Elasticity??? What and Why?

Degree of responsiveness of demand to the change in its determinants Crucial role in business-decisions

Few more
1. Price elasticity
2. Cross Elasticity

3. Income Elasticity
4. Advertisement Elasticity 5. Elasticity of price expectations

Price Elasticity??? What is it?

Definition: Responsiveness or sensitiveness of demand for a commodity to the changes in its price Percentage change in demand / Percentage change in price

How to do?
Ep = ------- ------- = ----- x ----Q P P Q Q

Where Q = Original quantity demand

P = Original Price Q = New Quantity demanded Original quantity demanded P = New Price Original Price

Problem:
The price of product Bread is Rs. 20/-, quantity demanded is 1000 packets and the price increased from Rs. 20/- to Rs. 30/-, the quantity demanded is decreased from 1000 packets to 850 packets.
Q P P Q

Ep = ------- x ----- = ----------- x ------1000

30-20

850-1000

20

Ep = -0.3
Ep < 0 - Relatively inelastic in nature as there is slight variation in demand even though there is rise in price

Determinants of Price Elasticity

Availability of substitutes Nature of commodity Weight age in the total consumption Time faction in adjustment of

consumption patterns
Range of commodity use Proportion of market supplied

Types of Price Elasticity

There are 5 types of Price Elasticity Perfectly Elasticity of Demand

Perfectly Inelasticity of Demand

Unitary Elasticity of Demand Relatively Elasticity of Demand Relatively Inelasticity of Demand

Perfectly Elasticity of Demand

E = Infinity

Eg: Medicines

Perfectly Inelasticity of Demand E = 0

Eg: Suger

Unitary Elasticity of Demand

E = 1

Relatively Elasticity of Demand

E > 1

Eg: Mobiles, Gold

Relatively Inelasticity of Demand E=1 E < 1

Unitary Elasticity of Demand

Eg: Inferior goods

Applications
Relationship between price and total revenue Determining what goods to tax Analyzing time tags in productive

Behaviour of a firm