MANAGERIAL ECONOMICS

CIA – I
ELASTICITY MEASUREMENT

Under the guidance of

Prof. Hemalatha R

Submitted by:

Rajasree Rajan

Register number: 2027349

INTRODUCTION
For determining the price a company should make a detail study on the elasticity of
demand. The quantity demanded will change with the change in price of the product. To
measure the degree of change in the quantity demanded of a commodity to the change in
the price of the commodity we use elasticity of demand. On the basis of the degree of
change in quantity demanded, price elasticity is classified into five perfectly elastic
demands, perfectly inelastic demand, unitary elastic demand, relatively elastic or more
elastic demand, relatively inelastic demand or less elastic demand. In this study the
information is used from the survey conducted. In economics, the relation between price and
quantity demanded of a commodity is known as law of demand. There is an inverse
relationship between the price of a commodity and the quantity demanded. The Law of
Demand states that at higher price lower quantity will be demanded and at lower price
higher quantity will be demanded, other things remaining equal. The Law of Demand tells
only the direction of the change. It does not tell the rate at which the changes take place. To
know about the rate of change, elasticity of demand is used. Elasticity of Demand means
the degree of responsiveness or sensitiveness of demand to the change in price. That is, the
rate of change in the quantity of demanded due to a change in price.
Objectives

• To find out the change that occur in the demand of a product while change in the price
• To know the willingness of the customer to purchase a product even in the higher
prices
• To know the changes in the quantity consumed by different income group.

Types of elasticity
The following are the different types of elasticity.

1. Price elasticity
Price elasticity is measures the responsiveness of demand according to the change in
price of the product.

Degree of price elasticity

• Perfectly Elastic Demand

A small change in price can make a great change in demand, this type is known as perfectly elastic
demand. Even the price remains constant, the demand keeps changing. (e =infinite)
 • Perfectly Inelastic Demand
In perfectly inelastic demand, whatever change happen to price will not make any changes in the
demand of a commodity. (e = 0)
• Unit Elasticity
In unit elasticity, percent change in price will make a directly or equally proportional change in
demand of the commodity also. (e = 1)

• Relatively Elastic Demand

In relatively elastic demand, the change in price results in a more than proportionate change in
quantity demanded. (e >=1)
• Relatively Inelastic Demand
In relatively inelastic demand, the change in price results in less than proportionate change in quantity
demanded. (e<=1)
INCOME PRODUCT P1 P0 Q1 Q0 % RESPONSIVENESS

Tea (AVT) 50 30 100 90 0.16 Relatively elastic

(2packet) (3 packet) demand
Middle
income
group Salt 12 8 12 16 .5 Relatively inelastic
(salary (1 packet) (2 packet) demand
range
from
15000-
30000) Face wash 90 150 180 150 0.25 Relatively Inelastic
(2 bottles) (1bottle) demand

Egg 10 8 130 120 0.33 Relatively Inelastic

(13eggs) (15eggs) demand

Feroglobin 200 180 600 540 1 Unitary elastic

(3) (3) demand

Tea (AVT) 50 30 150 150 0 Perfectly Inelastic

High (3 packet) (5 packet) demand
income
group
(salary
range salt 12 8 48 40 0.4 Relatively inelastic
from (4 packet) (5 packet) demand
above
30000)

Face wash 90 150 360 450 0.49 Relatively Inelastic

(4 bottle) (3 bottle) demand

Egg 10 8 150 160 0.25 Relatively Inelastic

(20 eggs) demand
(15 eggs)
Table 2:

Cross elasticity of demand (Tea (AVT) VS Bru Coffee)

P1 P0 Q1 Q0 Q1 Q0 %

(Tea-AVT) (Tea-AVT) (Tea-AVT) (Tea-AVT) (Bru Coffee) (Bru Coffee)

50 30 150 60 2 1 1.5%

Source: Sample collected

ANALYSIS AND INTERPRETATION:

In the above table 1 it is divided into middle income group and high income group. In the
first part that is middle income group, in case of Tea (AVT) have relatively elastic demand
that is, change in price causes more than a proportionate change in quantity demanded. And
for salt, face wash and egg it has relatively inelastic demand and for Feroglobin unitary
elastic demand. From the second part of the table 1, which consists of high income group,
apart from Feroglobin everything is relatively inelastic. So from this it can be inferred that if
the product need its elasticity will be less and if the product is want its elasticity will be more.
Even if the price changes, there will be no change in the quantity demanded.

In table 2 it explains about the cross elasticity of Tea(AVT) and Bru coffee. To get the cross
elasticity we need to divide the change in quantity demanded of Tea (AVT) by change in
price of Bru coffee. And while calculating the degree change is 1.5% that is they are
substitute products.

CONCLUSION

From this study it can be inferred that that change due to the price or income of a customer
will not have a great effect in the change of quantity demanded for necessary goods. But if
the product is less important or have close substitute its elasticity will be more.