ELASTICITY

Concept
Definition
Analysis

Concept

Think about a rubber band and

analyse what happens to it when
there is some force applied to it.
Variables involved are force and
length.
When force changes there is a
change in length.
Similarly when price changes there
is a change in demand and both are
variables.

Elasticity

Price elasticity is the degree of

responsiveness or sensitiveness
of demand for a commodity to
the changes in its price

Proportionate Change

When price changes from 5Rs to

7Rs the change is 2Rs and the
proportionate change is 40 %.

The formula for the proportionate

change is
= Delta price / Original Price

Definition

The price elasticity of demand is

degree of responsiveness of
demand for a commodity to the
change in its price.

E = % change in demand
% change in price

Types of elasticity.

Price Elasticity
% change in demand
% change in price
Cross Elasticity
Income Elasticity
Advertisement Elasticity

Price Elasticity

Point Elasticity
e = - dq/dp *p/q
ARC Elasticity

* Price elasticity is considered to

be a positive value there fore
ve sign is avoided.

Point and arc elasticity

Point The elasticity measured

on a finite point of a demand
curve is known as point
elasticity.
The elasticity measured on
between two elastic point is
called arc elasticity.

Point elasticity of Linear

Demand Schedule
lower segment
Ep = -------------------upper segment

Determinants

Availability of substitutes
Nature of Commodity
Proportion of income spent on
commodity
Time factor
Range of alternative uses of
commodity

Price elasticity and MR

Marginal Revenue

It is the extra revenue earned

when one extra unit of product is
sold
Q
P
TR
E.g 10 units 10 Rs
100 Rs
11 units 10 Rs
110 Rs

Marginal Revenue and price

elastiicty.

MR d(TR) / d(Q)

MR d(P.Q) / d(Q)

MR = P ( 1 1/e )

Total Revenue and price

elasticity
Let us suppose that
Qd = 100 5P
Putting value of P as 5, 10, 15, 20
Calculate Qd
75, 50, 25, 0
Calculate TR
P*Qd
Calculate Elasticity e

Types of Price Elasticity

e = infinty
e>1
e<1
e=1
e=0

Perfectly elastic
Relatively elastic
Relatively inelastic
Unitary elastic
Perfectly inelastic.

Conceptual View
% change demand
1
E = ------------------------= ------% change price
0
E = infinity

Various Values

E>1
% change D > % change P
E<1
% change D < % change P
E=1
% change D = % change P

Total Revenue

Price Elasticity And Total

Revenue

TR = Q.P

Quantity (Qx)

Price & MR

ep > 1

MR

Ep = 1

=2

0-0
.4Q

Ep < 1

Q=1
00

-5P

Quantity (Qx)

Determinants of Price
Elasticity.

Availability of substitutes.
Nature of commodity.
Proportion of income spent.
Range of alternatives

Price Elasticity
% change in demand
% change in price

Income Elasticity

% change In demand
E= ----------------------------% change in diposable income

Cross Elasticity

Applicable complementary and

substitutes.

E = % change in demand of X
------------------------------------% change in price of Y
X = tea Y = coffee

Advertisement Elasticity of
Sales
% change in sales
E=-------------------------% change in advertisement
budget