Economics 1 l04_v01

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This is for CA-CPT Economics for Chapter Elasticity of Demands.

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Economics 1 l04_v01

  1. 1. Economics – Lecture 4 Elasticity of Demands Balanced Sheets Ph : +91 9462550350 www.balancedsheets.co.in
  2. 2. Elasticity of demand <ul><li>Change in quantity demanded with change in one of the determinants. </li></ul><ul><li>Most common elasticity is Elasticity of Demand against price change of the commodity. </li></ul><ul><li>Other elasticity </li></ul><ul><ul><li>Elasticity to Income </li></ul></ul><ul><ul><li>Elasticity to Substitutes price change </li></ul></ul><ul><ul><li>Elasticity to Complements price change etc. </li></ul></ul>
  3. 3. Determinants of Price elasticity <ul><li>How elastic or inelastic is the demand of a commodity depends largely on below mentioned Determinants </li></ul><ul><li>Availability of substitutes </li></ul><ul><li>Position of commodity in consumers budget </li></ul><ul><li>Nature of need (Luxury or necessities) </li></ul><ul><li>Number of uses: more uses more elasticity </li></ul><ul><li>Period of adjustment. (Long Term or short term elasticity) </li></ul><ul><li>Consumer habit </li></ul><ul><li>Tied demand : Those goods which are tied to other goods is more inelastic (Like : Cones with Ice Cream) </li></ul>
  4. 4. Price Elasticity of Demand <ul><li>Computation or Price Elasticity of Demand </li></ul><ul><li>The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. </li></ul><ul><li>Eg. : If the price of Bread increase from Rs. 20 to Rs. 25 and the qty. demanded falls from 20 packets to 16 Packets then elasticity of demand will be. </li></ul>
  5. 5. Types of elasticity Based on quantum of Elasticity <ul><li>Zero- no change( Perfectly inelastic) </li></ul><ul><ul><li>Any price change will not effect the quantity demanded. Eg. Medicines </li></ul></ul><ul><li>Greater than zero but less than one </li></ul><ul><ul><li>Quantity Demanded will change with lesser percentage then Price movement </li></ul></ul><ul><li>One ( unitary elastic) </li></ul><ul><ul><li>Change in quantity demanded will be exactly equal to % change in price </li></ul></ul><ul><li>Greater than one but less than infinity </li></ul><ul><ul><li>Quantity demanded will change with higher percentage then price change </li></ul></ul><ul><li>Infinity ( perfectly elastic) </li></ul><ul><ul><li>Any price change will result in 0 demand </li></ul></ul>
  6. 6. Types of elasticity Zero Elasticity (Perfect Inelastic Demand) Quantity 0 Price 5 4 Demand 100 1. An increase in price . . . 2. . . . leaves the quantity demanded unchanged.
  7. 7. Types of elasticity Elasticity (0-1) (Inelastic Demand) Quantity 0 Price 5 90 Demand 1. A 25% increase in price . . . 2. . . . leads to an 10% decrease in quantity demanded. 4 100
  8. 8. Types of elasticity Unit Elasticity (Elasticity Equals to “1”) Quantity 0 Price 2. . . . leads to a 25% decrease in quantity demanded. 4 100 5 75 1. A 25% increase in price . . . Demand
  9. 9. Types of elasticity Elasticity (>1) (Elastic Demand) Quantity 0 Price Demand 4 100 5 50 1. A 25% increase in price . . . 2. . . . leads to a 50% decrease in quantity demanded.
  10. 10. Types of elasticity Infinite Elasticity (Perfectly Elastic Demand) Quantity 0 Price 4 Demand 2. At exactly 4, consumers will buy any quantity. 1. At any price above 4, quantity demanded is zero. 3. At a price below 4, quantity demanded is infinite.

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