GROUP ASSIGNMENT

MICROECONOMICS

Report about Elasticities

Report Prepared by:

Group’s members:
1. Vũ Thanh Dương – HE172068
2. Đỗ Trà Mi – HS180704
3. Trần Thị Thu Hiền – HS173030
4. Trần Thị Thu Duyên – HS173225
5. Vũ Minh Quân – HS1714153
Class: IB1802
Lecturer: Phạm Thành Vinh
Course: ECO111 – Microeconomics
School: FPT University
Date: Spring 2023
 Table of Contents
I. Elasticities ...................................................................................................................... 3

1. Definition ......................................................................................................................... 3

2. The Elasticity of Demand ................................................................................................ 3

3. The Price Elasticity of Supply .......................................................................................... 4

II. A real-life company utilize the knowledge about elasticity to make profits ...................... 5

III. Conclusion ...................................................................................................................... 6

IV. References .................................................................................................................... 6

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 I. Elasticities

1. Definition

Elasticities is a measure of how much buyers and sellers respond to changes in

market conditions. Understanding these elasticities can help companies make better

decisions about pricing, production, and marketing, ultimately leading to increased

profits.

2. The Elasticity of Demand

The price elasticity of demand measures how much the quantity demanded

responds to a change in price. Demand for a good is said to be elastic if the quantity

demanded responds substantially to changes in the price. Demand is said to be

inelastic if the quantity demanded responds only slightly to changes in the price.

Loosely speaking, it measures the price-sensitivity of buyers’ demand.

The Determinants of Demand Elasticity

• Availability of Close Substitutes:

Goods with close substitutes tend to have more elastic demand because

it is easier for consumers to switch from that good to others. For example, Deli

pencil and Thiên Long pencil are easily substitutable. A small increase in the

price of Deli pencil, assuming the price of Thiên Long pencil is held fixed, causes

the quantity of Deli pencil sold to fall by a large amount.

• Necessities versus Luxuries:

Necessities tend to have inelastic demands, whereas luxuries have

elastic demands. For example, Insulin is a necessity to diabetics. A rise in price

would cause little or no decrease in quantity demanded. By contrast, A Rolex

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 watch is a luxury. If the price rises, some people will forego it.

• Definition of the Market:

Price elasticity is higher for narrowly defined goods than for broadly

defined ones. For example, if a market is defined as "clothing" then the

consumer really has no substitutes to choose from. If the price of clothing goes

up, people will still buy clothing, just different kinds or cheaper kinds. By

contrast, if the market is defined as trench coats, the consumer has more

options to choose from. If the price of a trench coat rises, people may either buy

a cheaper trench coat or a different kind of coat, but they will have a choice.

• Time Horizon

Goods tend to have more elastic demand over longer time horizons. For

example, when the price of gasoline rises, the quantity of gasoline demanded

falls only slightly in the first few months. Over time, however, people buy more

fuelefficient cars, switch to public transportation, and move closer to where they

work. Within several years, the quantity of gasoline demanded falls more

substantially.

3. The Price Elasticity of Supply

Price elasticity of supply a measure of how much the quantity supplied of a good

responds to a change in the price of that good, computed as the percentage change in

quantity supplied divided by the percentage change in price. Loosely speaking, it

measures sellers’ price-sensitivity.

The Determinants of Supply Elasticity:

• Greater price elasticity of supply

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 The price elasticity of supply depends on the flexibility of sellers to change the

amount of the good they produce. The more easily sellers can change the quantity they

produce, such as books, cars, and televisions, have elastic supplies because firms that

produce them can run their factories longer in response to a higher price.

• Price elasticity of supply is greater in the long run than in the short run

Over short periods of time, firms cannot easily change the size of their factories

to make more or less of a good. Thus, in the short run, the quantity supplied is not very

responsive to the price. By contrast, over longer periods, firms can build new factories

or close old ones.

II. A real-life company utilize the knowledge about elasticity to make profits

One real-life example of a company that uses knowledge of elasticity to generate

profits is Amazon. Amazon is known for its dynamic pricing strategy, which involves

adjusting prices frequently based on changes in demand and supply. Amazon uses data

analytics to monitor customer behaviour and adjust prices in real-time to maximise

revenue.

During peak shopping periods like Black Friday or Cyber Monday and during the

holiday, Amazon may offer discounts on popular items to attract customers and drive

sales. According to its quarterly report, Amazon had its most lucrative Black Friday and

Cyber Monday weekend this year. And “between Black Friday and Christmas, US-

based third-party sellers sold an average of 11,500 products per minute”. Amazon’s

profits surged to $14.32 billion in a fourth quarter marked by record holiday sales.

In addition, Amazon uses elasticity to inform its advertising and marketing

strategies. By understanding the elasticity of demand for different products, Amazon

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can determine which products to promote and how much to spend on advertising. If

Amazon finds that a particular product has low elasticity of demand, it may not need to

spend as much on advertising to generate sales.

III. Conclusion

Overall, the use of elasticity in microeconomics can help companies like Amazon

determine the potential impact of changes in price. From there companies can make

better decisions regarding their pricing strategies and overall market strategy.

IV. References

https://en.wikipedia.org/wiki/Advertising_elasticity_of_demand

https://sman1kintamani.com/perpustakaan/buku/Microeconomics%207th%

20Edition.pdf

https://www.studysmarter.co.uk/explanations/microeconomics/supply-and-

demand/determinants-of-price-elasticity-of-demand/

https://www.bartleby.com/essay/Demand-Elasticity-Of-Amazon-s-Product-

F3GNY8WKPVDX

https://www.theguardian.com/technology/2022/feb/03/amazon-profits-

surge-cost-increase-prime-membership

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