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ECO - Price Elasticty
ECO - Price Elasticty
BVIMSR 09-11
DESIRE TO BUY A
COMMODITY
NEED TO
POSSESS A
COMMODITY CONSTITUE
DEMAND
WILLINGNESS TO
S
PURCHASE THE
COMMODITY
ABILITY TO
PURCHASE THE
COMMODITY
BVIMSR 09-11
v Quantity demanded of
a commodity
v Price at which it is
DEMAND FOR A demanded
COMMODITY
SHOULD INDICATE
v Time period over which
it is demanded
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Types of emand Schedules
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Demand Schedule
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ã ANTITIES EMANE BY
IN STRY EMAN = INIVI AL CONS MERS AT
IFFERENT ¢RICES
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Movement along emand Curve Vs. Shift in emand Curve:
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V Change in demand ~ hen the amount purchased of a commodity
rises or falls because of the change in factors other than the price of
the commodity.
¬ Increase in demands
¬ ecrease in demands
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V Income
V Related goods
V Tastes
V Number of consumers
V E pectations of future prices
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V Elasticity is a measure of the responsiveness
of one variable to another.
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V ¢rice elasticity of demand is a measure of how much the quantity
demanded of a good responds to a change in the price of that
good.
V It measures the sensitivity of the quantity demanded to changes
in the price.
V The percentage change in the quantity demanded caused by a
one percent change in the price.
BVIMSR 09-11
V According to the law of demand, whenever the price rises, the
quantity demanded falls. Thus the price elasticity of demand
is always negative.
V Because it is always negative, economists usually state the
value without the sign, i.e. to give it meaning.
V hen price elasticity is between µzero¶ and µ-1¶ we say
demand is Ú Ú.
V hen price elasticity is between µ-1¶ and µ- infinity¶, we say
demand is Ú.
V hen price elasticity is µ-1¶, we say demand is ÚÚ.
BVIMSR 09-11
emand for a product can be said to be very
inelastic if consumers will pay almost any price for
the product, and very elastic if consumers will only
pay a certain price, or a narrow range of prices, for
the product.
BVIMSR 09-11
The price elasticity of demand is computed as the percentage
change in the quantity demanded divided by the percentage change
in price.
Eg: If the quantity of toys sold falls by 3% when the price is raised by 1%, then the
price elasticity of demand is 3/1 = 3.
BVIMSR 09-11
`alue Meaning
Ed = 0 Perfectly inelastic
E d = -1 Unit elastic
Ed = Perfectly elastic
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V Perfectly Elastic Demand Curve
¬ The demand curve is horizontal, any change in price can and
will cause consumers to change their consumption.
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E ample: If the price of an ice cream cone increases from
$2.00 to $2.20 and the amount you buy falls from 10 to 8
cones, then your elasticity of demand would be calculated as
:
BVIMSR 09-11
The midpoint formula is preferable when calculating the
price elasticity of demand because it gives the same
answer regardless of the direction of the change.
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E ample: If the price of an ice cream cone increases from
$2.00 to $2.20 and the amount you buy falls from 10 to 8
cones, then your elasticity of demand using the midpoint
formula, would be calculated as :
BVIMSR 09-11
V Availability of substitutes
V ¢ostponement of consumption
V ¢roportion of e penditure (needles: inelastic; TV: elastic
V Nature of the commodity (necessity vs. lu ury
V ifferent uses of the commodity (paper vs. ink
V Time period (elastic in the long term
V oint demand
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V Total revenue is the amount paid by buyers and
received by sellers of a good.
TR = P x Q
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V TR increases as price is increased if demand is
inelastic: if e 1 and ¢ then TR
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Price Quantity Revenue
$1000 200 $200,000
$900 400 $360,000
$800 600 $480,000
$700 800 $560,000
$600 1000 $600,000
$500 1200 $600,000
$400 1400 $560,000
$300 1600 $480,000
$200 1800 $360,000
$100 2000 $200,000
BVIMSR 09-11
V ¢rice elasticity of demand measures how much the
quantity demanded responds to changes in the price.
V ¢rice elasticity of demand is calculated as the percentage
change in quantity demanded divided by the percentage
change in price.
V If a demand curve is elastic, total revenue falls when the
price rises.
V If it is inelastic, total revenue rises as the price rises.
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V Abhijeet V. V Chirag ¢.
V Amit G. V La man M.
V Amit K. V ¢riyanka K.
V Anil K. V Vinitha N.
V Babita S. V Zeet G.
Group # 3
BVIMSR 09-11