EXTENSIONS OF DEMAND AND SUPPLY ANALYSIS Pertemuan 16 Matakuliah : J0114-Teori Ekonomi Tahun : 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 Percentage Change in Quantity Demanded of Product X Ed = Percentage Change in Price of Product X Bina Nusantara University

Price Elasticity of Demand Formula Restated Change in Quantity Demanded of X Ed = Original Quantity Demanded of X Change in Price of X ÷ Original Price of X Using Averages Midpoint Formula Change in Quantity Ed = Sum of Quantities/2 ÷ Change in Price Sum of Prices/2 Bina Nusantara University

Price Elasticity of Demand Why Use Percentages? Elimination of the Minus Sign Interpretations of Ed Elastic Demand .04 = 2 Ed = .02 Inelastic Demand .01 = .5 Ed = .02 Unit Elasticity .02 Ed = = 1 .02 Bina Nusantara University

Price Elasticity of Demand Extreme Cases Perfectly Inelastic Demand P D1 Perfectly Inelastic Demand (Ed = 0) Q Perfectly Elastic Demand P D2 Perfectly Elastic Demand (Ed = ∞) Bina Nusantara University Q

The Total Revenue Test Total Revenue (TR) TR = P x Q Elastic Demand P $3 2 1 a b D1 Q 0 10 20 30 40 Bina Nusantara University

The Total Revenue Test Total Revenue (TR) TR = P x Q Inelastic Demand $4 3 2 1 c d D2 Bina Nusantara University 0 10 20 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 (3) Elasticity Coefficient (Ed) (4) Total Revenue (1) X (2) (5) Total-Revenue Test (2) Price Per Ticket 1 2 3 4 5 6 7 8 8 7 6 5 4 3 2 1 $8,000 14,000 18,000 20,000 8,000 ] 5.00 2.60 1.57 1.00 0.64 0.38 0.20 ] Elastic Unit Elastic Inelastic Bina Nusantara University Graphically…

Price Elasticity and the Total-Revenue Curve Ed > 1 a b c d e f g h $8 7 6 5 4 3 2 1 Unit Elastic Ed = 1 Price Inelastic Ed < 1 D 1 2 3 4 5 6 7 8 Quantity Demanded Elastic Ed > 1 $20 18 16 14 12 10 8 6 4 2 Unit Elastic Ed = 1 (Thousands of Dollars) Total Revenue TR Inelastic Ed < 1 Bina Nusantara University 1 2 3 4 5 6 7 8 Quantity Demanded

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

Price Elasticity of Supply Percentage Change in Quantity Supplied of Product X Es = Percentage Change in Price of Product X Unit Elastic Supply Es = 1 Market Period: Not Enough Time to Shift Resources Sm P Greatest Price Impact Pm P0 D1 D2 Bina Nusantara University Q0 Q

Price Elasticity of Supply Percentage Change in Quantity Supplied of Product X Es = Percentage Change in Price of Product X Es < 1 Inelastic Supply Short Run: Resources Not Easily Shifted to Alternative Uses Ss P Lower Price Impact Ps P0 D1 D2 Bina Nusantara University Q0 Qs Q

Price Elasticity of Supply Percentage Change in Quantity Supplied of Product X Es = Percentage Change in Price of Product X Elastic Supply Es > 1 Long Run: Resources Easily Shifted to Alternative Uses P Sl Least Price Impact Pl P0 Bina Nusantara University 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

Income Elasticity of Demand Percentage Change in Quantity Demanded Ei = Percentage Change in Income Normal Goods – Positive Sign Inferior Goods- Negative Sign Insights into the Economy Bina Nusantara University

Income Elasticity of Demand Percentage Change in Quantity Demanded Ei = Percentage Change in Income Normal Goods – Positive Sign Inferior Goods – Negative Sign Insights into the Economy Bina Nusantara University

Consumer and Producer Surplus Consumer Surplus Consumer Surplus Equilibrium Price = $8 P1 Price (Per Bag) D Bina Nusantara University Q1 Quantity (Bags)

Consumer and Producer Surplus Equilibrium Price = $8 P1 Price (Per Bag) Producer Surplus Bina Nusantara University Q1 Quantity (Bags)

Consumer and Producer Surplus Efficiency Revisited S Consumer Surplus Equilibrium Price = $8 P1 Price (Per Bag) Producer Surplus D Bina Nusantara University Q1 Quantity (Bags)

Consumer and Producer Surplus Efficiency Revisited Efficiency Losses (Deadweight Losses) S Efficiency Losses P1 Price (Per Bag) D Bina Nusantara University Q2 Q1 Q3 Quantity (Bags)