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ELASTICITY

INTRODUCTION

The ability of an object or material to resume its normal shape after being stretched or compressed; stretchiness.

Ability to change and adapt; adaptability.

Measuring the behavior of demand /Supply of a product with respect to changing price.

INTRODUCTION

Price elasticity of Demand.

Price elasticity of Supply.

AIM

To Discuss all about price elasticity of demand

SCOPE

What is elasticity ?Price elasticity of Demand.How to calculate Elasticity?Different types of Elasticity.Elasticity on Revenue.Recapitulation.

It is a Measure of how much buyers and sellers respond to changes in market conditions.

WHAT IS ELASTICITY

PRICE ELASTICITY OF DEMAND

It is a measurement of how much the quantity demanded of a good responds to a change in the price of that good.

P

Q

P1

P2

Qd1 Qd2

PRICE ELASTICITY OF DEMAND

It is the percentage change in quantity demanded given a percent change in the price.

Price Elasticity Of Demand =Percentage Change in Qd

Percentage Change in Price

HOW TO CALCULATE ELASTICITY

Price Elasticity Of Demand =Percentage Change in Qd

Percentage Change in Price

P

Q

P1

P2

Qd1 Qd2


P

Q

2.2

2.0

8 10

Example: 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:

210

20

10000.2

)00.220.2(

10010

)810(

percent

percent


P

Q

2.2

2.0

8 10

Example: If the price of an ice cream cone decreases from $2.20 to $2.00 and the amount you buy raise from 8 to 10 cones then your elasticity of demand would be calculated as:

75.20909.9

25

10020.2

)20.200.2(

1008

)108(

percent

percent


It is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.

Midpoint Formula

)/2]P)/[(PP(P

)/2]Q)/[(QQ(Q=Demand of Elasticity Price

1212

1212

Price Elasticity Of Demand =Change in Qd / Mid point of Qd

Change in P / Mid point of P

)Q(Q X )P(P

)Q(Q X )P(P=

1212

1212


P

Q

2.2

2.0

8 10

Price Elasticity Of Demand =Change in Qd / Mid point of Qd

Change in P / Mid point of P

33.2)810(

)810(

)2.20.2(

)2.20.2(

33.26.3

4.8

)108(

)108(

)0.22.2(

)0.22.2(

DIFFERENT TYPES OF ELASTICITY

Perfectly Inelastic Demand

Inelastic Demand

Unit Inelastic Demand

Elastic Demand

Perfectly Elastic Demand

DIFFERENT TYPES OF ELASTICITY

Perfectly Inelastic Demand When no change in quantity demanded. Price elasticity of demand is zero.

Inelastic DemandPercentage change in price is greater than percentage change in quantity demand.Price elasticity of demand is less than one.

Unit Inelastic DemandPercentage change in price is same as the percentage change in quantity demand.Price elasticity of demand is one.

DIFFERENT TYPES OFELASTICITY

Elastic Demand Percentage change in quantity demand is greater than

percentage change in price. Price elasticity of demand is greater than one.

Perfectly Elastic DemandWhen at any price quantity demanded is zero. Price elasticity of demand is infinitive.

Perfectly Inelastic Demand- Elasticity equals 0

Quantity

Price

4

$5

Demand

1002. ...leaves the quantity demanded unchanged.

1. Anincreasein price...

Inelastic Demand- Elasticity is less than 1

Quantity

Price

4

$51. A 25%increasein price...

Demand

100902. ...leads to a 10% decrease in quantity.

Unit Elastic Demand- Elasticity equals 1

Quantity

Price

4


Demand


Elastic Demand- Elasticity is greater than 1

Quantity

Price

4


Demand


Perfectly Elastic Demand- Elasticity equals infinity

Quantity

Price

Demand$4

1. At any priceabove $4, quantitydemanded is zero.

2. At exactly $4,consumers willbuy any quantity.

3. At a price below $4,quantity demanded is infinite.

ELASTICITY ON TOTAL REVENUE

Inelastic DemandTotal Revenue decreases in case price falls and revenue increases in case price rise.

Total revenue ∞ Price


Elastic DemandTotal Revenue decreases in case price rise and revenue increases in case price falls.

1Total revenue ∞ ------------ Price


Unit Elastic DemandTotal Revenue remains same irrespective of price change.

RECAPITULATION

What is elasticity ?Price elasticity of Demand.How to calculate Elasticity?Different types of Elasticity.Elasticity on Revenue.Recapitulation.

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