1. 1 STUDY UNI T 6 ELASTICITY

2. 2 STUDY OBJECTIVES n Define elasticity n Discuss price elasticity of demand n Indicate the relationship between elasticity and total revenue

3. 3 STUDY OBJECTIVES n Discuss factors that may influence price elasticity of demand n Discuss income elasticity of demand n Discuss cross elasticity of demand

4. 4 PRICE ELASTICITY OF DEMAND n Definition of price elasticity of demand n Formula to calculate (ep): % change in quantity demanded % change in price of the product

5. 5 PRICE ELASTICITY OF DEMAND n Formula to calculate (ep): ∆Q Q ∆P P

6. NUMERICAL EXAMPLE 6 Q P 24 18 12 8 6 (24-18) 18 4 (12-8) 12 0,33 (6÷18) 0,33 (4÷12) = 1

7. 7 PRICE ELASTICITY OF DEMAND n Five elasticity values: –Perfectly inelastic - Ep = 0 –Elastic - Ep > 1 –Unit elastic - Ep = 1 –Inelastic - 0 < Ep <1 –Perfectly elastic - Ep= 

8. 8 PERFECTLY INELASTIC DEMAND CURVE D E D = 0 Q P

9. 9 INELASTIC DEMAND D Habit forming products Fashionable Products Complementary products Products that are non-durable Necessities 0 < E d <1 %∆P > %∆Qd Q P

10. 10 UNIT ELASTIC DEMAND D E p = 1 %∆P = %∆Qd Q P

11. 11 ELASTIC DEMAND D Luxury products Products that you spend a large percentage of income on. Substitute products Durable products E p > 1 %∆P < %∆Qd Q P

12. 12 PERFECTLY ELASTIC CURVE E p = ∞

13. 13Chapter 9 Elasticity © Van Schaik Publishers Figure 9-4 The different categories of price elasticity of demand (as in textbook)

14. 14 Linear Demand Curve And Elasticity Values E p =1 0< E d <1 (Inelastic) E p >1 (Elastic) E p =  (Perfectly Elastic ) E p = 0

15. 15 PRICE, QUANTITY AND TOTAL REVENUE PriceQuantityTR = P x QELASTICITY VALUE ( for information only ) 800 ED =  710007000ED > 1 6200012000ED > 1 5300015000ED > 1 4400016000ED = 1 35000150000 < ED < 1 26000120000 < ED < 1 17000 0 < ED < 1 080000ED = 0

16. 16 THE TOTAL REVENUE CURVE

17. 17 DEMAND - CONSUMERS n Price elasticity and total revenue: –If Ed > 1 – product is elastic –If Ed < 1 – product inelastic –If Ed = 1 – product unit elastic n Draw graphs showing relationship between demand curve and Total revenue. (page 160) –In elastic section of demand curve – a price decrease leads to an increase in total revenue –In inelastic section of demand curve – a price decrease leads to a decrease in total revenue

18. 18 FACTORS INFLUENCING ELASTICITY OF DEMAND n Luxury or necessity n Availability of substitutes n Portion of monthly income spent on product n Habit forming products n Durability of products n Time period

19. 19 FACTORS INFLUENCING ELASTICITY OF DEMAND Other factors influencing elasticity of demand: n Definition of product n Advertising n Number of uses of the product

20. 20Chapter 9 Elasticity © Van Schaik Publishers Figure 9-3 The relationship between price elasticity of demand and total revenue

21. 21Chapter 9 Elasticity © Van Schaik Publishers Figure 9-5 The impact of an increase in supply

22. 22 ELASTICITY OF DEMAND - CONSUMERS n Income elasticity of demand: –Definition –Purpose: To establish whether the product is an inferior good or a normal good

23. 23 ELASTICITY OF DEMAND - CONSUMERS n Inferior products – Negative income elasticity (E y < 0) n Normal products – Positive income elasticity (E y > 0) n Normal products can be divided in two categories: –Necessities 0 < E Y < 1 –Luxury products E y > 1

24. 24 ELASTICITY OF DEMAND - CONSUMERS n Cross elasticity of demand: –Definition –Purpose: To establish whether product is a substitute or complement

25. 25 ELASTICITY OF DEMAND - CONSUMERS n Complementary goods – Negative cross elasticity (E c < 0) n Substitutes – Positive cross elasticity (E c > 0)

26. 26 EXAMINATION QUESTIONS

27. 27 QUESTIONS RELATING TO SLIDE 18 n At which prices is the price elasticity larger than one? n At which of the provided prices is the elasticity value smaller than one? n At which price level is the price elasticity equal to 1? n Suppose the price is R10. What must happen to prices in order to increase the total revenue? n Suppose the price is R30. What must happen to prices in order to increase the total revenue?

28. 28 P S0S0 D S1S1 S2S2 S3S3 50 40 30 25 20 0 Q

29. 29 QUESTIONS RELATING TO SLIDE 20 n Suppose the supply of maize increases from S 0 to S 2 ? What happens to total revenue? n Suppose the supply of maize decreases from S 3 to S 2 ? What happens to total revenue? n At which price will total revenue be maximised?

30. 30 P S0S0 D S1S1 20 10 0 Q

31. 31 QUESTIONS RELATING TO SLIDE 22 n The quantity of tomatoes sold increases from 2006 to 2007. What happened to the total revenue of tomato producers? n At which price will the total revenue be maximised?

32. 32 Draw a perfectly elastic demand curve?

33. 33 A perfectly elastic demand curve

34. 34 A perfectly inelastic demand curve. What happens to TR if prices increase? What happens to quantity demanded?

35. 35 Which curve is relatively elastic? Explain. D2D2 D1D1

36. 36 EXAMINATION QUESTION - ELASTICITY Q P S f 50 30 70 100 20 200 D

37. 37 QUESTIONS TO SLIDE 28 n What is the value of price elasticity of demand at Point f? n At which of the specified prices will total revenue be maximised?

38. 38 (a) An elastic demand curve (b) An inelastic demand curve

39. 39 (a) An elastic demand curve (b) An inelastic demand curve