Chapter 5 Elasticity and Its Application - Pps

CENGAGE
Learning
Principles of
economics
6th Edition
N. Gregory Mankiw
Copyright © 2004 South-Western/Thomson Learning
CHAPTER - 5
Principles of
MICROeconomics
(HSS – 1021)
Elasticity and its Applications

N. Gregory Mankiw
9/30/2019 6:17 PM 2
In this chapter, look for the answers
to these questions:
• What is elasticity? What kinds of issues can

elasticity help us to understand?
• What is the price elasticity of demand?
How is it related to the demand curve?
How is it related to revenue & expenditure?
• What are the income and cross-price elasticities of
demand?
• What is the price elasticity of supply?
How is it related to the supply curve?

Elasticity . . .
 Elastic – stretchy, flexible, Index of reaction
 Inelastic – rigid, inflexible
 Elasticity measure how responsive one variable is in
response to another variable, independent of units.
 Elasticity of Demand / Supply is a numerical measure of
the relative responsiveness of quantity demanded (Qd ) /
quantity supplied (Qs ) to a change in any one of its
determinants keeping other determinants constant.
 Elasticity measures the percentage change in a variable in
response to a percentage change in another variable.
 Larger the value of elasticity, the more responsiveness is
quantity demanded / supplied to changes in the
determinant under consideration.
ELASTICITY OF DEMAND
Demand elasticity measures the relative

responsiveness of quantity demanded of a
commodity to changes in one of its determinant,
assuming other determinants remain unchanged
Measures the percentage change in quantity
demanded of a commodity in response to 1%
change in one of its determinant, assuming other
determinants remain unchanged .

ELASTICITY OF DEMAND : TYPES
Types of Elasticity of Demand : depends on
which determinant brings out a change in
quantity demanded of a commodity
Determinants of Elasticity of Demand

Demand
Price of the Commodity Price elasticity of demand
Income of the Income elasticity of
Consumer demand
Price of Related Cross-price elasticity of
Commodity demand
Price Elasticity of Demand
Price elasticity of demand is relative responsiveness of
quantity demanded of a commodity to a change in price
of that commodity, keeping other determinants of
demand constant.
• Price elasticity of demand measures how much quantity
demanded of a commodity (Qd) responds to a change in
its own price (P).
 Loosely speaking, it measures the price-sensitivity of
buyers’ demand.
Price elasticity Percentage change in Qd
=
of demand Percentage change in P
7
=
P
Example:
If quantity P rises
P2
demanded of a by 10%
P1
commodity falls by
15% due to 10% D
increase in its price, Q
Price elasticity Q2 Q1
of demand equals -15% = -1.5 Q falls
10% by 15%
8
=
P
Along a D curve, P and Q move
in opposite directions, which P2
would make price elasticity
P1
negative.
D
For comparison purpose, minus
sign is dropped and all price Q
Q2 Q1
elasticities are reported as
positive numbers.
9
PRICE ELASTICITY OF DEMAND
Important Observations
 Price elasticity, ep will always have a negative value,
because of inverse relationship between price and
quantity demanded of a commodity
 Price elasticity, ep is a ratio of marginal demand
dQ/dP (for continuous data) or ∆Q/ ∆P (for discrete
data) to average demand Q/P
 Elasticity is unit less or dimension less concept
 The coefficient of elasticity is ordered according to
absolute value as opposed to algebraic value. Hence an
elasticity of –2 is greater than an elasticity of -1

Calculating Percentage Changes
Demand for Standard method

ice-cream of computing the
P percentage (%) change:
B
25 end value – start value
A x 100%
20 start value
D Going from A to B,
Q the % change in P equals
8 12
(25–20)/20 = 25%
11
Problem:
Demand for The standard method gives
Ice-cream different answers depending on
P where one starts, i.e., which is
the start value of price.
B
25 From A to B, (Start Value of Price = 20
A P rises 25%, Q falls 33%,
20
elasticity = - 33/25 = -1.33
D
From B to A, (Start Value of Price = 25
Q
8 12 P falls 20%, Q rises 50%,
elasticity = 50/ -20 = - 2.50
12
Calculating Percentage
Changes
• So, we instead use the midpoint (arc) method:
end value – start value

x 100%
Midpoint value
 The midpoint value is the number halfway between
the start & end values, i.e., the average of start &
end values
 It doesn’t matter which value you use as the “start”
and which as the “end” – you get the same answer
either way!
13
The Midpoint Method: A Better Way
to Calculate
Percentage Changes and Elasticities
• The midpoint (arc) formula is preferable when
calculating the price elasticity of demand because it
gives the same answer regardless of the direction of
the change.
(Q2  Q1 ) / [(Q2  Q1 ) / 2]
Price elasticity of demand =
(P2  P1 ) / [(P2  P1 ) / 2]
Where Q1 = Initial Quantity demanded
Q2 = Quantity demanded after price change
P1 = Initial Price
P2 = Changed Price

• Using the midpoint (arc) method, the % change in P

equals
25 – 20
x 100% = 22.2%
(25+20)/2
 The % change Q equals
8 – 12
x 100% = - 40.0%
(8+12)/2
 The price elasticity of demand equals
- 40/22.2 = -1.8
15
Calculating Price Elasticity of
Demand given Demand Function
Given demand function Qd = a - bP
dQd P
ep = — —d
dP Q
The Demand function for ballpoint pen is
P = 200 – 2Qd
Compute price elasticity at a price of Rs. 10.
At P = 10, Qd = 95, dQd / dP = - 0.5
dQd P
ep = — —d = (-0.5) * (10 / 95) = - 0.0526
dP Q
16
Calculating Price Elasticity of
Demand given Demand Function
Given demand function Qd = a - bP
dQd P
ep = — —d
dP Q
 Given linear demand function, the slope of the demand
curve , i.e., dQd/dP remain constant and the change in
price and quantity brings a change in price elasticity of
demand.
 If P increases, Qd decreases (law of demand) and
P/Qd increases. Therefore, eP increases. (dQd/dP constant)
 Similarly, if Qd increases, P decreases (law of demand) and
P/Qd decreases. Therefore, eP decreases. (dQd/dP constant)
17
The Variety of Demand Curves
• Inelastic Demand
• Quantity demanded does not respond strongly to price
changes.
• Percentage change in quantity demanded is less than
percentage change in price.
• Price elasticity of demand is less than one.
• Elastic Demand
• Quantity demanded responds strongly to changes in price.
• Percentage change in quantity demanded is more than
percentage change in price.
• Price elasticity of demand is greater than one.
The Variety of Demand Curves
• The price elasticity of demand is not equal to
the slope of the demand curve.
• The price elasticity of demand is closely related
to the slope of the demand curve.
• Rule of thumb:
The flatter the curve, the bigger the elasticity.
The steeper the curve, the smaller the elasticity.
• 5 different classifications of Demand curves.…
19
“Perfectly inelastic demand” when %∆Qd = 0
(one extreme case)
Price elasticity % change in Q 0%
= = =0
of demand % change in P 10%
D curve: P
D
vertical
P1
Consumers’
price sensitivity: P2
none
P falls Q
Elasticity: by 10% Q1
0 Q changes
by 0% 20
“Relatively Inelastic Demand”
when %∆Qd < %∆P
Price elasticity % change in Q < 10%
= = <1
D curve: P
relatively steep
P1
Consumers’
relatively low D
P falls Q
Elasticity: by 10% Q1 Q2
<1 Q rises less
than 10%
21
“Unit Elastic Demand” when %∆Qd = %∆P
= = =1
D curve: P
intermediate slope
P1
Consumers’
intermediate D
P falls Q
1
Q rises by 10%
22
“ Relatively Elastic Demand”
when %∆Qd > %∆P
Price elasticity % change in Q > 10%
= = >1
D curve: P
relatively flat
P1
Consumers’
price sensitivity: P2 D
relatively high
P falls Q
>1 Q rises more
than 10% 23
“Perfectly Elastic Demand” when %∆P = 0
(the other extreme)
Price elasticity % change in Q any %
= = = infinity
D curve: P
horizontal
P2 = P1 D
Consumers’
price sensitivity:
extreme
P changes Q
infinity Q changes
by any % 24
PRICE ELASTICITY OF DEMAND :
RANGES
 Perfectly Inelastic (ep = 0) : Any change in price does not
bring any change in quantity demanded
 Relatively Inelastic (0<ep <1) : Proportionate change in
price is greater than proportionate change in quantity
demanded
 Unitary Elastic (ep =1) : Proportionate change in price
results an equally proportionate change in quantity
demanded
 Relatively Elastic (1<ep <∞): Proportionate change in
quantity demanded is greater than proportionate change in
price
 Perfectly Elastic (ep = ∞) : Demand changes significantly,
even if there is no change in price
PRICE ELASTICITY OF DEMAND: ON
A DEMAND CURVE
• Geometrical (Diagrammatic): Ratio of the two
segments of the horizontal axis identified by the
intersection of the tangent to the point
considered, with the horizontal axis and by the
perpendicular from that point to the same axis
• Lower segment of the tangent

ep = ———————————— ——
Upper segment of the tangent

Elasticity of a Demand Curve
Remember
P
ep = AB / 0 = ∞ As price increases,
A the consumer is
ep > 1 moving from pint B
ep = AC / BC = 1, C is to point A. So price
C the mid point of AB elasticity of
demand increases.
ep < 1 As Quantity
ep = 0 / increases, the
AB = 0 consumer is moving
Q from pint A to point
0 B
B. So price
elasticity demand
decreases
27
PRICE ELASTICITY OF DEMAND: IN A
LINEAR DEMAND CVURVE
ΔQ/Q
ΔQ Q1Q2 OP1
ep = ——
Q = —— ——
ΔPΔP/P
OQ1 P1P2
P
FG OP1 FG OP1
== ——
OQ1 GE
—— = ——
GE
——
OQ1
Q1D OP1 Q1D ED
= —— ——
OP1 OQ1
= ——
OQ1
= ——
CE

Elasticity of a Linear Demand Curve
P Remember
200%
Rs.30 E= = 5.0 The slope of a
40%
linear demand
67% curve is constant,
20 E= = 1.0 but not its price
67%
elasticity demand.
40%
10 E= = 0.2 Price elasticity of
200% demand increases
as price increases
Rs.0 Q and decreases as
0 20 40 60
price decreases.
29
Price Elasticity and Total
Revenue
• Continuing our scenario, if you raise your price
from Rs.20 to Rs.25, would your revenue rise or fall?
Revenue = P x Q
• A price increase has two effects on revenue:
• Higher P means more revenue on each unit
you sell.
• But you sell fewer units (lower Q),
due to Law of Demand. Therefore, less revenue.
• Which of these two effects is bigger?
It depends on the price elasticity of demand.
30
Revenue
Price elasticity Percentage change in Q
=
Revenue = P x Q
• If demand is elastic, then
price elasticity of demand > 1
% change in Q > % change in P
• The fall in revenue from lower Q is greater

than the increase in revenue from higher P,
so revenue falls. 31
Revenue
Increase in Demand for
Elastic demand revenue
(elasticity = 1.8) Ice-cream
P (Rs.40) due Loss of
to higher P revenue
If P = Rs.20,
Q = 12 and revenue (Rs.80)
Rs.25 due to
= Rs.240.
lower Q
Rs.20
If P = Rs.25, D
Q = 8 and
revenue = Rs.200.
When D is elastic, Q
8 12
a price increase
causes revenue to fall.
32
Revenue
Price elasticity Percentage change in Q
=
• If demand is inelastic, then Revenue = P x Q

price elasticity of demand < 1
% change in Q < % change in P
• The fall in revenue from lower Q is smaller
than the increase in revenue from higher P,
so revenue rises.
• In our example, suppose that Q only falls to 10 (instead
of 8) when you raise your price to Rs.25.
33
Revenue
Now, demand is Increase in Demand for
inelastic: revenue (Rs. 50) Ice-cream
elasticity = 0.82 P due to higher P Loss in
If P = Rs.20, revenue
(Rs.40)
Q = 12 and revenue
Rs.25 due to
= Rs.240. lower Q
If P = Rs.25, Rs.20
Q = 10 and D
revenue = Rs.250.
When D is inelastic,
Q
a price increase 10 12
causes revenue to rise.
34
Revenue
Price Quan Total % % Elastic Description
tity Reven Change Change ity
ue Price Quantity
7 0 0
6 2 12 -15.4 200.0 -13.0 Relatively Elastic
3 8 24 -28.6 28.6 -1.0 Unitary Elastic
2 10 20 -40.0 22.2 -0.6Relatively Inelastic

PRICE ELASTICITY OF DEMAND:
MEASUREMENT
Total Outlay or Revenue or Expenditure Method :
Increase in Decrease in Total

Total Total Revenue
Revenue Revenue Remaining
Constant
Increase in INELASTIC ELASTIC UNIT
Price DEMAND DEMAND ELASTIC
DEMAND
Decrease in ELASTIC INELASTIC UNIT
Price DEMAND DEMAND ELASTIC
DEMAND
Price Elasticity and Total Revenue
RK Foods produces two commodities, i.e.,

salt and sugar. The price elasticities of
demand for salt and sugar are estimated at
(-) 0.60 and (-) 1.50 respectively. RK Foods
wants to get maximum profit by increasing
the price of two goods. What advise will
you provide to the company?

Let us assume ‘Q’ amount of salt is demanded at a price ‘P’.
So total revenue, TR= P*Q
Assume price increase by 10%
Since the price elasticity of demand is – 0.60, the quantity
demanded of salt will decrease by 6%.
Now, the new price (P1) = P + 10% of P = 1.1P
New, new quantity demanded (Q1) = Q – 6% of Q = 0.94Q
Total revenue after increase in price, TR1 = P1*Q1
= 1.1P * 0.94Q = 1.034PQ
1.034PQ > PQ and total revenue increases with rise in price
So price of salt should increase to increase total revenue
Let us assume ‘Q’ amount of sugar is demanded at a price ‘P’.
So total revenue, TR= P*Q
Assume price increase by 10%
Since the price elasticity of demand is – 1.50, the quantity
demanded of salt will decrease by 15%.
Now, the new price (P1) = P + 10% of P = 1.1P
New, new quantity demanded (Q1) = Q – 15% of Q = 0.85Q
Total revenue after increase in price, TR1 = P1*Q1
= 1.1P * 0.85Q = 0.935PQ
0.935PQ < PQ and total revenue decreases with rise in price
So price of sugar should not be raised to increase total revenue
INCOME ELASTICITY OF DEMAND
 ‘…the responsiveness of demand to a change in
consumer income, Y’
 It is computed as the percentage change in the quantity
demanded divided by the percentage change in income.
 If we substitute variable ‘income’ for variable ‘price’,
then the formula for measuring income-elasticity of
demand is same as for measuring price-elasticity of
demand
 Income elasticity of demand for normal goods is always
positive except for inferior goods

MEASSURING INCOME ELASTICITY
OF DEMAND
Example: 24 DVDs demanded (Qd) when consumer’s
income (Y) is Rs. 20000. When income increased to
Rs. 25000, demand for DVD increases to 30. Calculate
income elasticity of demand. (use mid-point method)
Answer: ey = % ∆ in Qd / % ∆ in Y
= ((30 -24)/(30+24)) / ((25000 – 20000) / (25000+20000))
= (6 / 54 ) / (5000 / 45000) = ( 1/9 ) / (1/9) = 1
(Find what you are getting using percentage method)
 Unitary income elasticity of demand implying 1%
increase in income of the consumer leads to 1 %
increase in quantity demanded of DVD
 DVD in question is a normal commodity since income
elasticity of demand is positive
MEASSURING INCOME ELASTICITY
OF DEMAND
If demand function is given (Qd is a function of Income)
Calculate income elasticity of demand at income level (Y) of
Rs. 25000 if the demand function is Qd = 600 - 0.02 Y
Answer: At Y = 25,000, quantity demanded = 600 - 500 = 100
ey =( dQ / dY) * ( Y / Q)
= (-)0.02 * (25000 / 100) = (-) 5
 Income elasticity of demand is elastic in nature implying
1% increase in income of the consumer leads to 5 %
decrease in quantity demanded of the commodity
 The commodity in question is an inferior commodity
since income elasticity of demand is negative.
INCOME ELASTICITY OF DEMAND
 Nature of Commodities and Income Elasticity of Demand

Goods Income-elasticity Effect on sale
Essential or Less than unity Less than proportionate
Necessary change in sale
goods
Comforts or Almost equal to Almost proportionate
Semi-luxuries unity change in sale
Luxuries Greater than More than proportionate
unity increase in sale

CROSS ELASTICITY OF DEMAND
 ‘…the responsiveness of demand of a commodity to a change

in the price of its related (substitutes and complementary)
commodities
 It is computed as the percentage change in the quantity
demanded divided by the percentage change in the price of
substitute or complementary commodities.
 Positive cross elasticity : Substitutes
 Negative cross elasticity : Complementary commodities
 Zero cross elasticity : Independent commodities
 The greater the absolute value of cross elasticity of demand,
the more intense is the relationship existing between the two
goods
MEASURING CROSS ELASTICITY
OF DEMAND
Example: 2 units of Pizza is demanded (Qd) when the price of
Burger is Rs. 20. When price of Burger increases to Rs. 25,
demand for Pizza increases to 4. Calculate cross elasticity of
demand using mid-point method.
Answer: ePB = % ∆ in Qd of Pizza / % ∆ in Price of Burger
= ((4 -2)/(4+2)) / ((25 – 20) / (25+20))
= (2 / 6 ) / (5 / 45) = ( 1/3 ) / (1/9) = 3
 Cross elasticity of demand is elastic in nature, implying 1%

increase in price of Burger leads to 3 % increase in quantity
demanded of Pizza.
 Pizza and Burger in question are substitute commodities
since cross elasticity of demand is positive.
MEASSURING CROSS ELASTICITY
OF DEMAND
If demand function is given (Qd is a function of Price of related
commodity)
The demand function for Burger is estimated at
QB = 6 - 0.2 PT, Where QB = Quantity demanded of Burger and
PT is the Price of Tomato Ketchup.
Calculate cross elasticity of demand at PT = 20.
Answer: At PT = 20, QB = 6 - 4 = 2
eTB =( d QB / d PT) * (PT / QB)
= (-)0.2 * (20 / 2) = (-) 2
 Cross elasticity of demand is elastic in nature implying 1%
increase in Price of Tomato Ketchup leads to 2 % decrease in
quantity demanded for Burger
 Burger and Tomato Ketchup in question are complementary to
each other since cross elasticity of demand is negative.
Time Watch Co. assembles wrist watches and sells in Western India.
Demand function faced by the Company is estimated to be
Q = 40,000 – 2 Pt – 2Y + 4Pc
Where,
Q = Number of watches demanded from Time Watch Co.
Pt = Price of watches sold by Time Watch Co.
Y = Per-capita income in Western India
Pc = Price charged by Casio Watch Co, the competitors
Currently Pt, I and Pc are Rs. 350, Rs.10,000 and Rs. 400 respectively
Estimate
a) Price elasticity of demand;
b) Income elasticity of demand and comment on nature of product;
c) Cross elasticity of demand and bring how these two watches
relates to each other.
d) Do you recommend an increase in price if Times Watch Co.
wanted to maximise sales revenue ? Justify

Q = 40,000 – 2 Pt – 2Y + 4Pc
When Pt, Y and Pc are Rs. 350, Rs.10,000 and Rs. 400
respectively,
Q = 40,000 – 700 – 20,000 + 1600 = 20,900
a) Price elasticity of demand = (-2) * (350 / 20900) = - 7 / 209 = -
0.03349
b) Income elasticity of demand = (-2) * (10000/20900) = - 0.96
Nature of product – since ei < 0, Inferior commodity
c) Cross elasticity of demand = (4) * (400/20900) = 0.0766
Nature of relationship – since ei > 0, Substitutes
d)Yes. Sales can be maximised when MR = 0 or ep = 1.
Since demand is inelastic, increase in price will increase sales
revenue.
THE ELASTICITY OF SUPPLY
• Price elasticity of supply is a measure of how
much 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
percent change in price.

Price Elasticity of Supply
Price elasticity Percentage change in Qs
=
of supply Percentage change in P
• Price elasticity of supply measures how
much Qs responds to a change in P.
 Loosely speaking, it measures the price-sensitivity of
sellers’ supply.
 Again, use the midpoint method to compute the
percentage changes.

Price elasticity Percentage change in Qs
=
of supply Percentage change in P
Example: P
45 units of pen is S
supplied at a price P rises P2
Rs.10. When price by 40% 15
P1
increases to Rs. 15,
10
80 units is supplied.
Find elasticity of Q
supply. Q1 Q2
45 80
Q rises
Price elasticity 56%
= = 1.4 by 56%
of supply 40%
Price Elasticity of Supply Given Supply Function
dQs P
e s = — —
Example: dP Qs P
S
The supply function for P2
ballpoint pen is 15
Qs = 100 + 2P P1
10
Compute price elasticity at a
price of Rs. 10. Q
At P = 10, Qs = 120, Q1 Q2
45 80
dQs / dP = 2
es = 2 * (10/120) = 1/6
The Variety of Supply Curves
• Economists classify supply curves according to
their elasticity.
• The slope of the supply curve is closely related
to price elasticity of supply.
• Rule of thumb:
The flatter the curve, the bigger the elasticity.
The steeper the curve, the smaller the elasticity.
• The next slides present the different
classifications, from least to most elastic.
“Perfectly inelastic” (one extreme)
= = =0
of supply % change in P 10%
S curve: P
S
vertical
P2
Sellers’
0
P rises Q
Elasticity: by 10% Q1changes
Q
0 by 0%
“Inelastic”
Price elasticity % change in Q < 10%
= = <1
S curve: P
S
relatively steep
P2
Sellers’
relatively low
P rises Q
Elasticity: by 10% Q1 Q 2
<1 Q rises less
than 10%
“Unit elastic”
= = =1
S curve: P
intermediate slope S
P2
Sellers’
intermediate
P rises Q
=1 Q rises
by 10%
“Elastic”
Price elasticity % change in Q > 10%
= = >1
S curve: P
relatively flat S
P2
Sellers’
relatively high
P rises Q
>1 Q rises more
than 10%
“Perfectly elastic” (the other extreme)
Price elasticity % change in Q any %
= = = infinity
S curve: P
horizontal
P2 = P1 S
Sellers’
price sensitivity:
extreme
P changes Q
infinity Q changes
by any %
The Determinants of Supply
Elasticity
• The more easily sellers can change the
quantity they produce, the greater the price
elasticity of supply.
• Example: Supply of beachfront property is
harder to vary and thus less elastic than
supply of new cars.
• For many goods, price elasticity of supply is
greater in the long run than in the short run,
because firms can build new factories, or
new firms may be able to enter the market.
Summary
• Price elasticity of demand measures how much the
quantity demanded responds to changes in the price.
• Price elasticity of demand is calculated as the
percentage change in quantity demanded divided by
the percentage change in price.
• The income elasticity of demand measures how much
the quantity demanded responds to changes in
consumers’ income.
• The cross-price elasticity of demand measures how
much the quantity demanded of one good responds to
the price of another good.
QUESTIONS FOR PRACTICE
Suppose the price of wheat decreases from

Rs. 25 to Rs. 20 per kg. As a result, the quantity
demanded of wheat increases from 2,000 kg. to
2,200 kg. Using the midpoint method, compute
the price elasticity of demand for wheat.

Studies indicate that the price elasticity of

demand for beer is about (-) 0.4. If a bottle of
beer is currently costs Rs. 60 and the
Government want to reduce consuming beer by
20 percent (%), by how much should it increase
the price?

A 5% rise in price of a good leads to 20% fall

in its demand. A consumer buys 80 units of
good at a price of Rs.10 per unit. How many
units will the consumer buy when price changes
to Rs.11? Use percentage method.

A firm’s sale of product X is 15,000 units when

it declares the price of X as Rs. 5. When this
firm declares a price increase of 10% for the
product, its sale of X drops to 12,500 units.
a. Find price elasticity of demand, assuming
a linear demand curve.
b. Given the elasticity coefficient found in
(a) above, find the change in sales if the
firm would have decided to decrease the
price by 10%.

Chapter 5 Elasticity and Its Application - Pps

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Chapter 5 Elasticity and Its Application - Pps

Загружено:

Авторское право:

Доступные форматы

CENGAGE

Elasticity and its Applications

• What is elasticity? What kinds of issues can

Copyright © 2004 South-Western/Thomson Learning

Demand elasticity measures the relative

Copyright © 2004 South-Western/Thomson Learning

Determinants of Elasticity of Demand

Copyright © 2004 South-Western/Thomson Learning

Demand for Standard method

end value – start value

Copyright © 2004 South-Western/Thomson Learning

• Using the midpoint (arc) method, the % change in P

• Lower segment of the tangent

Copyright © 2004 South-Western/Thomson Learning

Copyright © 2004 South-Western/Thomson Learning

• The fall in revenue from lower Q is greater

• If demand is inelastic, then Revenue = P x Q

Copyright © 2004 South-Western/Thomson Learning

Total Outlay or Revenue or Expenditure Method :

Increase in Decrease in Total

RK Foods produces two commodities, i.e.,

Copyright © 2004 South-Western/Thomson Learning

Copyright © 2004 South-Western/Thomson Learning

 Nature of Commodities and Income Elasticity of Demand

Copyright © 2004 South-Western/Thomson Learning

 ‘…the responsiveness of demand of a commodity to a change

 Cross elasticity of demand is elastic in nature, implying 1%

Copyright © 2004 South-Western/Thomson Learning

Copyright © 2004 South-Western/Thomson Learning

Copyright © 2004 South-Western/Thomson Learning

Suppose the price of wheat decreases from

Copyright © 2004 South-Western/Thomson Learning

Studies indicate that the price elasticity of

Copyright © 2004 South-Western/Thomson Learning

A 5% rise in price of a good leads to 20% fall

Copyright © 2004 South-Western/Thomson Learning

A firm’s sale of product X is 15,000 units when

Вам также может понравиться