Elasticity and It’s Application

Lesson 3

For Econ101, PGCSM (Post Graduate Certificate in Securities Markets)

 Re-visiting lesson 2
• The demand curve
Econ101@NISM | Lesson 3 | 13-08-2024

• The supply curve

• Market equilibrium
• Movement vs. Shift in demand and supply
• Prices help in allocation of scarce resources (Principle 6)

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 What we will discuss today
• Elasticity of demand and supply
Econ101@NISM | Lesson 3 | 13-08-2024

• Factors that influence elasticity of demand and supply

• Price, cross-price, and income elasticity
• Price elasticity of demand and its impact on total revenue
• Applications of elasticity
• Can good news for farming be bad news for farmers?
• Will crackdown of drug mafia increase or decrease drug related crime?
• Govt policies and elasticity
• Price ceiling and how it affects market outcome
• Price floor and how it affects market outcome

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 Elasticity of demand and supply
• When price rises, quantity demanded falls and vice-versa
Econ101@NISM | Lesson 3 | 13-08-2024

• When price rises, quantity supplied rises and vice-versa

• Now the question is by how much?
• Elasticity measures how much consumers and producers respond to when
market conditions change.
• % change in quantity due to % change in price or income, etc.

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 Factors that influence elasticity
• Availability of substitutes
Econ101@NISM | Lesson 3 | 13-08-2024

• Necessities and luxuries

• Definition of the market (Narrow or broad)
• Time horizon

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 Price (own) elasticity of demand
• The law of demand states that a fall in the price of a good raises the quantity
demanded.
Econ101@NISM | Lesson 3 | 13-08-2024

• 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 (>1) if the quantity demanded responds
substantially to changes in the price.
• Demand is said to be inelastic (<1) if the quantity demanded responds only
slightly to changes in the price.
• Demand for a good is said to be unit elastic (=1) if the quantity demanded
responds proportionately to changes in the price.

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 Econ101@NISM | Lesson 3 | 13-08-2024

Elastic and inelastic demand

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 Econ101@NISM | Lesson 3 | 13-08-2024

Unit elastic demand

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 Perfectly elastic and perfectly inelastic demand
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 Cross-price elasticity of demand
• The cross-price elasticity of demand measures how the quantity demanded of
one good responds to a change in the price of another good.
Econ101@NISM | Lesson 3 | 13-08-2024

• Will the cross price elasticity of demand be positive or negative?

• If goods are substitutes, cross-price elasticity will be positive
• If good are complementary, cross price elasticity will be negative
• Can you explain using a diagram?

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 Income elasticity of demand
• The income elasticity of demand measures how the quantity demanded changes
as consumer income changes.
Econ101@NISM | Lesson 3 | 13-08-2024

• Will the income elasticity of demand be positive or negative?

• If goods are normal, income elasticity will be positive
• If good are inferior, income elasticity will be negative
• Can you explain using a diagram?

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 Elasticity and its impact on total revenue
Econ101@NISM | Lesson 3 | 13-08-2024

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 Elasticity of supply
• The law of demand states that a fall in the price of a good raises the quantity
demanded.
Econ101@NISM | Lesson 3 | 13-08-2024

• 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 (>1) if the quantity demanded responds
substantially to changes in the price.
• Demand is said to be inelastic (<1) if the quantity demanded responds only
slightly to changes in the price.
• Demand for a good is said to be unit elastic (=1) if the quantity demanded
responds proportionately to changes in the price.

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 Econ101@NISM | Lesson 3 | 13-08-2024

Elasticity of supply can vary

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 Application of elasticity
• Can good news for farming be bad news for farmers?
Econ101@NISM | Lesson 3 | 13-08-2024

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 Application of elasticity
• Will crackdown of drug mafia increase or decrease drug related crime?
Econ101@NISM | Lesson 3 | 13-08-2024

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 Govt policies and elasticity
• Price ceiling and how it affects market outcome (hoarding/ black marketing)
Econ101@NISM | Lesson 3 | 13-08-2024

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 Govt policies and elasticity
• Price floor and how it affects market outcome (min wage and unemployment)
Econ101@NISM | Lesson 3 | 13-08-2024

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 Should there be a min wage or not?
• Who is affected by min wage?
Econ101@NISM | Lesson 3 | 13-08-2024

• How to increase income of people below

the poverty line?
• High min wage encourages school
dropouts?
• Are all min wage workers heads of their
households?

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 Before the next lesson
• Ch 5 and 6 of the reference textbook
Econ101@NISM | Lesson 3 | 13-08-2024

• Group assignment details will be shared

• On elasticity – Why Are C.E.O.s Suddenly Obsessed With ‘Elasticity’?
• Thank you!

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