Voicing our elasticity
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The document discusses various concepts of elasticity that will be covered in a presentation, including: 1. The four types of elasticity - price elasticity of demand (PED), price elasticity of supply (PES), cross elasticity of demand (XED), and income elasticity of demand (YED). 2. How elasticity influences decision making for firms and governments regarding pricing, taxes, and subsidies. 3. Examples are provided to demonstrate how to calculate PED using a hypothetical change in price and demand for Volkswagen cars, and XED using a change in the price of petroleum and demand for cars.
Voicing our elasticity
- 2. The points that we will be discussing The main points that we will be discussing through out our presentation are :- 1. The 4 different elasticity's – PED, PES, XED AND YED with examples. 2. Determinants of PED and their effects on PED. 3. Different types of goods and their relationship with elasticity of demand.
- 3. The points that we will be discussing 4. Roles played by different elasticity's in the decision making of the firms. 5. Role of different elasticity’s in the decisions made by the government regarding taxes, subsidy’s and price controls. 6. And finally we will explain the reason why the PED of primary commodities is relatively low and why the PED for manufactured products is relatively high.
- 4. The 4 different elasticity’s 1. Price elasticity of demand (PED) – A measure of the responsiveness of the demand for a product to changes in its own price. Formula - % Change in quantity demanded/ % Change in price Now lets consider a good and we can calculate its price elasticity of demand
- 5. Example The price of Volkswagen car rises by 15 %, and at the same time demand falls by 5 %. Now % Change in quantity demanded/ % Change in price = -20%/15% = 1.33 Therefore the coefficient of PED is 1.33 Price elasticity is negative because price and quantity demanded usually vary inversely with each other. This is so common that the sign is ignored.
- 6. PED Therefore since PED > , the good has and elastic demand which means that any change in price has a relatively large change on demand. This implies a demand curve that is relatively flat.
- 7. Cross Elasticity of demand (XED) The cross elasticity is a measure of the responsiveness of the demand for one product to changes in the price of another product. Its formula - XED = % change in quantity demanded of good X / % change in price of good Y Now lets again investigate with the example of a Volkswagen car. Now the increase in the price of petroleum by 5 % causes the demand of the car to fall by 7 %
- 8. XED XED = % change in quantity demanded of good X / % change in price of good Y = -7 % / 5% = -1.4 Therefore XED = -1.4 Here the sign plays an important role. Complementary goods have negative cross price elasticity’s. Whereas, Substitutes have positive cross price elasticities. Now since the absolute of XED is greater than 1 we can say that the XED of these goods is elastic.