Transcript Document

Inelastic demand 0< Є < 1
• Price rises:
As P , Q
percentage change in P > percentage change in Q.
Now TR = P x Q
TR will also .
• Price falls:
As P , Q
percentage change in P > percentage change in Q.
Now TR = P x Q
TR will also .
NOTE : In the case of inelastic demand TR and Price always change in
the same direction or percentage change in P dominates percentage
change in Q.
Recap
Elastic demand Є > 1
• Price rises:
As P , Q
percentage change in P < percentage change in Q.
Now TR = P x Q
TR will also .
• Price falls:
As P , Q
percentage change in P < percentage change in Q.
Now TR = P x Q
TR will also .
NOTE : In the case of elastic demand TR and Quantity always change
in the same direction or percentage change in Q dominates percentage
change in P.
Unit elastic demand Є = 1
• Price rises:
As P , Q
percentage change in P = percentage change in Q.
Now TR = P x Q
TR will remain unchanged.
• Price falls:
As P , Q
percentage change in P = percentage change in Q.
Now TR = P x Q
TR will remain unchanged.
NOTE :In case of unit elastic demand TR remains unchanged.
Example
P
Q
TR
2.5
400
1,000
5
200
1,000
10
100
1,000
20
50
1,000
40
25
1,000
Price
Rectangular Hyperbola
50
40
30
20
10
0
TR = 40 x 25 = 1000
TR = 100 x 10 = 1000
0
TR Remains
Unchanged
100
200
300
400
Quantity Demanded
500
Formula for elasticity
Є=∆Q ÷
Q
∆P
P
As ∆P , To maintain Є = 1 ,
P
∆ Q should rise enough to compensate the increase in ∆P
Q
P
Totally inelastic demand
Є=0
TR 1
P
P2
TR 2
P1
Q1
Qd
TR1 at P1 > TR2 at P2
e.g. Water at sale.
Infinitely elastic demand
Є=1
P
TR 1
TR 2
P
Q1
Q2
Qd
TR1 at Q1 > TR2 at Q2
e.g. Small scale grain farmers who are price takers.
Determinants of price elasticity of demand
1.The number & closeness of substitute good
The price elasticity of demand for a particular ‘brand’
of a product will probably be fairly high
Example
• Rank the following in ascending order of
elasticity.
• Trousers .
1
• Jeans .
2
• Black Jeans .
3
• Levis black Jeans .
4
Example
Arranged
Cold drink
Least Elastic
In
ascending
order
of
Soda
elasticity
Black soda
Most Elastic
Pepsi
Compiled by Ministry of Agriculture
Food
Price Elasticity of
Demand
Milk
-0.29
Cheese
-1.20
Broiler Chicken
-0.13
Sugar
-0.24
Bread
-0.09
Fruit Juices
-0.80
Fresh Potatoes
-0.21
Fresh Green Vegetables
-0.58
Determinants of price elasticity of demand
2. The proportion of income spent on a good
The higher the proportion of our income spent on a
good, the more we will be forced to cut consumption
when its price rises.
E.g.: Income effect of price rise of salt would be small and of
petrol would be high as the proportion of income spent on
petrol is high as compared to salt.
Determinants of price elasticity of demand
3. The Time Period
When price increases or decreases people may take time
in adjusting their consumption patterns and finding
alternatives.
Advertising & its effect on demand
curves.
• Advertisers are trying to:
a. Shift the product’s demand curve to the right.
b. Make it less price elastic
P2
P1
C
K
A
B
D2
D1
Q1
Q3
Q2
Q
Pricing bus tickets
Fare
( Rs Per Mile)
Estimated
Demand
Total
Revenue
(in rupees)
Old
Total
Cost
New
Total
Cost
(in rupees)
( in rupees)
8
6
480,000
360,000
440,000
10
4
400,000
360,000
440,000
12
3
360,000
360,000
440,000
Price elasticity of supply
Є=0
Є=
P
P
O
Qs
O
Qs
Less elastic
P
S1
S2
P2
More elastic
P1
O
Q 1 Q2
Q3
Qs
S1
P
b
6
3
2
1
O
S2
S3
d
a
f
c
e
2
3
4
Supply in different time periods
SS
Si
Immediate = I
P
Short run = S
P2
b
c
P3
SL
d
Long run = L
P4
P1
a
D2
D1
O
Q1
Q2
Q3
Qs