Module 2 , 1st sem

1. ElasticityElasticity
Module: 2 (contd.)Module: 2 (contd.)

2. What is elasticity ?What is elasticity ?
 Degree ofDegree of responsiveness of demandresponsiveness of demand
to its determinantsto its determinants
– Own priceOwn price
– Cross priceCross price
– IncomeIncome

3. Price Elasticity of DemandPrice Elasticity of Demand
 Measures the percentage change inMeasures the percentage change in
thethe quantity demandedquantity demanded resultingresulting
from a percent change infrom a percent change in priceprice
Q
P
P
Q
P/P
Q/Q
P%
Q%
EP
∆
∆
=
∆
∆
=
∆
∆
=

4. Price Elasticity of DemandPrice Elasticity of Demand
 Elastic DemandElastic Demand
– EEpp is greater than than 1 in absoluteis greater than than 1 in absolute
valuevalue
– Quantity demanded is relativelyQuantity demanded is relatively
responsive to a change in priceresponsive to a change in price
– |%|%∆∆Q| > |%Q| > |%∆∆P|P|
– Total expenditure/Total Revenue (PxQ)Total expenditure/Total Revenue (PxQ)
decreases when price increasesdecreases when price increases

5. Price Elasticity of DemandPrice Elasticity of Demand
 Inelastic DemandInelastic Demand
– EEpp is less than 1 in absolute valueis less than 1 in absolute value
– Quantity demanded is relativelyQuantity demanded is relatively
unresponsive to a change in priceunresponsive to a change in price
– |%|%∆∆Q| < |%Q| < |%∆∆P|P|
– Total expenditure/Total Revenue (PxQ)Total expenditure/Total Revenue (PxQ)
increases when price increasesincreases when price increases

6. Price Elasticity andPrice Elasticity and
Total Expenditure/RevenueTotal Expenditure/Revenue

7. Factors on which elasticity dependsFactors on which elasticity depends
 Availability of substitutesAvailability of substitutes
 Nature of the commodityNature of the commodity
 Weightage in total consumptionWeightage in total consumption
 Time period of adjustmentTime period of adjustment

8. Cross Elasticity of DemandCross Elasticity of Demand
 Measures theMeasures the percentage change in thepercentage change in the
quantity demandedquantity demanded of a commodity resultingof a commodity resulting
from afrom a percent change in price of itspercent change in price of its
substitutes or complementssubstitutes or complements
Exy = %∆Qx/ %∆Py
Exy = ∆Qx/ Qx
∆Py/ Py

9. Income Elasticity of demandIncome Elasticity of demand
 Measures the percentage change inMeasures the percentage change in
thethe quantity demandedquantity demanded of a commodityof a commodity
resulting from a percent change inresulting from a percent change in incomeincome
Exy = %∆Qx/ %∆M
Exy = ∆Qx/ Qx
∆M/ M

10. Income Elasticity of demandIncome Elasticity of demand
 Measures the percentage change inMeasures the percentage change in
thethe quantity demandedquantity demanded of a commodityof a commodity
resulting from a percent change inresulting from a percent change in incomeincome
Exy = %∆Qx/ %∆M
Exy = ∆Qx/ Qx
∆M/ M