Elasticity PGDM

Elasticity of Demand
 Price elasticity of demand

 Income elasticity of demand
 Cross elasticity of demand
Microeconomics
Price elasticity of demand
Microeconomics
Microeconomics
The price 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.
When we talk about elasticity, that responsiveness is always measured in

percentage terms.
Specifically, the price elasticity of demand is the percentage change in quantity

demanded due to a percentage change in the price.
Microeconomics
Computing the Price Elasticity of Demand
The price elasticity of demand is computed as the percentage change in

the quantity demanded divided by the percentage change in price.
Percentage change in quantity dem anded

Price elasticity of dem and =
Percentage change in price
Microeconomics
 If the price of product/good increases from 2.00 to 4.00 and the amount
you buy falls from 10 to 8 cones, then your elasticity of demand would be:
P ercentage chan g e in qu antity d em and ed

P rice elasticity of d em and =
P ercentage chan g e in price
Microeconomics
 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:
Microeconomics
Types of price elasticity of Demand
i. Perfectly Inelastic
ii. Inelastic Demand
iii. Unit Elastic
iv. Elastic Demand
v. Perfectly Elastic
Microeconomics
Perfectly Inelastic Demand
Quantity demanded does not respond to price changes
Price
(P)
A change in the price has no effect

on the quantity demanded
Quantity Demanded
Microeconomics
Perfectly Inelastic Demand and Life Saving Medicine
Microeconomics
Life Saving Medicine
Sirturo- Bedaquiline (compound), an antibiotic made

by the company Johnson & Johnson
(first new treatment for tuberculosis in almost 50
years)
Microeconomics
Inelastic Demand
Quantity demanded does not respond strongly to price changes
Price
(P)
Change in price leads

to a smaller percentage
change in demand
Quantity Demanded
Microeconomics
Inelastic Demand
Microeconomics
Unit Elastic Demand
Quantity demanded changes by the same percentage as the price.
Price
(P)
Percentage Change in price is

equal to percentage change in
quantity demanded
Quantity Demanded
Microeconomics
Unit Elastic Demand
Microeconomics
Elastic Demand
Quantity demanded responds strongly to changes in price.
Price
(P)
Change in price leads to a bigger

percentage change in demand
Quantity Demanded
Microeconomics
Elastic Demand
Microeconomics
Perfectly Elastic
Price
(P)
Quantity Demanded
Microeconomics
Microeconomics
The Price Elasticity of Demand and Its Determinants
1. Availability of Close Substitutes
2. Necessities versus Luxuries
3. Definition of the Market
4. Time Horizon
Microeconomics
The Price Elasticity of Demand and Its Determinants
A. Availability of Close Substitutes
B. Necessities versus Luxuries
C. Definition of the Market
D. Time Horizon
Demand tends to be more elastic:

 the larger the number of close substitutes.
 if the good is a luxury.
 the more narrowly defined the market.
 the longer the time period.
Microeconomics
Types of price elasticity of Demand
ii. Inelastic Demand
iii. Unit Elastic
iv. Elastic Demand
Microeconomics
Slope and Price elasticity of a demand curve
Microeconomics
Price elasticity of demand on a straight line demand
curve
Price
(P)
Quantity Demanded
Microeconomics
Elasticity of Demand
 Price elasticity of demand

 Income elasticity of demand
 Cross elasticity of demand
Microeconomics
Income elasticity of demand
Microeconomics
Income elasticity of demand measures how much the quantity demanded of a good
responds to a change in consumers’ income.
It is computed as the percentage change in the quantity demanded divided by the

percentage change in income.
Microeconomics
 Computing Income Elasticity

P ercen tag e ch an g e
in q u an tity d em an d ed
In co m e elasticity o f d em an d =
in in co m e
Remember, all elasticity's are measured by dividing one

percentage change by another
Microeconomics
Income elasticity can be positive or negative depending on the nature of the good
examining.
Microeconomics
Income Elasticity
Types of Goods
 Normal Goods
 Inferior Goods
Higher income raises the quantity demanded for normal goods but lowers the quantity
demanded for inferior goods.
Microeconomics
Microeconomics
Income Elasticity
Goods consumers regard as necessities tend to be income inelastic
 Examples include food, fuel, clothing, utilities, and medical services.
Goods consumers regard as luxuries tend to be income elastic.

 Examples include sports cars, furs, and expensive foods
Microeconomics
Giffen Goods and Veblen Goods
Microeconomics
Giffen Goods
Robert Giffen
Microeconomics
Giffen Good: Example
Microeconomics
Veblen Goods
Thorstein Veblen
Microeconomics
Cross elasticity of demand
Microeconomics
A measure of how much the quantity demanded of one good responds to a change in the
price of another good.
Computed as the percentage change in quantity demanded of the first good divided by
the percentage change in the price of the second good
%change in quantity demanded of good 1

Cross - price elasticityof demand 
%change in price of good 2
Microeconomics
Two Type of Goods
Substitute Goods:
Complementary Goods:
Microeconomics
THE ELASTICITY OF SUPPLY
Microeconomics
THE ELASTICITY OF SUPPLY
 Price elasticity of supply is a measure of how much the quantity supplied of a
good responds to a change in the price of that good.
 Price elasticity of supply is the percentage change in quantity supplied

resulting from a percentage change in price.
Microeconomics
Computing the Price Elasticity of Supply
The price elasticity of supply is computed as the percentage change in the

quantity supplied divided by the percentage change in price.
in q u an tity su p p lied
P rice elasticity o f su p p ly =
P ercen tag e ch an g e in p rice
Microeconomics
Types of price elasticity of Supply
ii. Inelastic Supply
iii. Unit Supply
iv. Elastic Supply
Microeconomics
Perfectly Inelastic Supply
Quantity Supplied does not respond to price changes
Price
(P)
A change in the price has no effect

on the quantity Supplied
Quantity Supplied
Microeconomics
Perfectly Inelastic Supply
Microeconomics
Inelastic Supply
Quantity Supplied does not respond strongly to price changes
Price
(P)
Change in price leads

to a smaller percentage
change in Supply
Quantity Supplied
Microeconomics
Examples: Inelastic Supply
Managerial Economics
Unit Elastic Supply
Quantity Supplied changes by the same percentage as the price.
Price
(P)
Percentage Change in price is

equal to percentage change in
quantity Supplied
Quantity Supplied
Microeconomics
Unit Elastic Demand
Microeconomics
Elastic Supply
Quantity Supplied responds strongly to changes in price.
Price
(P)
Change in price leads to a bigger

percentage change in Supply
Quantity Supplied
Microeconomics
Elastic Supply
Microeconomics
Perfectly Elastic
Price
(P)
Quantity Supplied
Microeconomics
The Price Elasticity of Supply and Its Determinants
Microeconomics
The Price Elasticity of Supply and Its Determinants
 Ability of sellers to change the amount of the good they produce.
 Beach-front land is inelastic.
 Books, cars, or manufactured goods are elastic.
 Time period
 Supply is more elastic in the long run.
Microeconomics
Are the following statements true/false
 The elasticity of demand is the same as the slope of the demand curve
 The cross-price elasticity will always be positive
 The supply of apartments is more inelastic in the short-run than the long run.
Microeconomics
Consider two goods: Paper Towels & Television
Would you expect the price elasticity of demand for paper towels be larger in
the short-span of time or long span of time?
What about TV?

Microeconomics
If a 3 percent increase in the price of Cars cause a 6-percent decline in the
quantity demand what would be the price elasticity of demand.
Microeconomics
Let us assume that a consumer spends all his/her income on two goods, good X
and good Y. If a 50 percent increase in the price of good X does not change the
amount consumed of good Y. What is the cross elasticity of demand for good Y.
Microeconomics
Consider this situation:
JK constructions builds independent houses around the suburbs of Kerala near to Kochi for sale.
Consider what will happen to the equilibrium price and quantity of new houses in the case of following
situations.
1. If the wage rate of carpenters falls?
2. Due to COVID-19 the money at the disposal of the people to by new houses decrease
3. The price of Villas drop in the suburbs

Microeconomics

Elasticity PGDM

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Elasticity of Demand

 Price elasticity of demand

When we talk about elasticity, that responsiveness is always measured in

Specifically, the price elasticity of demand is the percentage change in quantity

The price elasticity of demand is computed as the percentage change in

Percentage change in quantity dem anded

P ercentage chan g e in qu antity d em and ed

A change in the price has no effect

Sirturo- Bedaquiline (compound), an antibiotic made

Change in price leads

Percentage Change in price is

Change in price leads to a bigger

1. Availability of Close Substitutes

2. Necessities versus Luxuries

3. Definition of the Market

Demand tends to be more elastic:

 Price elasticity of demand

It is computed as the percentage change in the quantity demanded divided by the

 Computing Income Elasticity

Remember, all elasticity's are measured by dividing one

Goods consumers regard as luxuries tend to be income elastic.

%change in quantity demanded of good 1

 Price elasticity of supply is the percentage change in quantity supplied

The price elasticity of supply is computed as the percentage change in the

A change in the price has no effect

Change in price leads

Percentage Change in price is

Change in price leads to a bigger

 The cross-price elasticity will always be positive

What about TV?

1. If the wage rate of carpenters falls?

3. The price of Villas drop in the suburbs

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