The document discusses the concept of elasticity in economics. It defines elasticity as a measure of how sensitive a variable is to changes in another variable. There are different types of elasticity including price elasticity of demand, income elasticity of demand, and cross elasticity of demand. Price elasticity of demand refers to how much demand for a good changes when its price changes. Income elasticity of demand refers to how demand changes with changes in consumer income. Demand can be perfectly elastic, perfectly inelastic, relatively elastic, or relatively inelastic depending on the responsiveness of quantity demanded to price changes. Factors like availability of substitutes, income level, and time impact price elasticity. Income elastic goods see larger increases
Here are the steps to solve the problems:
1. DEMAND FOR good Y
A. Q1 = 160; P1 = 110
B. Q2 = 240; P2 = 90
% change in Q = (Q2 - Q1)/Q1 = (240 - 160)/160 = 50%
% change in P = (P1 - P2)/P1 = (110 - 90)/110 = 18.18%
ED = % change in Q / % change in P = 50/18.18 = 2.75
2. SUPPLY FOR good X
Q1 = 75; P1 = 30
Q2 = 175; P2 = 31
% change in
This document discusses the concepts of price elasticity of demand and supply. It defines price elasticity of demand as a measure of how much quantity demanded responds to changes in price. Demand can be elastic, inelastic, or unit elastic depending on if the percentage change in quantity is greater than, less than, or equal to the percentage change in price. Factors like availability of substitutes and necessity of a good influence elasticity. Price elasticity of supply is defined similarly for quantity supplied responses to price changes. Production possibilities and storage abilities impact supply elasticity. Formulas are provided to calculate elasticities from percentage changes. Total revenue tests and expenditure tests can also indicate elasticity.
Concept of Elasticity
Types of Elasticity
Price Elasticity of Demand
Classification of price elasticity of demand
Determinants of price elasticity of demand
Price Elasticity of Supply
Classification of Price elasticity of supply
Determinants of Price elasticity of supply
Income Elasticity of Demand
Cross Elasticity of Demand
Alfred Marshall
Demand and Supply Analysis (Economics) Lecture NotesFellowBuddy.com
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This document discusses elasticity of demand, including definitions and types. It defines elasticity as measuring the responsiveness of one variable to changes in another. There are different types of elasticity depending on what is changing, such as price elasticity (responsiveness of demand to price changes), income elasticity (responsiveness of demand to income changes), and cross elasticity (responsiveness of demand for one good to price changes in another good). The document discusses concepts like perfectly inelastic, perfectly elastic, and unit elastic demand curves, and provides examples of goods that fall under each category. It also outlines factors that influence a good's price elasticity and significance of understanding elasticities.
This document provides an overview of elasticity of demand, including:
- Definitions of price elasticity of demand and the types of elasticities, including perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, and unit elastic demands.
- Factors that affect price and income elasticities of demand, such as commodity nature, availability of substitutes, and proportion of income spent.
- Explanations and diagrams demonstrating zero income elasticity, negative income elasticity, and positive income elasticity of demand.
- Measurements of income elasticity and how it is calculated using changes in quantity demanded and income.
- Other elasticities discussed include cross elasticity of demand and advertising
Elasticity of supply measures how responsive the quantity supplied is to changes in price. It can be elastic, inelastic, or unitary elastic. Elasticity is calculated by taking the percentage change in quantity supplied divided by the percentage change in price. If the result is greater than 1, supply is elastic. If it is less than 1, supply is inelastic. If it is exactly 1, supply is unitary elastic. Elastic supply responds strongly to price changes in the long run, while inelastic supply is not very sensitive to price changes in the short run. Unitary elastic supply means quantity and price move proportionately.
1. The document discusses the theory of consumer choice and how it relates to budget constraints, preferences, and optimization.
2. It explains that a consumer's budget constraint depicts the combinations of goods they can afford based on their income and prices, while their preferences are represented by indifference curves.
3. The consumer will choose the combination of goods that puts them on the highest possible indifference curve that is also on or below their budget constraint, which is their optimal choice.
Here are the steps to solve the problems:
1. DEMAND FOR good Y
A. Q1 = 160; P1 = 110
B. Q2 = 240; P2 = 90
% change in Q = (Q2 - Q1)/Q1 = (240 - 160)/160 = 50%
% change in P = (P1 - P2)/P1 = (110 - 90)/110 = 18.18%
ED = % change in Q / % change in P = 50/18.18 = 2.75
2. SUPPLY FOR good X
Q1 = 75; P1 = 30
Q2 = 175; P2 = 31
% change in
This document discusses the concepts of price elasticity of demand and supply. It defines price elasticity of demand as a measure of how much quantity demanded responds to changes in price. Demand can be elastic, inelastic, or unit elastic depending on if the percentage change in quantity is greater than, less than, or equal to the percentage change in price. Factors like availability of substitutes and necessity of a good influence elasticity. Price elasticity of supply is defined similarly for quantity supplied responses to price changes. Production possibilities and storage abilities impact supply elasticity. Formulas are provided to calculate elasticities from percentage changes. Total revenue tests and expenditure tests can also indicate elasticity.
Concept of Elasticity
Types of Elasticity
Price Elasticity of Demand
Classification of price elasticity of demand
Determinants of price elasticity of demand
Price Elasticity of Supply
Classification of Price elasticity of supply
Determinants of Price elasticity of supply
Income Elasticity of Demand
Cross Elasticity of Demand
Alfred Marshall
Demand and Supply Analysis (Economics) Lecture NotesFellowBuddy.com
FellowBuddy.com is an innovative platform that brings students together to share notes, exam papers, study guides, project reports and presentation for upcoming exams.
We connect Students who have an understanding of course material with Students who need help.
Benefits:-
# Students can catch up on notes they missed because of an absence.
# Underachievers can find peer developed notes that break down lecture and study material in a way that they can understand
# Students can earn better grades, save time and study effectively
Our Vision & Mission – Simplifying Students Life
Our Belief – “The great breakthrough in your life comes when you realize it, that you can learn anything you need to learn; to accomplish any goal that you have set for yourself. This means there are no limits on what you can be, have or do.”
Like Us - https://www.facebook.com/FellowBuddycom
This document discusses elasticity of demand, including definitions and types. It defines elasticity as measuring the responsiveness of one variable to changes in another. There are different types of elasticity depending on what is changing, such as price elasticity (responsiveness of demand to price changes), income elasticity (responsiveness of demand to income changes), and cross elasticity (responsiveness of demand for one good to price changes in another good). The document discusses concepts like perfectly inelastic, perfectly elastic, and unit elastic demand curves, and provides examples of goods that fall under each category. It also outlines factors that influence a good's price elasticity and significance of understanding elasticities.
This document provides an overview of elasticity of demand, including:
- Definitions of price elasticity of demand and the types of elasticities, including perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, and unit elastic demands.
- Factors that affect price and income elasticities of demand, such as commodity nature, availability of substitutes, and proportion of income spent.
- Explanations and diagrams demonstrating zero income elasticity, negative income elasticity, and positive income elasticity of demand.
- Measurements of income elasticity and how it is calculated using changes in quantity demanded and income.
- Other elasticities discussed include cross elasticity of demand and advertising
Elasticity of supply measures how responsive the quantity supplied is to changes in price. It can be elastic, inelastic, or unitary elastic. Elasticity is calculated by taking the percentage change in quantity supplied divided by the percentage change in price. If the result is greater than 1, supply is elastic. If it is less than 1, supply is inelastic. If it is exactly 1, supply is unitary elastic. Elastic supply responds strongly to price changes in the long run, while inelastic supply is not very sensitive to price changes in the short run. Unitary elastic supply means quantity and price move proportionately.
1. The document discusses the theory of consumer choice and how it relates to budget constraints, preferences, and optimization.
2. It explains that a consumer's budget constraint depicts the combinations of goods they can afford based on their income and prices, while their preferences are represented by indifference curves.
3. The consumer will choose the combination of goods that puts them on the highest possible indifference curve that is also on or below their budget constraint, which is their optimal choice.
1. Supply is defined as the willingness and ability of sellers to provide a range of quantities of a good at different prices over a given time period.
2. The supply price is the minimum price sellers will accept for a given quantity, and the quantity supplied refers to the specific amount provided at a given price.
3. The law of supply states that, all else equal, higher prices result in greater quantities supplied as producers respond to higher costs of production at larger output levels.
Consumer theory helps understand how individuals make choices given limited budgets to maximize satisfaction or utility. It assumes consumers are rational and want to maximize utility subject to budget constraints. There are two main approaches - the cardinal and ordinal theories. The cardinal theory assumes utility is quantitatively measurable while the ordinal theory only requires preferences can be ranked. Both use concepts like total utility, marginal utility, indifference curves, and budget constraints to model consumer choice and derive the downward sloping demand curve. The law of diminishing marginal utility states that as consumption of a good increases, the marginal utility from each additional unit decreases. This forms the basis for consumer demand curves and many economic implications.
The document discusses elasticity of demand, which refers to how much consumer demand for a product changes when the price changes. If demand does not change much when the price increases, demand is said to be inelastic. Inelastic demand occurs for necessities like insulin for diabetics - even if the price rises, diabetics' demand will not decrease much as they need it. Factors that impact elasticity include availability of substitutes, importance of the product in the consumer's budget, whether it is considered a necessity or luxury, and potential for substitutes over time. Companies must consider elasticity and the demand curve for their product to determine optimal pricing that maximizes revenue.
This document defines elasticity and discusses different types of elasticity, including:
- Price elasticity of demand measures responsiveness of quantity demanded to price changes. It can be elastic, inelastic, or unitary.
- Income elasticity of demand measures responsiveness of quantity demanded to changes in income. Goods can be normal, inferior, luxury, or necessity.
- Cross elasticity of demand measures responsiveness of demand for one good to price changes of other goods.
- Price elasticity of supply measures responsiveness of quantity supplied to price changes. Supply can be elastic, inelastic, or unitary. Determinants include time period and ability to adjust inputs.
The cross-price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity due to the change in price of another commodity.
An oligopoly is a market structure with a small number of firms that dominate the market. There are barriers to entry that prevent new competition. Each firm recognizes their interdependence and that their actions impact rivals. This can lead to collusion, market sharing, or complex strategic interactions modeled using game theory. Oligopolies may produce homogeneous goods like steel or differentiated goods like cars. They tend to compete on non-price factors more than price. Common oligopoly models include the dominant firm model, Cournot-Nash model, and Bertrand model.
The document discusses supply and the law of supply. It defines supply as the willingness and ability of sellers to produce and offer different quantities of a good at different prices. The law of supply states that quantity supplied increases as price increases, and decreases as price decreases, resulting in a direct relationship between price and quantity supplied. Supply can be illustrated using supply schedules and supply curves, with the curve shifting right when supply increases and left when supply decreases. Factors that cause supply curves to shift include resource prices, technology, taxes, subsidies, quotas, number of sellers, expectations, and weather.
1) Inflation can be caused by demand-side factors like excess aggregate demand or cost-push factors like external supply shocks.
2) Demand-pull inflation occurs when aggregate demand exceeds potential output, leading businesses to raise prices to increase profits. Cost-push inflation is caused by increases in input costs like wages, commodities, or exchange rates, forcing businesses to raise prices.
3) The document discusses causes of inflation in the UK including the economic cycle, exchange rates, taxes, and money supply growth for demand-pull inflation and wage growth, import prices, and commodity prices for cost-push inflation.
The Importance of Elasticity of Demand & Supply (MBA MicroEconomics)joyousjoylyn
Importance of Elasticity of Demand & Supply explained through real world examples like Big Bazaar, Indian Aviation Sector, Diesel-Cars, Email Marketing, Practical applications and factors affecting it.
This document provides an overview and outline of key topics in microeconomics that will be covered in the textbook. It introduces microeconomics and defines its scope, discusses the themes of tradeoffs, prices and markets, theories and models, and positive versus normative analysis. It also defines what a market is, explores real versus nominal prices, and discusses why microeconomics is important to study, using examples of corporate decision making and public policy design.
This document discusses price controls and their impact on supply and demand. It provides examples of price ceilings, which establish a legal maximum price, and price floors, which set a legal minimum price. Price ceilings can cause shortages by creating a surplus of demand over supply. Price floors can result in surpluses or unemployment by producing a surplus of supply over demand. The effects are illustrated using supply and demand graphs for rental housing prices under a price ceiling and wages for unskilled labor under a minimum wage price floor.
Price elasticity of demand refers to how responsive the quantity demanded of a good is to changes in its price. There are three methods to measure price elasticity: percentage method, total-outlay method, and geometrical method. The percentage method uses a formula to directly calculate elasticity. The total-outlay method examines how total expenditure changes with price changes to determine if demand is elastic or inelastic. Geometrical representation shows demand curves for different elasticity scenarios like perfectly inelastic, unitary, and perfectly elastic demand. Price elasticity can be classified as zero, less than one, equal to one, greater than one, and infinity depending on how quantity demanded responds to price changes.
The document discusses the different types of changes in demand. It defines demand and explains the demand function. There are two types of changes in demand: (1) Extension or contraction of demand due to changes in price with other factors remaining the same, which results in movement along the demand curve. (2) Shift in demand due to changes in factors other than price with price remaining the same, resulting in the demand curve shifting up or down. An upward shift represents increasing demand while a downward shift represents decreasing demand.
A monopoly is characterized by a single seller, a unique product with no close substitutes, and high barriers to entry that make it difficult for competitors to enter the market. A monopolist is a price maker that faces a downward sloping demand curve and sets price and quantity such that marginal revenue equals marginal cost to maximize profits. This results in the monopoly quantity being lower and price being higher than under perfect competition, creating inefficiencies like deadweight loss and redistributing wealth from consumers to the producer.
This document summarizes key concepts related to demand and supply analysis. It defines demand as the willingness and ability of consumers to purchase a good at a given price. The market demand curve is the horizontal summation of individual demand curves. Supply is defined as the quantity producers are willing to provide at a given price. Equilibrium price is reached where the demand and supply curves intersect, indicating the price at which quantity demanded equals quantity supplied. The summary discusses how shifts in demand or supply curves affect equilibrium price and quantity.
Here are some ways the concept of price elasticity can be used in business decisions:
1. Maruti Udyog - If cross price elasticity of demand between Zen and Alto is high (i.e. they are close substitutes), then a price decrease for one model can help boost its sales by diverting demand from the other. This information helps in pricing strategies.
2. HP - Since laptops and printers are complements, a price decrease in one will lead to an increase in demand for both by virtue of complementarity. So bundle pricing or discounts on both can boost revenues.
3. Diamond factory - Since supply of skilled labor is fixed in short run, elasticity of supply of labor is low
1. A new, more productive variety of paddy increases supply, shifting the supply curve to the right.
2. With inelastic demand, this leads to a large fall in price and a proportionately smaller increase in quantity sold.
3. As a result, total revenue for farmers falls despite the increased supply.
This document discusses price elasticity of demand, which measures how responsive demand is to changes in a good's own price. It provides the formula for calculating the price elasticity coefficient and explains what different coefficient values mean in terms of elastic vs inelastic demand. Factors that impact a good's price elasticity are also examined, such as availability of substitutes and degree of necessity. Examples are provided to demonstrate calculating price elasticity from changes in price and quantity demanded.
This document defines key economic concepts related to demand, including:
1. Demand is defined as consumer desire and ability to purchase goods and services, and is the driving force behind economic growth.
2. The law of demand states that as price increases, quantity demanded decreases, and vice versa.
3. Supply is defined as the willingness and ability of producers to provide goods and services to the market. The law of supply states that as price increases, quantity supplied increases as well.
4. Elasticity measures the responsiveness of one variable to changes in another, and is calculated for price, income, and cross elasticity. Demand can be elastic or inelastic depending on the degree of responsiveness to price
This document discusses the concept of elasticity of demand as introduced by Marshall. It defines elasticity of demand as the ratio of percentage change in quantity demanded to the percentage change in price. There are three types of elasticity: price, income, and cross elasticity. Factors that influence elasticity include the nature of the commodity, availability of substitutes, uses, ability to postpone demand, amount spent, time, and price range. Elasticity is important for price fixation, production, distribution, international trade, public finance, and nationalization decisions.
1. Supply is defined as the willingness and ability of sellers to provide a range of quantities of a good at different prices over a given time period.
2. The supply price is the minimum price sellers will accept for a given quantity, and the quantity supplied refers to the specific amount provided at a given price.
3. The law of supply states that, all else equal, higher prices result in greater quantities supplied as producers respond to higher costs of production at larger output levels.
Consumer theory helps understand how individuals make choices given limited budgets to maximize satisfaction or utility. It assumes consumers are rational and want to maximize utility subject to budget constraints. There are two main approaches - the cardinal and ordinal theories. The cardinal theory assumes utility is quantitatively measurable while the ordinal theory only requires preferences can be ranked. Both use concepts like total utility, marginal utility, indifference curves, and budget constraints to model consumer choice and derive the downward sloping demand curve. The law of diminishing marginal utility states that as consumption of a good increases, the marginal utility from each additional unit decreases. This forms the basis for consumer demand curves and many economic implications.
The document discusses elasticity of demand, which refers to how much consumer demand for a product changes when the price changes. If demand does not change much when the price increases, demand is said to be inelastic. Inelastic demand occurs for necessities like insulin for diabetics - even if the price rises, diabetics' demand will not decrease much as they need it. Factors that impact elasticity include availability of substitutes, importance of the product in the consumer's budget, whether it is considered a necessity or luxury, and potential for substitutes over time. Companies must consider elasticity and the demand curve for their product to determine optimal pricing that maximizes revenue.
This document defines elasticity and discusses different types of elasticity, including:
- Price elasticity of demand measures responsiveness of quantity demanded to price changes. It can be elastic, inelastic, or unitary.
- Income elasticity of demand measures responsiveness of quantity demanded to changes in income. Goods can be normal, inferior, luxury, or necessity.
- Cross elasticity of demand measures responsiveness of demand for one good to price changes of other goods.
- Price elasticity of supply measures responsiveness of quantity supplied to price changes. Supply can be elastic, inelastic, or unitary. Determinants include time period and ability to adjust inputs.
The cross-price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity due to the change in price of another commodity.
An oligopoly is a market structure with a small number of firms that dominate the market. There are barriers to entry that prevent new competition. Each firm recognizes their interdependence and that their actions impact rivals. This can lead to collusion, market sharing, or complex strategic interactions modeled using game theory. Oligopolies may produce homogeneous goods like steel or differentiated goods like cars. They tend to compete on non-price factors more than price. Common oligopoly models include the dominant firm model, Cournot-Nash model, and Bertrand model.
The document discusses supply and the law of supply. It defines supply as the willingness and ability of sellers to produce and offer different quantities of a good at different prices. The law of supply states that quantity supplied increases as price increases, and decreases as price decreases, resulting in a direct relationship between price and quantity supplied. Supply can be illustrated using supply schedules and supply curves, with the curve shifting right when supply increases and left when supply decreases. Factors that cause supply curves to shift include resource prices, technology, taxes, subsidies, quotas, number of sellers, expectations, and weather.
1) Inflation can be caused by demand-side factors like excess aggregate demand or cost-push factors like external supply shocks.
2) Demand-pull inflation occurs when aggregate demand exceeds potential output, leading businesses to raise prices to increase profits. Cost-push inflation is caused by increases in input costs like wages, commodities, or exchange rates, forcing businesses to raise prices.
3) The document discusses causes of inflation in the UK including the economic cycle, exchange rates, taxes, and money supply growth for demand-pull inflation and wage growth, import prices, and commodity prices for cost-push inflation.
The Importance of Elasticity of Demand & Supply (MBA MicroEconomics)joyousjoylyn
Importance of Elasticity of Demand & Supply explained through real world examples like Big Bazaar, Indian Aviation Sector, Diesel-Cars, Email Marketing, Practical applications and factors affecting it.
This document provides an overview and outline of key topics in microeconomics that will be covered in the textbook. It introduces microeconomics and defines its scope, discusses the themes of tradeoffs, prices and markets, theories and models, and positive versus normative analysis. It also defines what a market is, explores real versus nominal prices, and discusses why microeconomics is important to study, using examples of corporate decision making and public policy design.
This document discusses price controls and their impact on supply and demand. It provides examples of price ceilings, which establish a legal maximum price, and price floors, which set a legal minimum price. Price ceilings can cause shortages by creating a surplus of demand over supply. Price floors can result in surpluses or unemployment by producing a surplus of supply over demand. The effects are illustrated using supply and demand graphs for rental housing prices under a price ceiling and wages for unskilled labor under a minimum wage price floor.
Price elasticity of demand refers to how responsive the quantity demanded of a good is to changes in its price. There are three methods to measure price elasticity: percentage method, total-outlay method, and geometrical method. The percentage method uses a formula to directly calculate elasticity. The total-outlay method examines how total expenditure changes with price changes to determine if demand is elastic or inelastic. Geometrical representation shows demand curves for different elasticity scenarios like perfectly inelastic, unitary, and perfectly elastic demand. Price elasticity can be classified as zero, less than one, equal to one, greater than one, and infinity depending on how quantity demanded responds to price changes.
The document discusses the different types of changes in demand. It defines demand and explains the demand function. There are two types of changes in demand: (1) Extension or contraction of demand due to changes in price with other factors remaining the same, which results in movement along the demand curve. (2) Shift in demand due to changes in factors other than price with price remaining the same, resulting in the demand curve shifting up or down. An upward shift represents increasing demand while a downward shift represents decreasing demand.
A monopoly is characterized by a single seller, a unique product with no close substitutes, and high barriers to entry that make it difficult for competitors to enter the market. A monopolist is a price maker that faces a downward sloping demand curve and sets price and quantity such that marginal revenue equals marginal cost to maximize profits. This results in the monopoly quantity being lower and price being higher than under perfect competition, creating inefficiencies like deadweight loss and redistributing wealth from consumers to the producer.
This document summarizes key concepts related to demand and supply analysis. It defines demand as the willingness and ability of consumers to purchase a good at a given price. The market demand curve is the horizontal summation of individual demand curves. Supply is defined as the quantity producers are willing to provide at a given price. Equilibrium price is reached where the demand and supply curves intersect, indicating the price at which quantity demanded equals quantity supplied. The summary discusses how shifts in demand or supply curves affect equilibrium price and quantity.
Here are some ways the concept of price elasticity can be used in business decisions:
1. Maruti Udyog - If cross price elasticity of demand between Zen and Alto is high (i.e. they are close substitutes), then a price decrease for one model can help boost its sales by diverting demand from the other. This information helps in pricing strategies.
2. HP - Since laptops and printers are complements, a price decrease in one will lead to an increase in demand for both by virtue of complementarity. So bundle pricing or discounts on both can boost revenues.
3. Diamond factory - Since supply of skilled labor is fixed in short run, elasticity of supply of labor is low
1. A new, more productive variety of paddy increases supply, shifting the supply curve to the right.
2. With inelastic demand, this leads to a large fall in price and a proportionately smaller increase in quantity sold.
3. As a result, total revenue for farmers falls despite the increased supply.
This document discusses price elasticity of demand, which measures how responsive demand is to changes in a good's own price. It provides the formula for calculating the price elasticity coefficient and explains what different coefficient values mean in terms of elastic vs inelastic demand. Factors that impact a good's price elasticity are also examined, such as availability of substitutes and degree of necessity. Examples are provided to demonstrate calculating price elasticity from changes in price and quantity demanded.
This document defines key economic concepts related to demand, including:
1. Demand is defined as consumer desire and ability to purchase goods and services, and is the driving force behind economic growth.
2. The law of demand states that as price increases, quantity demanded decreases, and vice versa.
3. Supply is defined as the willingness and ability of producers to provide goods and services to the market. The law of supply states that as price increases, quantity supplied increases as well.
4. Elasticity measures the responsiveness of one variable to changes in another, and is calculated for price, income, and cross elasticity. Demand can be elastic or inelastic depending on the degree of responsiveness to price
This document discusses the concept of elasticity of demand as introduced by Marshall. It defines elasticity of demand as the ratio of percentage change in quantity demanded to the percentage change in price. There are three types of elasticity: price, income, and cross elasticity. Factors that influence elasticity include the nature of the commodity, availability of substitutes, uses, ability to postpone demand, amount spent, time, and price range. Elasticity is important for price fixation, production, distribution, international trade, public finance, and nationalization decisions.
This document discusses the concept of demand, the law of demand, and elasticity of demand. It defines demand as how much of a product or service is desired by buyers at a given price. The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand it. Elasticity of demand refers to the responsiveness of quantity demanded to changes in price. There are different types of elasticity including price elasticity, income elasticity, and cross elasticity. Understanding elasticity is important for areas like production, pricing, and economic policymaking.
1. Elasticity measures the responsiveness of quantity demanded or supplied to a change in its price. It is calculated as the percentage change in quantity divided by the percentage change in price.
2. Demand is more elastic when good substitutes are available and less elastic when substitutes are unavailable. Demand for necessities tends to be inelastic while demand for luxuries tends to be more elastic.
3. If demand is elastic, total revenue increases when price decreases as the rise in quantity sold outweighs the fall in price. If demand is inelastic, total revenue decreases with a price decrease as quantity does not rise enough.
This lesson on price elasticity of demand contains an explanation of elasticity, how to solve for both arc and point price elasticity of demand, its relation to total revenue, and the factors that influence the elasticity of demand for a product or service.
This document discusses concepts related to demand, including:
- The law of demand, which states that quantity demanded increases when price decreases and decreases when price increases
- Determinants of demand such as price, income, tastes, and expectations
- Elasticity of demand, which measures responsiveness of demand to changes in price or other factors
- Types of elasticity including price elasticity, cross elasticity between substitutes and complements, and income elasticity
- Formulas are provided for calculating different types of elasticities based on percentage changes in quantity and the related variable.
This document provides an overview of elasticity of demand from Team -3. It includes:
1. An introduction to elasticity and definitions of elastic and inelastic demand. Elastic demand means a small price change leads to a large quantity change, while inelastic means a large price change leads to a small quantity change.
2. The three main types of elasticity - price elasticity, income elasticity, and cross elasticity. Price elasticity measures responsiveness to price changes. Income elasticity measures responsiveness to income changes. Cross elasticity measures responsiveness between related goods.
3. Factors that determine price elasticity, like nature of the good, substitutes, proportion of income spent.
The document discusses price elasticity of supply and demand and its applications in real life. Price elasticity measures how quantity supplied and demanded respond to price changes. Understanding elasticity is important for businesses to set prices and production levels, governments to implement taxes, and markets to respond to changes and help with decision-making, resource allocation, and planning.
This document defines and explains different types of elasticity, including price elasticity, income elasticity, and cross elasticity. It discusses how economists use elasticity to measure consumer responsiveness to changes in price, income, and the prices of related goods. Price elasticity is defined as the percentage change in quantity demanded divided by the percentage change in price. Income elasticity is defined as the percentage change in quantity demanded divided by the percentage change in consumer income. Cross elasticity measures responsiveness between two related goods.
This document discusses the concept of demand elasticity. It defines elasticity as the responsiveness of quantity demanded to changes in price or other factors. There are different types of elasticity including price elasticity, income elasticity, and cross elasticity. Price elasticity specifically refers to how much quantity demanded changes with price changes. Demand can be perfectly inelastic, inelastic, unitary, elastic, or perfectly elastic depending on the degree of responsiveness. The document also discusses factors that influence elasticity like availability of substitutes and proportion of income spent. It explains the importance of understanding elasticity for business decisions, taxation, trade, and policymaking.
This document discusses the concept of elasticity of demand. It defines demand as the willingness and ability to purchase goods at different prices over time, and elasticity as the relative response of one variable, such as quantity, to changes in another like price. Elasticity of demand refers to how sensitive demand is to economic factors like prices and income. There are three main types of elasticity discussed: price elasticity, which measures responsiveness of quantity to price changes; income elasticity, which measures responsiveness of quantity to income changes; and cross elasticity, which measures responsiveness of demand for one good to price changes in another good. Understanding elasticity helps managers determine how changes in prices will impact total revenue.
This document discusses different concepts of elasticity in economics, including:
1) Elasticity of demand measures how responsive quantity demanded is to changes in price. Demand is elastic if a small price change causes a large quantity change, and inelastic if the opposite is true.
2) Cross-price elasticity measures how the quantity demanded of one good responds to price changes in another good, showing how goods can be substitutes or complements.
3) Factors like availability of substitutes, budget importance, and luxury vs necessity determine whether demand is more elastic or inelastic for different goods.
This document discusses various concepts related to elasticity, including:
- Price elasticity of demand measures how quantity demanded responds to price changes. Demand can be elastic, inelastic, or unit elastic.
- Price elasticity of supply measures how quantity supplied responds to price changes over different time periods.
- Income elasticity of demand indicates whether a good is a necessity, luxury, or inferior based on how demand responds to income changes.
- Cross price elasticity measures how demand for one good responds to price changes in another good if they are substitutes or complements.
This document discusses the concept of elasticity in economics. It defines three types of elasticity - price elasticity of demand, income elasticity of demand, and cross elasticity of demand. Formulas are provided for calculating each type. The degrees of elasticity are also explained, including perfectly elastic demand, unitary elastic demand, perfectly inelastic demand, and relatively elastic/inelastic demand. Finally, several methods for measuring price elasticity are outlined, including the total expenditure method, geometrical/point elasticity method, and arc method.
The document discusses the concept of elasticity and how it can help answer questions about strategies to combat illegal music downloads. It defines price elasticity of demand, cross elasticity of demand, and income elasticity of demand. It explains how to calculate each and the factors that influence their values, such as availability of substitutes, proportion of income spent, and time elapsed since a price change. Lowering CD prices could increase total revenue if demand is elastic but decrease it if demand is inelastic. The document also defines price elasticity of supply and the factors that determine its value over different time frames.
The document discusses the concept of elasticity of demand. It defines elasticity of demand as the percentage change in quantity demanded divided by the percentage change in price. An elastic demand means this ratio is greater than 1, an inelastic demand means the ratio is less than 1, and a unit elastic demand means the ratio equals 1. The document then discusses how the slope of a demand curve relates to its elasticity, with flatter curves being more elastic and steeper curves being less elastic. It also introduces the total revenue test for elasticity and other types of elasticity like cross-price and income elasticity.
Elasticity of demand measures the responsiveness of quantity demanded to changes in other economic factors like price and income. There are three main types of elasticity of demand: price elasticity measures changes to price, income elasticity to income changes, and cross elasticity to other goods' prices. Demand can also be classified as perfectly elastic, perfectly inelastic, relatively elastic/inelastic, or unitary elastic based on the rate of change in quantity demanded versus the changing variable.
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2. TABLE OF CONTENTS
1. What Is Elasticity?
2. Types Of Elasticity
3. Types Of Price Elasticity Of Demand
4. Factors Affecting Price Elasticity Of
Demand
5. Examples Of Factors Affecting Price
Elasticity Of Demand
6. Income Elasticity Of Demand
7. Example Of Income Elasticity Of
Demand
3. 3
WHAT IS ELASTICITY ?
Elasticity is a measure of a variable's sensitivity to a change in another variable.
In business and economics, elasticity refers the degree to which individuals, consumers or
producers change their demand or the amount supplied in response to price or income changes.
It is predominantly used to assess the change in consumer demand as a result of a change in a good
or service's price.
A good or service is considered to be highly elastic if a slight change in price leads to a sharp
change in the quantity demanded or supplied.
Usually these kinds of products are readily available in the market and a person may not
necessarily need them in his or her daily life.
On the other hand, an inelastic good or service is one in which changes in price witness only
modest changes in the quantity demanded or supplied, if any at all.
These goods tend to be things that are more of a necessity to the consumer in his or her daily life.
4. To determine the elasticity of the supply or demand
curves, we can use this simple equation:
Elasticity = (% change in quantity / % change in price)
If elasticity is greater than or equal to one, the curve is
considered to be elastic.
If it is less than one, the curve is said to be inelastic.
4
6. 6
▫ Price Elasticity Of Demand :Price elasticity of demand is an economic measure of
the change in the quantity demanded or purchased of a product in relation to its
price change.
▫ Income Elasticity Of Demand: Income elasticity of demand refers to the sensitivity
of the quantity demanded for a certain good to a change in real income of
consumers who buy this good, keeping all other things constant.
▫ Cross Elasticity Of Demand: The cross elasticity of demand is an economic concept
that measures the responsiveness in the quantity demanded of one good when
the price for another good changes.
▫ Advertising Elasticity Of Demand :AED is a measure of a market's sensitivity to
increases or decreases in advertising saturation. Advertising elasticity is a
measure of an advertising campaign's effectiveness in generating new sales.
7. ▫ In the following presentation we will be
majorly focusing on Price & Income
Elasticity’s of Demand
7
9. 9
PERFECTLY ELASTIC DEMAND
When a small change in price of a product causes a major change in its demand, it is said to be
perfectly elastic demand.
In perfectly elastic demand, a small rise in price results in fall in demand to zero, while a small
fall in price causes increase in demand to infinity.
In such a case, the demand is perfectly elastic or ep = 00.
The degree of elasticity of demand helps in defining the shape and slope of a demand curve.
Therefore, the elasticity of demand can be determined by the slope of the demand curve.
Flatter the slope of the demand curve, higher the elasticity of demand.
In Perfectly Elastic Demand, The Demand Curve Is Represented As A Horizontal Straight
Line
10. 10
▫ At price OP, demand is infinite;
however, a slight rise in price would
result in fall in demand to zero.
▫ It can also be interpreted from the
above figure that at price P consumers
are ready to buy as much quantity of
the product as they want.
▫ However, a small rise in price would
resist consumers to buy the product.
11. 11
PERFECTLY INELASTIC DEMAND
A perfectly inelastic demand is one when there is no change produced in the
demand of a product with change in its price.
The numerical value for perfectly inelastic demand is zero (ep=0).
In Case Of Perfectly Inelastic Demand, Demand Curve Is Represented As A
Straight Vertical Line
12. 12
▫ It can be interpreted from the
figure that the movement in
price from OP1 to OP2 and
OP2 to OP3 does not show any
change in the demand of a
product (OQ)
▫ The demand remains constant
for any value of price
13. 13
RELATIVE ELASTIC DEMAND
▫ Relatively elastic demand refers to the demand when the proportionate change
produced in demand is greater than the proportionate change in price of a product.
▫ The numerical value of relatively elastic demand ranges between one to infinity.
▫ Mathematically, relatively elastic demand is known as more than unit elastic
demand (ep>1).
▫ For example, if the price of a product increases by 20% and the demand of the
product decreases by 25%, then the demand would be relatively elastic.
▫ The Demand Curve Of Relatively Elastic Demand Is Gradually Sloping
14. 14
▫ It can be interpreted from the
figure that the proportionate
change in demand from OQ1 to
OQ2 is relatively larger than
the proportionate change in
price from OP1 to OP2
15. 15
RELATIVE INELASTIC DEMAND
▫ Relatively inelastic demand is one when the percentage change produced in
demand is less than the percentage change in the price of a product.
▫ For example, if the price of a product increases by 30% and the demand for the
product decreases only by 10%, then the demand would be called relatively
inelastic.
▫ The numerical value of relatively elastic demand ranges between zero to one
(ep<1).
▫ Marshall has termed relatively inelastic demand as elasticity being less than unity.
▫ The Demand Curve Of Relatively Inelastic Demand Is Rapidly Sloping
16. 16
▫ It can be interpreted from the
figure that the proportionate
change in demand from OQ1 to
OQ2 is relatively smaller than
the proportionate change in
price from OP1 to OP2
17. 17
UNITARY ELASTIC DEMAND
▫ When the proportionate change in demand produces the same change in the price
of the product, the demand is referred as unitary elastic demand.
▫ The numerical value for unitary elastic demand is equal to one (ep=1).
▫ The Demand Curve For Unitary Elastic Demand Is Represented As A Rectangular
Hyperbola
18. FACTORS AFFECTING PRICE ELASTICITY OF DEMAND
The Availability Of
Substitutes
▫ It is the most
important factor
influencing the
elasticity of a good or
service
▫ In general, the more
substitutes, the
more elastic the
demand will be
Amount Of Income
Available To Spend
On The Good
▫ It refers to the total a
person can spend on
a particular good or
service
Time
▫ The third influential
factor is time
18
19. 19
EXAMPLES OF FACTORS AFFECTING PRICE ELASTICITY OF DEMAND
AVAILABILITY OF SUBSTITUTES
If the price of a cup of coffee went up by $0.25, consumers could replace their morning
caffeine with a cup of tea. This means that coffee is an elastic good because a raise in
price will cause a large decrease in demand as consumers start buying more tea instead
of coffee.
However, if the price of caffeine were to go up as a whole, we would probably see little
change in the consumption of coffee or tea because there are few substitutes for
caffeine.
Most people are not willing to give up their morning cup of caffeine no matter what the
price. We would say, therefore, that caffeine is an inelastic product because of its lack of
substitutes.
Thus, while a product within an industry is elastic due to the availability of substitutes,
the industry itself tends to be inelastic. Usually, unique goods such as diamonds are
inelastic because they have few if any substitutes.
20. 20
AMOUNT OF INCOME AVAILABLE TO SPEND ON THE GOOD
If the price of a can of Coke goes up from $0.50 to $1 and income stays the same,
the income that is available to spend on coke, which is $2, is now enough for only
two rather than four cans of Coke.
In other words, the consumer is forced to reduce his or her demand of Coke.
Thus if there is an increase in price and no change in the amount of income
available to spend on the good, there will be an elastic reaction in demand
Demand will be sensitive to a change in price if there is no change in income.
21. 21
TIME
If the price of cigarettes goes up $2 per pack, a smoker with very
few available substitutes will most likely continue buying his or
her daily cigarettes.
This means that tobacco is inelastic because the change in price
will not have a significant influence on the quantity demanded.
However, if that smoker finds that he or she cannot afford to
spend the extra $2 per day and begins to kick the habit over a
period of time, the price elasticity of cigarettes for that consumer
becomes elastic in the long run.
22. 22
INCOME ELASTICITY OF DEMAND
▫ In the factor outlined above, we saw that if price increases while income stays the
same, demand will decrease.
▫ It follows, then, that if there is an increase in income, demand tends to increase as
well.
▫ The degree to which an increase in income will cause an increase in demand is
called income elasticity of demand, which can be expressed in the following
equation:
▫ If EDy is greater than one, demand for the item is considered to have a high
income elasticity.
▫ If however EDy is less than one, demand is considered to be income inelastic.
▫ Luxury items usually have higher income elasticity because when people have a
higher income, they don't have to forfeit as much to buy these luxury items.
23. 23
▫ Let's look at an example of a luxury good: AIR TRAVEL
Bob has just received a $10,000 increase in his salary, giving him a total of $80,000 per annum.
▫ With this higher purchasing power, he decides that he can now afford air travel twice a year instead
of his previous once a year.
▫ With the following equation we can calculate income demand elasticity:
▫ Income elasticity of demand for Bob's air travel is seven - highly elastic.
With some goods and services, we may actually notice a decrease in demand as income increases.
▫ These are considered goods and services of inferior quality that will be dropped by a consumer who
receives a salary increase.
▫ An example may be the increase in the demand of DVDs as opposed to video cassettes, which are
generally considered to be of lower quality.
▫ Products for which the demand decreases as income increases have an income elasticity of less than
zero.
▫ Products that witness no change in demand despite a change in income usually have an income
elasticity of zero - these goods and services are considered necessities