This document provides an overview of demand and elasticity concepts for an MBA program. It defines price elasticity as a measure of how sensitive demand is to price changes. The document explains how to calculate price elasticity using percentage changes in quantity and price. It also discusses factors that determine a good's elasticity, such as availability of substitutes. Special cases like perfectly inelastic and elastic demands are addressed. Finally, the document introduces other elasticity measures like income elasticity and cross-price elasticity.

1. Free Video Lectures for MBA
By:
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2. Demand and Elasticity
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3. Consider the following cases:
Making Sales Targets
A Public Transportation Problem:
Can the daily ridership fluctuations be controlled
through a pricing strategy?
The Airliners’ Pricing Problem:
How can an airliner fill its plains while
maximizing its profit?
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4. 220
TR 0 = 220 x 120 = 26,400
TR1 = 180 x 140 = 25,200
TR2 = 180 x 200 = 36,000
D 2
120
180
D 1
0 Q
video.edhole.com 140 200

5. Note: Slope and Scale
o
o
A B
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6. Elasticity
A general definition:
“Elasticity” is a (standard) measure of the
degree of sensitivity ( or responsiveness) of one
variable to changes in another variable.
The price elasticity of Demand
The (self) price elasticity of demand is a
measure of the degree of sensitivity of demand
to changes in the (self) price, ceteris paribus.
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7. Determining Price Elasticity
Percentage Change in Quantity
Ep =
Percentage Change in Price
Change in Quantity
Quantity
Ep =
Change in Price
video.edhole.com Price

8. P
10
8
Ep (a --- b) = (10/8)/(-2/10) = -6.25
Ep (c ---d ) = (10/80)/(-2/4) = -.25
Q
D
a
b
c
d 2 4
8 18 80 90
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9. What does the elasticity
“measure” really measure?
The elasticity measure is a ratio between
two percentage measures: the percentage
change in one variable over the percentage
change in another variable
A price elasticity of -6.25 means that for
each one percent change in price the
quantity demanded will change by 6.25
percent.
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10. Arc (Price) Elasticity
P
Q
10
a
b
c
D 2 4
Note that if we increased
the price,
(from 8 to 10 or 2 to 4)
the original P and Q would
be 2 and 8 and 18 and
90, respectively.
Ep = (-10/18)/(2/8) = -2.22
Ep = (-10/90)/(2/2) = -.11
8
d
8 18 80 90
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11. Arc Elasticity
To get the average elasticity between two
points on a demand curve we take the
average of the two end points (for both
price and quantity) and use it as the initial
value:
Q2-Q1 10
(Q1+Q2) 8+18
Ea = = -3.49
P2-P1 -2
video. e d h o l e .(cPo1+mP2) 10+8

12. Elasticity and the Price Level
Along a linear demand curve as
the price goes up, |elasticity |
increases.
Note that between points a and
b the (arc) elasticity of the
above demand curve is -3.49,
whereas between c and d it
is -.17.
P
D
a
b
c
d
8 18 80 90
10
8
2 4
| Ep | 1 : Elastic
| Ep | 1 : Inelastic
| Ep | = 1 : Unit-elastic
E =-3.49
E = -.17
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13. Point Elasticity
Q
---------
Q1+Q2 Q P1+P2 Q P
E = ------------ = ------- . ------- = ------- . ------
P P Q1+Q2 P Q
---------
P1+P2
dQ P
Or, = ------ . -----
v i d e o . e d h o l e . c o m dP Q

14. P,MR
Q
Q
TR
0
0
| E | = 1
Q = C - b P
C 1
P = ----- - ----- Q
b b
C 2
MR = ------ - ------ Q
b b
C
D
MR
Note:
In the demand equation
dQ/dP = -b
That means
P
Q video.edhole.com
E p = -b -----

15. A note about marginal revenue:
Recall: TR = P.Q ; P = f (Q )
Marginal Revenue = Change in TR resulting from
producing (selling) one additional unit of output.
TR (P.Q) d P d Q
MR = ------ = -------- = ------ .Q + ------ .P
Q Q d Q d Q
d P Q P 1
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= ( -----. ----- + ------ ).P = P. ( ------- + 1 )

16. Q = C - b P
Slope= -1/b
Slope=-2/b
D
MR
0 Q
C
P, MR
dQ
---- = - b
d p
dQ P P
E = ----- . ----- = -b . ------
d p Q Q
1
MR = P. ( 1 + ---- )
E
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17. Special Cases
P
D
D
0 Q 0 Q
Infinitely (price) elastic Infinitely price inelastic
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18. Important Observations
•When demand is elastic, a decrease in price
will result is an increase in the revenue
(sales).
•When demand is inelastic, a decrease in
price will result is a decrease in the revenue
(sales).
•When demand is unit-elastic, an increase
(or a decrease) in price will not change the
video.reedvheonlue.ec o(smales).

19. What Determines Elasticity
Necessities versus luxuries
Eating at restaurants
Groceries
Availability of substitutes
Chicken versus beef
How much of our income a good takes
Salt versus Nike sneakers
video.eTdhheo lpea.csosamge of time

20. Elasticity and Passage of Time
D D1 Do D3 2
Q3 Q2 Q1 Q’o Qo
Q
P
O
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21. Other Elasticity Measures
Recall: “Elasticity” is a (standard) measure of
the degree of sensitivity ( or responsiveness) of
one variable to changes in another variable.
Income Elasticity: a measure of the degree of
sensitivity of demand for a good (or service) to
changes in consumers’ (buyers’) income
Cross Price Elasticity: a measure of the degree
of sensitivity of demand for a good (or service)
to changes in the price of another good or
service
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22. Income Elasticity of Demand
A measure of the degree of responsiveness
of demand (for a good) to a change in
income, ceteris paribus.
(Shift of the demand curve)
Q2-Q1
Q2+Q1 d Q I
EI = = or = ------ . ------
I2-I1 d I Q
I1+I2
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23. Cross (Price) Elasticity
A measure of the degree of responsiveness
of the demand for one good (X) to a change
in the price of another good (Y):
(Shift of demand curve)
Qx2- Qx1
Qx2+Qx1 d Qx Py
Ec = or = ----------- . -------
Py2- Py1 d Py Qx
Py1+Py2
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