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Elasticity

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25 views33 pages

Elasticity

Uploaded by

meetunstop
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ELASTICITY

23rd -25th July 2024


Elasticity of Demand and Supply
• Objective: To examine how much demand or supply changes with
change in its determinants
• Elasticity of Demand
• Price
• Income
• Cross
Qd changes by Little when price
changes- Inelastic Demand
Elastic vs inelastic demand Qd changes by Lot when price
changes-Elastic Demand

The more responsive Qd is to


FLATTER IS MORE ELASTIC changes in price more elastic is
the demand curve
General Rules About Price Elasticity of
Demand
• Overarching Principle: Ease of Substitutability
• Necessities vs luxuries
• Availability of close substitutes
• Product Category
• Definition of Market (necessities vs luxuries)
• Purchase Size
• Time Horizon
• Short run
• Long run
Examples
• Oil
• Coorg Coffee
• Crocin
• Insulin
Expression for Price Elasticity of Demand

• If Price of oil increases by 10% and over several years, the quantity
falls by 5% the long-run elasticity of demand is
ED = -5%/10%= -0.5=0.5 ignoring the sign
Can you guess the unit of measurement of elasticity?
Types of Elasticity of Demand
• If ED < 1 relatively inelastic demand
• If ED >1 relatively elastic demand
• If ED=1 Unit elastic demand
Calculation of percentage change
• Let old price, demand be
Point A: Price=4, Quantity=120
• New Price demand is
Point B: Price=6, Quantity=80
Percentage change in Price from A to B is
(6-4)/4=2/4=50%
Percentage change in Quantity from A to B is
(80-120)/120=33% (ignoring sign)
Hence Price elasticity of demand is 33%/50%=0.66
(What is the unit?)
Exercise
• Find the elasticity of Demand if we move from Point B to Point A.
What is the problem?
Mid-Point Method
• At the mid-point of A and B,
• Price= (4+6)/2=5
• Quantity=(60+40)/2=50
Types of Elasticity of Demand-I
Types of Elasticity of Demand-II
Types of Elasticity of Demand-III
Total Revenue
• If Quantity Q is sold at price P then Total Revenue(TR) is PXQ
Computing Demand Elasticities
Other Elasticities of Demand
• Income Elasticity

• Positive for normal goods, negative for inferior goods


• Relatively small for necessities, high for luxuries
• Cross elasticity of Demand
Contd
• Cross price elasticity of demand

• Positive for substitutes, negative for complements


Elasticity of Supply
• The elasticity of supply measures how responsive a quantity supplied
is to changes in price
• Supply curve is elastic when quantity supplied increases a lot for a
relatively small change in price
• Supply curve is inelastic when quantity supplied increases by little for
relatively larger change in price
Again FLATTER IS MORE ELASTIC
Determinants of Elasticity of Supply
• Change in per unit cost with increased production (Tanjore paintings vs
toothpicks)

• Time horizon
• Share of Market for inputs
• Geographical scope
Price Elasticity of Supply

Let A: P=2.85, S=9000


B: P=3.15, S=11000

%change in quantity supplied =(11000-9000)/10000=20%

% Change in price =(3.15-2.85)/3= 10%

Hence Price Elasticity of supply=2


Variety of Supply Curves-I
Variety of Supply Curves-II
Variety of Supply Curves-III

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