Elasticity
- 1. Elasticity??? What and Why?
- 2. Degree of responsiveness of demand to the change in its determinants Crucial role in business-decisions
- 3. Few more …… Price elasticity Cross Elasticity Income Elasticity Advertisement Elasticity Elasticity of price expectations
- 4. Price Elasticity??? What is it? Definition: Responsiveness or sensitiveness of demand for a commodity to the changes in its price Percentage change in demand / Percentage change in price
- 5. How to do? E p = ------- ÷ ------- = ----- x ----- ∆ Q ∆ P Q P ∆ Q ∆ P P Q Where Q = Original quantity demand P = Original Price ∆ Q = New Quantity demanded – Original quantity demanded ∆ P = New Price – Original Price
- 6. Problem: The price of product Bread is Rs. 20/-, quantity demanded is 1000 packets and the price increased from Rs. 20/- to Rs. 30/-, the quantity demanded is decreased from 1000 packets to 850 packets. E p = ------- x ----- = ----------- x ------- ∆ Q ∆ P P Q 850-1000 20 30-20 1000 E p = -0.3 E p < 0 - Relatively inelastic in nature as there is slight variation in demand even though there is rise in price
- 7. Determinants of Price Elasticity Availability of substitutes Nature of commodity Weight age in the total consumption Time faction in adjustment of consumption patterns Range of commodity use Proportion of market supplied Availability of substitutes Nature of commodity Weight age in the total consumption Time faction in adjustment of consumption patterns Range of commodity use Proportion of market supplied
- 8. Types of Price Elasticity There are 5 types of Price Elasticity Perfectly Elasticity of Demand Perfectly Inelasticity of Demand Unitary Elasticity of Demand Relatively Elasticity of Demand Relatively Inelasticity of Demand
- 9. Perfectly Elasticity of Demand E = Infinity Eg: Medicines
- 10. Perfectly Inelasticity of Demand E = 0 Eg: Suger
- 11. Unitary Elasticity of Demand E = 1
- 12. Relatively Elasticity of Demand E > 1 Eg: Mobiles, Gold
- 13. Unitary Elasticity of Demand E=1 Relatively Inelasticity of Demand E < 1 Eg: Inferior goods
- 14. Applications Relationship between price and total revenue Determining what goods to tax Analyzing time tags in productive Behaviour of a firm