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Chapter 4Elasticity Example 4.1 Will the China’s trade balance (export – import) deteriorate if RMB appreciates (say, from 1USD=8.1RMB to 1USD=7.8RMB)? China’s imports become less expensive. Quantity demanded for import may increase. China’s Exports become more expensive. Quantity demanded for export may decrease. The impact of RMB appreciation on the trade balance depends on the responsiveness of import demand and export demand to the appreciation. Price Elasticity of Demand The Price Elasticity of Demand is a measure of the responsiveness of the quantity demanded of a good to a change in the price of that good. Formally, it is the percentage change in the quantity demanded that results from a 1 percent change in its price. Elasticity Generally, elasticity is a measure of the responsiveness of the quantity demanded of a good to a change in the price of that good Example 4.2 The price of pork falls by 2% and the quantity demanded increases by 6% Then the price elasticity of demand for pork is Example 4.3. If a 1 percent rise in the price of shelter caused a 2 percent reduction in the quantity of shelter demanded, the price elasticity of demand for shelter would be Price Elasticity of Demand Price Elasticity of Demand Example 4.4. What is the elasticity of demand for sushi? Originally Price = $10/piece Quantity demanded = 400 pieces/day New Price = $9.7/piece Quantity demanded = 404 pieces/day, then Example 4.5. What is the elasticity of Hong Kong Disney passes? Originally Price = $1600 Quantity demanded = 10,000 passes/year New Price = $1520 Quantity demanded = 12,000 passes/year, then Determinants of Price Elasticity of Demand Availability of substitutes - the higher the number of substitutes, the more responsive people are to price changes. Elasticity increases with availability of substitutes. Proportion of income used to buy the good - the higher the fraction of income spent on a good, the higher is elasticity. Temporary versus perman