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