quantity demand for a product due to a change in income

ü  It is to determine typed of the product either luxuries goods,necessity goods or giffen / inferior goods

ü  Formula = % ΔQ

 % ΔY

= Q₁ – Q₀   x    Y₀

      Y₁ – Y₀            Q₀

ü  Interpreted the value of income elasticity

Value of Elasticity	Typed of goods	Example of Goods
ᵋy > 1	Luxuries	Antique furniture, gold and jewellery
ᵋy < 0	Giffen/ inferior	Used cars, salted fish
0 < ᵋy < 1	Necessity / Normal	Rice, Vegetables

Elasticity for normal goods is a condition in which the quantity demand for a product increase as income increases although the income increase faster than the quantity demand

Elasticity for luxuries goods is a condition in which as the income increases, the quantity demand for a product increases and vice versa

Elasticity for giffen or inferior goods is a condition in which the quantity demand for a product decreases as income increases

Elasticity for necessity goods is a condition in which the quantity demanded for a product does not change even though income increases

Cross- price elasticity of demand (ᵋAB)

ü  Cross – price elasticity of demand measures can be defines as the degree of responsiveness of quantity demanded of goods A change in price od goods B

ü  It is to determine relationship of the goods either substitute’s goods( +ve), complements goods(-ve) or independents goods(0).

ü  Formula = %ΔQ_A

% ΔP_B

= Q_1A – Q_0A     x     P_0B

    P_1B – P_0B               Q_0A

ü  Interpreted the value of cross elasticity

Value of elasticity	Relationsip of goods
>0 (positive)	Substitutes
<0 (negative)	Complementary
= 0	Independence

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PRICING THEORY PART II

SUPPLY

• DEFINITION OF SUPPLY

Supply is refer to ability and willingness to sell specific quantities of goods in a given period of time at a particular price.

Willingness + ability to sell

• LAW OF SUPPLY

Positive relationship between product and quantity supplied.

When the price of the product increase, quantity supplied of that product will be increase.

When the price of the product decrease, the quantity supplied of that product will be decrease.

• SUPPLY SCHEDULE AND SUPPLY CURVE

INDIVIDUAL SUPPLY AND SCHEDULE FOR SUGAR

COMBINATION	PRICE (RM)	QUANTITY (UNITS)
A	P1	Q1
B	P2	Q2
C	P3	Q3

SUPPLY CURVE FOR SUGAR

• INDIVIDUAL SUPPLY AND MARKET SUPPLY

Individual supply- Relationship between the quantity of a product supplied by a single seller and its price.

Market supply- Relationship between the total quantity of a product supplied by additional all quantities supply by all seller in the market and its price.

MARKET SUPPLIED IS THE COMBINATION OF INDIVIDUAL SUPPLY

Individual supply 1 + Individual supply 2 = MARKET SUPPLY

PRICE OF THE RELATED GOODS

v  SUBSTITUTE GOODS

SUPPLY OF A PRODUCT WILL DECREASE IF THERE IS AN INCREASE IN THE PRICE OF A SUBSTITUTE PRODUCT. MAXIS AND CELCOM

v  COMPLEMENTARY GOODS

AN INCREASE IN THE PRICE OF A PRODUCT WILL INCREASE THE SUPPLY OF A COMPLEMENTARY PRODUCT. PETROL AND CAR

v  COST OF PRODUCTION

WHEN THE COST OF PRODUCTION INCREASE, QUANTITY SUPPLIED WILL BE DECREASE AND VICE VERSA

v  EXPECTED FUTURE PRICE

IF THE SELLER WAS EXPECTING THE PRICE WILL INCREASE IN FOLLOWING MONTH, THE CURRENT QUANTITIES SUPPLIED WILL BE DECREASE AND VICE VERSA.

v  TECHNOLOGY ADVANCE

CHANGES IN TECHNOLOGY ARE THE MOST INFLUENCES ON SUPPLY. EXISTANCE OF THE NEW TECHNOLOGY WILL REDUCE THE COST OF PRODUCTION. SO THE SELLER CAN INCREASE THEIR PRODUCTION.

v  NUMBER OF SELLERS

THE LARGE NUMBER OF FIRMS SUPPLYING A PRODUCT, THE LARGE QUANTITY SUPPLIED OF THE PRODUCT AND VICE VERSA.

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