Elasticity

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Elasticity

  1. 1. Elasticity??? What and Why?
  2. 2. <ul><ul><li>Degree of responsiveness of demand to the change in its determinants </li></ul></ul><ul><ul><li>Crucial role in business-decisions </li></ul></ul>
  3. 3. <ul><li>Few more …… </li></ul><ul><ul><li>Price elasticity </li></ul></ul><ul><ul><li>Cross Elasticity </li></ul></ul><ul><ul><li>Income Elasticity </li></ul></ul><ul><ul><li>Advertisement Elasticity </li></ul></ul><ul><ul><li>Elasticity of price expectations </li></ul></ul>
  4. 4. Price Elasticity??? What is it? <ul><ul><li>Definition: Responsiveness or sensitiveness of demand for a commodity to the changes in its price </li></ul></ul><ul><ul><li>Percentage change in demand / Percentage change in price </li></ul></ul>
  5. 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. 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. 7. Determinants of Price Elasticity <ul><ul><li>Availability of substitutes </li></ul></ul><ul><ul><li>Nature of commodity </li></ul></ul><ul><ul><li>Weight age in the total consumption </li></ul></ul><ul><ul><li>Time faction in adjustment of </li></ul></ul><ul><ul><li>consumption patterns </li></ul></ul><ul><ul><li>Range of commodity use </li></ul></ul><ul><ul><li>Proportion of market supplied </li></ul></ul><ul><ul><li>Availability of substitutes </li></ul></ul><ul><ul><li>Nature of commodity </li></ul></ul><ul><ul><li>Weight age in the total consumption </li></ul></ul><ul><ul><li>Time faction in adjustment of </li></ul></ul><ul><ul><li>consumption patterns </li></ul></ul><ul><ul><li>Range of commodity use </li></ul></ul><ul><ul><li>Proportion of market supplied </li></ul></ul>
  8. 8. Types of Price Elasticity <ul><ul><li>There are 5 types of Price Elasticity </li></ul></ul><ul><ul><li>Perfectly Elasticity of Demand </li></ul></ul><ul><ul><li>Perfectly Inelasticity of Demand </li></ul></ul><ul><ul><li>Unitary Elasticity of Demand </li></ul></ul><ul><ul><li>Relatively Elasticity of Demand </li></ul></ul><ul><ul><li>Relatively Inelasticity of Demand </li></ul></ul>
  9. 9. Perfectly Elasticity of Demand <ul><li>E = Infinity </li></ul><ul><li>Eg: Medicines </li></ul>
  10. 10. Perfectly Inelasticity of Demand <ul><li>E = 0 </li></ul><ul><li>Eg: Suger </li></ul>
  11. 11. Unitary Elasticity of Demand <ul><li>E = 1 </li></ul>
  12. 12. Relatively Elasticity of Demand <ul><li>E > 1 </li></ul><ul><li>Eg: Mobiles, Gold </li></ul>
  13. 13. Unitary Elasticity of Demand <ul><li>E=1 </li></ul>Relatively Inelasticity of Demand <ul><li>E < 1 </li></ul><ul><li>Eg: Inferior goods </li></ul>
  14. 14. Applications <ul><ul><li>Relationship between price and total revenue </li></ul></ul><ul><ul><li>Determining what goods to tax </li></ul></ul><ul><ul><li>Analyzing time tags in productive </li></ul></ul><ul><ul><li>Behaviour of a firm </li></ul></ul>

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