Scribd
Upload
49 views26 pages

Elasticity Demand

The document discusses the concept of elasticity of demand, including definitions and formulas for price elasticity, income elasticity, and cross elasticity. It provides examples of calculating elasticities using the percentage change and midpoint methods. The relationship between price elasticity and total revenue is also explained. Factors affecting price elasticity and the importance of the elasticity concept are briefly discussed.

Uploaded by

4058AMAN ANAND
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
49 views26 pages

Elasticity Demand

The document discusses the concept of elasticity of demand, including definitions and formulas for price elasticity, income elasticity, and cross elasticity. It provides examples of calculating elasticities using the percentage change and midpoint methods. The relationship between price elasticity and total revenue is also explained. Factors affecting price elasticity and the importance of the elasticity concept are briefly discussed.

Uploaded by

4058AMAN ANAND
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 26

ELASTICITY OF

DEMAND
Ed refers to the degree of change in quantity demanded of a
commodity due to a given change in price, income or price
of related commodities.

3 types of Ed .
(i) Price Ed shown as ep
(ii) Income Ed shown as ei and
(iii) Cross Ed shown as ec.
Price Ed (ep): It measures the proportionate change in quantity
demanded of a product to a certain proportionate change in
price.

ep= (Δq/Δp) *(p/q)


Where ‘p’ and ‘q’ are initial price and quantity
values.
Or for a function q=f(p) ,
ep =(dq/dp)*(p/q)
Possible Degrees of price Ed
1.Perfectly elastic demand: ep=∞
2. Perfectly Inelastic demand: ep=0.
3. Relatively elastic demand: ep >1.
4. Relatively inelastic demand: ep <1.
5. Unitary elastic demand: ep =1
Q. Suppose the elasticity of a product is given as
1 .2.

If now there is a 5% increase in price of the


commodity, what is the resultant change in
quantity demanded of the product?
Solution:

ep =>1.2= Δq/q÷0.05
=> Δq/q=1.2x0.05 = 0.06
So there will be a 6% decrease in quantity
demanded of the product.
METHODS OF MEASURING PRICE Ed:
(i) Point/percentage method
(ii) Mid-point method
(iii) Total Revenue or Total Outlay method.
(IV) Graphical method
Point/percentage method

ep= (Δq/Δp) *(p/q)


•Limitation:
It gives different values even for the same
absolute changes if the initial values are
reversed. So we use the Mid-point method.
Mid-point method:
ep= (Δq/Δp)*(P1+P2)/(q1+q2)
Answer the following:
•Q1. A consumer purchasing 80 units of a
commodity when its price was Re.1 decreases
his consumption to 48 units when its price rises
to Rs. 2 per unit. What is the price Ed for the
commodity. Solve by mid-point method. Also
identify the type of product.
Total Outlay Method or Total Revenue
method:
The rule is:
If P↑ x Q.D↓ => TR↑ or
if P↓ x Q.D↑=TR↓
i.e., there is a direct relation between price and total
revenue, then the demand for the product is inelastic.
Similarly if P↑ x Q.D↓ => TR ↓ or
if P↓ x Q.D ↑ =>TR↑, then the demand curve for the
product is elastic.
Q1.Given the following Market demand schedule of
a certain producer:
(i) Find the ep between points A & B, C & D and E&F
by mid-point method.

(ii) If the producer currently increases his price from


Rs.50 to Rs. 60, what is the change in his Total
Revenue? Should he go for the price change?
Explain your answer.
Market demand schedule
Q2. Suppose a seller of a textile cloth wants to lower the
price of its cloth from Rs.150 per metre to Rs.142.5 per
meter.
If its present sales are 2000 metres of cloth per
month and further it is estimated that the I ep I=0.7,
find whether he should go for the price change
based on his TR changes?
INCOME ELASTICITY OF DEMAND (ei)
It shows the degree of responsiveness of quantity of
a good to a marginal change in income of the
consumer.
So ei => (Δq/Δy)*(y/q) ( by Point method)
and ei= (Δq/Δy)*[(y1+y2)/(q1/q2)]
( by Mid-point method)
Y=income
Values of ei
•If ei>1 => luxury goods
• if ei<1 => necessaries and
•if ei <0, it is inferior commodities
Q1. If a consumer’s daily income increases from Rs.300 to
Rs.350, his purchase of a commodity X increases from 25
units per day to 35 units.
Find the ei of the product by Mid-point method.
CROSS ELASTICITY OF DEMAND (ec):
• ec will measure the % variation in quantity
demanded of a commodity due to a certain %
variation in price.
•Ec => (Δqx/Δpy)*(py /qx )(by Point method)
•and ec = (Δqx/Δpy)* (py1+py2)/(qx1+qx2)(by Mid-point
method)
Features of Cross ed:

1. Substitute goods will have +ve cross ed.


2. Complements or Joint products will have –ve
Cross ed.
3. A high coefficient of Cross ed would mean a high
degree of substitutability or complementarity
between the goods.
4. Two unrelated goods will have zero cross ed.
Q2. The monthly demand schedule of a household is given
below: Measure the Cross ed between (i) Tea and Coffee
and (ii) Bread and butter
Solution:
(i) Tea and coffee => ΔP=1 ΔQ =50 P=4 Q= 50
ec => (10/1) * (4/50) = 0.8 > 0 (+ve , so substitutes)

(ii) Bread and Butter => ec (-10/1) * (7/80) = - 0.88


<0 ( -ve, so complements)
Q3. A TV company plans to increase the price of its TV sets by
10% next year. The economic report of the company has
indicated about a rise in per capita income by 5% during the
year.
Its economic advisers have estimated the price elasticity for its
TV sets at -1.4 and the income elasticity at 2.2. The company
currently sells 50000 TV sets. Now each TV set is sold at Rs.
10,000.
i. Find the new sales of the company.
ii. Find whether the Total revenue of the company will increase
or decrease as a result of the decision to raise the price by
10%.
iii. Is it advisable for the company to raise the price if it wants to
sell more number of TV sets?
RELATION BETWEEN AR, MR AND PRICE
ELASTICITY (ep)
• ep = AR / (AR-MR)
Q4. Show that ep => AR/(AR-MR) at P=5 where the
demand is given by P=50-3X.
Q5. Given the demand curve => P=400-2q -3q2
where P=price and q=quantity, find ep at q=10.
FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

1.Availability of substitutes
2.Nature of the commodity
3.Possibility of postponing the purchase of the
commodity
4.Level of expenditure on the commodity
5.Habitual necessities
6.Prevailing price level of the commodity
7.Time Period
IMPORTANCE OF ELASTICITY CONCEPT
1.International trade:
2.Formulation of Government Policies:
3. Factor Pricing:
4. Price Decisions of the sellers:
5. Paradox of poverty amidst plenty:
6.Shifting of tax burden:
7.Public utilities:

Q. Make brief notes on ‘Importance of Elasticity’


concept.
Link for understanding BITCOINS:
• https://www.khanacademy.org/economics-fin
ance-domain/core-finance/money-and-bankin
g/bitcoin/v/bitcoin-what-is-it

You might also like