Inelastic demand 0< Є < 1
• Price rises:Price rises:As P , Q percentage change in P > percentage change in Q.Now TR = P x Q TR will also .
• Price falls:Price falls:As P , Q percentage change in P > percentage change in Q.Now TR = P x Q TR will also .
NOTE :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.
Elastic demand Є > 1
• Price rises:Price rises:As P , Q percentage change in P < percentage change in Q.Now TR = P x Q TR will also .
• Price falls:Price falls:As P , Q
percentage change in P < percentage change in Q.Now TR = P x Q TR will also .
NOTE : 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:Price rises:As P , Q percentage change in P = percentage change in Q.Now TR = P x Q TR will remain unchanged.
• Price falls:Price falls:As P , Q percentage change in P = percentage change in Q.Now TR = P x Q TR will remain unchanged.
NOTE :NOTE :In case of unit elastic demand TR remains unchanged.
Rectangular Hyperbola
0
10
2030
40
50
0 100 200 300 400 500
Quantity Demanded
Pri
ce
TR Remains Unchanged
TR = 40 x 25 = 1000
TR = 100 x 10 = 1000
Є = ∆ Q ÷ ∆ P Q P
Formula for elasticity
As ∆P , To maintain Є = 1 ,
P
∆ Q should rise enough to compensate the increase in ∆P
Q P
Infinitely elastic demand
ЄЄ = 1 = 1P
QdQ1
P
Q2
TR1 at Q1 > TR2 at Q2
e.g. Small scale grain farmers who are price takers.
TR 1
TR 2
1.The number & closeness of substitute good
The price elasticity of demand for a particular ‘brand’ of a product will probably be fairly high
Determinants of price elasticity of demand
Example
• Rank the following in ascending order of elasticity.
• Trousers . 1
• Jeans . 2
• Black Jeans . 3
• Levis black Jeans . 4
Example
Cold drinkCold drink
SodaSoda
Black soda Black soda
Pepsi Pepsi
Least Elastic
Most Elastic
Arranged
In
ascending
order
of
elasticity
Compiled by Ministry of Agriculture
FoodPrice 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
AP1 B
D1
C
QQ1
P2
D2
K
Q3 Q2
Pricing bus tickets
Fare ( Rs Per Mile)
EstimatedDemand
Total Revenue
(in rupees)
Old Total Cost
(in rupees)
New Total Cost
( 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
Top Related