Elasticity

Elasticity-the extent to which buyers and sellers respond to a change in market condition.
There are 4 types of elasticity:

1)Price elasticity of demand (PED):the responsiveness of the quantity demanded to a change in the price of the product.
PED is measured by the following formula:
PED=% change in quantity demended/% change in price
Example: suppose a tour operator sells 5.000 holidays per month to Majorka for a price of 400 pounds.When the price is increased to 440 pounds, demand falls to 4000 holidays per month. So,

PED= -1000/5000 divided by 40/400 multiply to 100% = -20/10 = -2
The estimate of -2 indicates that the demand for holidays is responsive to a change in the price of these holidays. This known as a price elastic or price sensitive situation.
Not all products we buy are very responsive to a change in their price.This is price inelastic or price insensitive,indicating that the quantity demanded is not responsive to a change in price.So:

Price elastic:where the percentage change in the quantity demanded is sensitive to a change in price.
Price inelastic: where the percentage change in the quantity demanded is insensitive to a change in price.
If PED>1 - elastic, if PED<1 red="1">
What determines the price elasticity of demand for a product or group of products?
There are three main determinants:

• The availability and closeness of substitutes

A substitute is the alternative to a particular product.The greater the number of substitutes and the greater their closeness to a given product, then the likelihood is that such product will be price elastic.

• The relative expence of the product with respect to income.

If a product takes up a very small proportion of a person`s income,then doubling in the price will not result in much change in the quantity demanded.In such situation demand is price inelastic.(Examples: bus fares,newspapers,cheap food).
Where a product takes up a larger proportion of income (a holiday or eating out),then it is more likely that demand will be more sensitive to a change in price and so will be more price elastic.A possible exception is the case of habit-forming items, such as cigarettes and certain types of alcohol.

• Time

In the short term, most consumers find it difficult to alter their spending habits. This means they are quit likely to continue to purchase a product despite a price increase.Over time, as consumers find out more about possible substitutes, demand for a product is likely to become more price elastic.

2)Income elasticity of the demand (YED): the responsiveness of demand to a change in income.
Formula: YED = % change in quantity demanded/% change in income
Most products have a positive income elasticity of demand and are known as normal good. This means that, as real disposable income increases, demand for this product will also increase.
The extent of the response of demand to the change in income can vary:

• where the estimate of income elasticity of demand is less than 1. For such a product, demand is said to be income inelastic.
• where the estimate of income elasticity of demand is greater than 1.For such a product, demand is said to be income elastic.

Normal goods: goods with a positive income elasticity of demand.
Income inelastic: goods for which a change in income produces a less than proportionate change in demand.
Income elastic: goods for which a change in income produces a greater proportionate change in demand.
A small number of products have a negative income elasticity of demand.There are known as inferior goods.
Inferior goods: goods for which an increase in income leads to a fall in demand.
Normal goods have a positive YED.
Inferior goods have a negative YED.

Cross elasticity of demand (XED):the responsiveness of demand for one product in relation to a change in the price of another product.
Formula: XED= % change in quantity demanded of product A/% change in price of product B.

• A positive estimate indicates that the two products are substitutes.A negative estimate means that they are complements.A zero estimates means there is no particular relationship.
• The size of the cross elasticity of demand indicates the strength of the relationship between a change in the price of one product and a change in demand for another product.Where products are good or close substitutes, the value of the cross elasticity of demand will be higher than if they are only modest substitutes.Similarly, for complements, a high value of cross elasticity of demand is indicative of products with a high degree of complementary.

Substitutes have a positive XED
Complements have a negative XED

Price elasticity of supply (PES): the responsiveness of the quantity supplied to a change in the price of the product.
Formula: PES= % change in quantity supplied/% change in price.
Price elasticity of supply indicates how much additional supply a producer is willing to provide for the market following a change in price of the product.
The size of the price elasticity of supply can take the following values:

• between 0 and 1.This means that the elasticity of supply is inelastic.
• greater than 1.In this case supply is elastic.
• equal to 1.Here the change in price causes an exactly proportional change in quantity supplied.

So, what determines the price elasticity of supply?There are three main factors:

• Availability of stock of the product.
• Availability of factor of production.
• Time period
  

Chapter 2-Revision

Market-where or when buyers and sellers meet to tradeor exchange product.
There are many types of markets:

• foreign exchange market
• stock market
• holiday market
• housing market
• retail market
• commodity market
• labour market
• eBay

Each of these markets has the same basic characteristics:

• a physical place where, or some mechanism whereby, buyers and sellers can meet or contact each other.
• a willigness to trade or exchange goods and services.

Sub-market: a recognised or distinguishable part of a market.Also known as a market segment.
Demand
In simple terms, demand is what consumers want.However,what consumers want and what they actually demand are not the same thing for two reasons:

• Whants are unlimited
• The point about demand is that to consume a product,consumers nast have the ability to pay.

So:
Demand:the quantity of a product thet consumers are able and willing to purchase at various prices over a period of time.
National demand: the desire for a product
Effective demand: the willigness and ability to buy a product
Ceteris paribus: (Latin: other things being equal): assuming other variables remain unchanged.

Relationship between price and quantity demanded
The relationship between price and quantity demanded of a product is in certain respects obvious.From our own experience, we know that in general if there is a sale and the price of something we want falls,then we are more likely to purchase it.Conversely, if there is an increase in price of a particular product, the usual reaction from consumers is to by less of it.

Thise relationship is a key consideration in microeconomics.In other words, it means that:

• there is an inverse relationship between the price of a product and quantity demanded
• the lower the price, the more that will be demanded
• the higher the price,the less that will be demanded
  

The demand curve
The demand curve is a simple representation of the relationship between the price of a product and the quantity that is demanded.It is usually represented in the form of the simple graph; price is plotted on the vertical (y) axis, the quantity on the horisontal (x) axis.
The data from which a demand curve is derived is taken from what is known as a demand schedule.

Demand curve: this shows the relationship between the price of a product and the quantity demanded.
Demand schedule: the data that is used to draw the demand curve for a product.
Movement along the demand curve: this is in response to a change in the price of a product.





An extention in demand is where a fall in price results in a greater quantity demanded.

A contraction in demand is where a higher price results in a lesser quantity demanded.







Consumer surplus.

Consumer surplus: the extra amount that a consumer is willing to pay for a product above the price that is actually paid.
For example, a persone prepared to pay 4 pounds for the first cinema trip, 3 pounds for the second and 2.25 for the third.If the actual price of admission is only 1.50,thise person will go to the cinema five times per month.The consumer surplus therefore is 2.50 pounds for the 1-st,1.50 for a second and so on. When demand is five times rer month , this individual has received a consumer surplus of 5.05 pounds.




Prise it is not the only reason or factor that affects the demand for a product.There are three non-price factors, recognised by economists as influencing the demand for most types of product.

• consumer income
• the prices of other products
• tastes and fashion

Consumer income
It is almost stating the obvious to say that income,our ability to purchase a product, has an important influence on whether we actually by a good.To be more specific, income is best seen in terms of what is left in our pockets once direct tax has been deducted and any state benefits have been added and the effects of inflation have been taken into account.This is referred to in economics as real disposable income. Example, if the money you receive increases by 5 per cent but prices rise by 3 per cent, then real income has increased by 2 per cent.

Disposable income: income after taxes on income have been deducted and state benefits have been added.
Real disposable income: income after taxes on income have been deducted and state benefits have been added and the result has been adjusted to take into account changes in the price level.

There are two types of goods: normal goods and inferior goods.

Normal goods: goods for which an increase in income leads to an increase in demand.
Inferior goods: goods for which an increse in income leads to a fall in demand.

The demand for many products we buy is mainly determined by our real disposable income.

The price of other products
The demand for a particular product can also be affected by a chage in the price of another,different product.Two possible cases are recognised: substitute and complements

Substitute: competing goods (BMW and Audi cars are top of the range substiutes )
Complements: goods for which there is joint demand. (Car prices and petrol prices)

Tastes and fushion

Over time, consumer tastes change.That is why in our fast-moving world, the life cycle of many products may be quite limited.

DEMAND AND LAW OF DEMAND - Continuation

2)Government policy.Government policy also affects demand.When the government wants to reduce the demand for a commodity it imposes a tax on this coomodity.After that the price for commodity goes up and its demand decreases.
3)Climet and season.They also affects demand.For example,the demand on ice will increase in summer,but there will not mutch demand during the winter.Or, the demand on woolen garments wil be higher at the places with cold climet.
4)Distribution of income.Market demand is also influenced by chang in the distribution of income in the society.If income is equitable distributed there will be more demand.In case if income is not equitable distributed then more income will consentrate with the rich,then large number of people will be poor and so market demand will be low.

The law of demand.
The law of demand suggests an inverse relationship between the price of the commodity and its quantity demanded.
So, when the price falls the demand for the commodity goes up,when the prise rises demand comes down.
Definition:
"According to the Law of Demand, the quantity demanded varies inversely with the prise."-Ferguon.

DEMAND AND LAW OF DEMAND

Demand is defined as the quantities of a product which a consumer is not only desiring to purchase and able to purchase at given price an at the given point of time.

There are five essential elements of the demand for a good:

1. Desire to perchase a good
2. Money to satisfy that desire
3. Willigness to spend money
4. Relationship between the quantity demanded of goods and their prices
5. Relationship between the quantity demanded and the period of time

Definitions of demand

1. In the words of Miller,"Demand is the willigness and ability of consumers to purchase commodity at a given price over a particular period of time"
2. According to Vera Anstey, "The demand for a particular good is the amount that will be purchased at a given price at a given time" etc.

There are many economic,social,political factors which greatly influence the demand for commodities.This factors are classified on the basis of: 1)individual demand,2)market demand.

unit 1 - continuation

Definitions:
Choice: the selection of appropriate alternatives
Opportunity cost: the cost of the next best alternative.
Specialisation: the concentration by a worker or workers,firm,region or whole economy on a narrow range of goods and services.
Exchange: the process by which goods and services are traded.
Subsidy: a payment by a governing body to encourage the production or consumption of a product.
Division of a labour: the specialisation of labour where the production process is broken down into separate tasks.
Productivity: output, or production of a good or service, per worker.
Production possibility curve: this shows the maximum quantities of different combination of output of two products, given current resources and the state of technology.
Developed economy: an economy with a high level of income per head.
Developing economy: an economy with a relatively low level of income per head.
Trade-off: the calculation involved in deciding on whether to give up one good for another.
Economic growth: change in the productive potential of an economy.
Productive potential: the maximum output that an economy is capable of producing.
Economic system: the way in which production is organised in a country or group of countries.
Market economy: an economic system whereby resources are allocated through the market forces of demand and supply.
Price system: a method of allocating resources by the free movement of prices.
Supply: the quantity of a product that producers are willing and able to provide at different market prices over a period of time.
Demand:the quantity of a product that consumers are able and willing to purchase at various prices over a period of time.
Command economy: an economic system in which most resources are state owned and also allocated centrally.
Mixed economy: an economic system in which resources are allocated through a mixture of the market and direct public sector involvement.

"Financial crash"

Today on tutor groups assembly we discussed this theme. Personally for me it was interesting, and I decided to write about it.
First we need to know what does a credit means.Credits - the money borrowed for some time under percent{interests}.It was practised even in ancient Sumer. Europeans can not imagine a life without credits.Because now there is no need to wait for accumulation of the necessary sum of money, practically any goods can be bought on credit.

So, what is the reasons of so-called "Financial crash"?
Economists are unanimous in opinion, that modern financial crisis is a direct consequence of crisis of hypothecary crediting in the USA (the share of the given sector in a national economy makes 1.4 %). Private American banks was so interested in a pursuit of enrichment, distributing to the right and on the left hypothecary credits, that in a category of happy proprietors of hypothecary habitation have entered also those Americans who were simply not in a condition on a regular basis to pay percent{interests} under credits. As a result the habitation almost in the mass order carried over banks, and there was not enough of people which would like to buy this habitation. The outcome of a similar state of affairs is quite predicted: bankruptcy of banks.

There is quite natural question: « How did they allowed occurrence of such situation? ». All is simple: the share market was occupied by players-speculators who were engaged in sale and purchase highly remunerative, but risky tools, creating financial pyramids. Roughly speaking, they put 1 dollar, and received 9, but that was a very big risk. In fact even small reduction of cost of securities could cause huge losses.

As a result the financial system of the USA has given failure - billions and billions dollars which have been involved in financial operations of the increased risk,simply, are illiquid. And then the investment companies and banks incur losses and become bankrupts. A situation become worse in the global financial market. In fact the American economy is similar to the huge octopus, shrouded with his feelers all planet : branches of the American corporations are opened almost worldwide, the American dollar, securities of the USA traditionally represent itself as the financial guarantor for other countries which with their help are protected from a various sort of risks. Therefore it is no wonder, that crisis of hypothecary crediting in the USA has responded financial "pain" to all world.

if demand increases, supply extends
if demand decreases,supply contracts
if supply increases, demand extends
if supply decreases, demand contracts

elastic-responsive to a change in market conditions
elasticity-the extent to which buyers and sellers respond to a change in market conditions.
elasticity>responsivness

1.price elasticity of demand when a percentage change in quantity demand respondes to a percentage change in price.

2.income elasticity of demand when a percentage change in quantity demand respondes to a percentage change in income.

3.cross elasticity of demand when a percentage change in quantity demand respondes to a percentage change in price.

4.change in quantity of supply when a percentage change in quantity demand respondes to a percentage change in price.
Formulas:
1) % change QD/% change P=PED
2)% change QD/% change income=YED
3)% change QDA/% change PB=XED
4)% change QS/% change P=SED