2. What is ELASTICITY?
•Elasticity is the concept economists use to
describe the steepness or flatness of curves or
functions.
•In general, elasticity measures the
responsiveness of one variable to changes in
another variable.
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3. Price Elasticity of Demand
•Price Elasticity of demand can be defined as a
measure of change in quantity demanded to
the corresponding change in price. Below are
the various types of elasticity of demand
•Price elasticity's are almost always negative,
although analysts tend to ignore the sign
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4. Types Of Elasticity of Demand
•Elastic demand.
•Inelastic demand.
•Unitary demand.
•Perfectly elastic demand.
•Perfectly inelastic demand.
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5. Elastic Demand – If the change in price
leads to greater change than proportional
change in demand then the demand for that
good is price elastic. For example a 20% fall
in price leads to a 30% increase in quantity
demanded.
Eg. Ice cream
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7. Inelastic Demand – If the change in price
leads to less than proportional change in demand
then the demand for that good is price inelastic.
For example a 30% increase in price leads to a
15% fall in quantity demanded
Eg. sugar
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9. Unitary Demand – If the change in price
leads to equal change in demand then the
demand for that good is unitary.
For example a 10% increase in price leads to
10% decrease in demand.
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10. Unitary elasticity
demand
Ed = - 1
For example, a rise in
the price of gasoline at all stations may not reduce
gasoline sales significantly. However, a rise of an
individual station’s price will significantly affect that
station’s sales.
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11. Unitary Demand – If the change in price
leads to equal change in demand then the
demand for that good is unitary.
For example a 10% increase in price leads to
10% decrease in demand.
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12. Perfectly Elastic Demand – It refers to a
situation when any change in price will see
quantity demanded fall to zero.
The graph above
illustrates that at prices
above $20, quantity
demanded is zero.
However, when price is
set below $20, quantity
Perfectly elastic demand demanded increases
Ed = - ∞ infinitely.
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13. Perfectly Inelastic Demand – It refers to a
situation when any change in price will not
affect the demand for a good that is quantity
demanded will remain unchanged irrespective of
change in the price of that good.
Eg.as quantity is totally unresponsive of
price, consumer has no alternative in
perfectly inelastic demand, he will pay
any price for it. examples are air, water,
electricity etc.
Ed = 0 Eg. Air, water, electricity etc.
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14. FACTS ABOUT ELASTICITY
•It’s always a ratio of percentage changes.
•That means it is a pure number -- there are no
units of measurement ion elasticity.
•Price elasticity of demand is computed along a
demand curve.
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15. What’s the percent increase in price here
because of the shift in supply?
S'
price S
pE = $2
D
Q
QE
CIGARETTE MARKET
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16. TERMS TO LEARN
•Demand is ELASTIC when the numerical
value of elasticity is greater than 1.
•Demand is INELASTIC when the numerical
value of elasticity is less than 1.
•Demand is UNIT ELASTIC when the
numerical value of elasticity equals 1.
NOTE: Numerical value here means “absolute
value.”
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17. DETERMINANTS OF DEMAND
ELASTICITY
•The more substitutes there are available for a
good, the more elastic the demand for it will tend
to be. [Related to the idea of necessities and
luxuries. Necessities tend to have few
substitutes.]
•The longer the time period involved, the more
elastic the demand will tend to be.
•The higher the fraction of income spent on the
good, the more elastic the demand will tend to
be.
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18. OTHER ELASTICITY MEASURES
•In principle, you can compute the elasticity
between any three variables.
Income elasticity of demand
Cross price elasticity of demand
Elasticity of supply
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19. Each of these concepts has the expected
definition. For example, income elasticity of
demand is the percent change in quantity
demand divided by a percent change income:
% change in Q
EINCOME =
% change in I
Income elasticity of demand will be positive
for normal goods, negative for inferior ones.
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20. Conclusion
I hope that this presentation have gave you
a brief knowledge about Elasticity of
demand.
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