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    002 DemandSupply

    Uploaded by

    Bhavya Narang
    Here are the steps to solve this practice question: 1) Original price was 16$, demand was 120 units New price was 13$, demand increased to 145 units 2) Change in price = 16-13 = 3 Change in price % = (3/16) * 100 = 18.75% Change in demand = 145 - 120 = 25 Change in demand % = (25/120) * 100 = 20.83% 3) Point elasticity = % change in demand / % change in price = 20.83%/18.75% = 1.11 Demand is unitarily elastic as point elasticity is equal to 1. 4) Arc elasticity can also

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    © All Rights Reserved
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    002 DemandSupply

    Uploaded by

    Bhavya Narang
    61 views28 pages
    Here are the steps to solve this practice question: 1) Original price was 16$, demand was 120 units New price was 13$, demand increased to 145 units 2) Change in price = 16-13 = 3 Change in price % = (3/16) * 100 = 18.75% Change in demand = 145 - 120 = 25 Change in demand % = (25/120) * 100 = 20.83% 3) Point elasticity = % change in demand / % change in price = 20.83%/18.75% = 1.11 Demand is unitarily elastic as point elasticity is equal to 1. 4) Arc elasticity can also

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    002-DemandSupply

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    Here are the steps to solve this practice question: 1) Original price was 16$, demand was 120 units New price was 13$, demand increased to 145 units 2) Change in price = 16-13 = 3 Change in price % = (3/16) * 100 = 18.75% Change in demand = 145 - 120 = 25 Change in demand % = (25/120) * 100 = 20.83% 3) Point elasticity = % change in demand / % change in price = 20.83%/18.75% = 1.11 Demand is unitarily elastic as point elasticity is equal to 1. 4) Arc elasticity can also

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    61 views28 pages

    002 DemandSupply

    Uploaded by

    Bhavya Narang
    Here are the steps to solve this practice question: 1) Original price was 16$, demand was 120 units New price was 13$, demand increased to 145 units 2) Change in price = 16-13 = 3 Change in price % = (3/16) * 100 = 18.75% Change in demand = 145 - 120 = 25 Change in demand % = (25/120) * 100 = 20.83% 3) Point elasticity = % change in demand / % change in price = 20.83%/18.75% = 1.11 Demand is unitarily elastic as point elasticity is equal to 1. 4) Arc elasticity can also

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    DEMAND AND SUPPLY

    Price and Demand Relationship


    Law of Demand- Basic Principles

    • Higher price = consumers will demand a lower quantity of a good.


    • Demand is derived from the law of diminishing marginal utility
    • A market demand curve expresses the sum of quantity demanded at each price
    across all consumers in the market
    • Changes in price can be reflected in movement along a demand curve, but do
    not by themselves increase or decrease demand
    • The shape and magnitude of demand shifts in response to changes in
    consumer preferences, incomes, or related economic goods, NOT to changes in
    price
    Driving Factors and Impact on Demand

    • Willingness to Spend More


    Rising Income • Demand more for normal goods (especially variations of the goods,
    Levels new features etc.)
    • Impulsive spending can be a norm

    Change in • Stages in Life


    • Environmental Changes
    Preference
    • Availability

    • Parle-G
    Accessibility • On the Shelf
    • Availability of Substitutes
    Driving Factors and Impact on Supply

    Production
    Capacity

    Number of
    Competitors

    Other Factors
    Demand and Supply Equilibrium
    Elasticity

    • Price elasticity of demand is an indicator of the impact of a price change, up or down, on a


    product's sales.
    • Demand elasticity is a more general term, allowing the impact on demand of a number of factors
    to be estimated.
    • Higher price elasticity of demand suggests that consumers are more responsive to a product's price
    change.

    S
    P
    D
    Types of Elasticity

    Elasticity Change in Price (Proportion) <Ratio> Change in Demand (Proportion)

    Perfectly Elastic Price Increase = Demand Becomes Zero (Not all Entire Market Quantity
    but for that product or Service (E.g. Flight Tickets, Amazon products)

    Relatively Elastic Change in Price (Proportion) = More Change in Demand (Proportion)

    Perfectly In- Change in Price (Proportion) = No Change in Demand


    Elastic

    Relatively In- Change in Price (Proportion) = Less Change in Demand


    Elastic
    Examples of Perfectly Elastic Demand

    https://studyfinance.com/perfectly-elastic-demand/
    Examples of Relatively Elastic Demand
    Examples of Perfectly In-Elastic Demand

    https://sites.google.com/site/economicsbasics/perfectly-inelastic-deman
    d

    https://studyfinance.com/perfectly-inelastic-demand/
    Examples of Relatively In-Elastic Demand
    Income Elasticity

    • Consumers' incomes play a very important role in the demand


    for a good or service.
    • When there is a change in consumers' incomes, it causes a
    change in the quantity demanded of a good or service if all other
    factors remain the same.
    • The sensitivity of a change in the quantity demanded of a good
    or service relative to a change in consumers' incomes is known
    as income elasticity of demand.
    Q&A on Elasticity Concept
    Problem : Yesterday, the price of envelopes was $3 a box, and Julie was willing
    to buy 10 boxes. Today, the price has gone up to $3.75 a box, and Julie is now
    willing to buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic?
    What is Julie's elasticity of demand?
    Steps to Solution

    • Calculate Change in Quantity and %

    • Calculate Change in Price and %

    • Divide CIQ/CIP %

    • The ratio is Elasticity of Demand to Price


    Q&A on Elasticity Concept
    Problem : Which of the following goods are likely to have elastic demand, and
    which are likely to have inelastic demand?
    Options Options

    • Salt • Fuel

    • Aerated Drinks • Washing Machine

    • Chocolate • Mobile Phones

    • Medicines • Washing Powder

    • Drinking Water • Masks-N95


    Q&A on Elasticity Concept
    Problem : Katherine advertises to sell cookies for $4 a dozen. She sells 50
    dozen, and decides that she can charge more. She raises the price to $6 a
    dozen and sells 40 dozen. What is the elasticity of demand? Assuming that the
    elasticity of demand is constant, how many would she sell if the price were $10
    a box?
    Solve and Capture the Answers in Chat Box

    • Elasticity of Demand Ratio =

    • Demand Quantity at Price of $ 10 =


    Depiction of Shift in Supply or Demand Curve/Line
    Fuel Supply in United States
    Summary of 5 Types
    Calculations of 5 Types

    Change
    Change
    Price Change in in
    Price (P0) Change in Price Change is Demand(D0) Demand (D1) Change is in Price Elasticity Type
    (P1) Demand Demand
    %
    %
    40 45 5 Positive 80 70 -10 Negative -12.50% 12.50% -1.00 Unitary Elastic
    40 42 2 Positive 80 70 -10 Negative -12.50% 5.00% -2.50 Relatively Elastic
    40 48 8 Positive 80 70 -10 Negative -12.50% 20.00% -0.63 Relatively Inelastic
    40 45 5 Positive 80 80 0 No Change 0.00% 12.50% - Perfectly Inelastic
    40 45 5 Positive 80 0 -80 Total Demand Lost -100.00% 12.50% -8.00 Perfectly Elastic

    Note In Price Elasticity of Demand, because of inverse relationship, one of the factor (either price or demand change) will always negative
    Practical Applications of Elasticity Concepts

    Setting Price - In monopolistic market conditions, if the demand is


    elastic, the price is set very low for per unit of product and vice versa

    Price Discrimination - Demand for electricity for domestic users is


    inelastic; therefore, the price of domestic electricity is high, whereas the
    demand for industrial electricity is elastic. There are Cogen plants which
    can replace purchased power with own generation at lower costs
    Practical Applications of Elasticity Concepts

    Government Policies - A high rate of tax is levied on products having


    inelastic demand.

    Input Costs Rising-When costs are rising, it is tempting to pass on the


    cost increases by increasing price to the consumer, and if demand for the
    product is relatively inelastic, this measure may well succeed
    Practical Applications of Elasticity Concepts

    Trade Unions- The bargaining power of the trade unions in raising the
    wages of a group of labour in a particular industry also depends, among
    other things, on the elasticity of demand for their services to the
    employer. A trade union usually succeeds in raising wages when the
    demand for the services of labour to the employer is inelastic: because,
    in such a case the employer cannot easily dispense with their services.
    On the other hand, it may not succeed when demand for labour is elastic
    Arc Elasticity
    Given - Price of a product decreases from $10 to $8, leading to an
    increase in quantity demanded from 40 to 60 units
    Point Elasticity Arc Elasticity
    As changes happen over a period of Time and not at once, a better
    computation should consider Mid Point instead of Extremes

    Particulars Values Particulars Values


    Change in Price (10-8) -2 Mid Point of Price (10+8)/2 9
    Change in Price % (-2/10) -20% Mid Point of Demand (40+60)/2 50
    Change in Demand(60-40) 20 Change in Demand (60-40) 20
    Change in Demand %(20/40) 50% Change in Price (10-8) -2
    Point Elasticity = CID%/CIP% (50%/-20%) -2.5 Change in Demand % = Change/Midpoint = 20/50 40%
    Change in Price % = Change/Midpoint = -2/9 -22%
    Arc Elasticity = CID%/CIP%=40%/-22% -1.82
    Practice Question - 1
    Given – Price of Product Y was revised last
    month from 8$ to 11$ and the demand
    dropped from 90 Units to 65 Units. The
    management is considering the revision of
    price from 11$ to 13$.
    • Identify the Type of Elasticity?
    • Calculate the Point and Arc Elasticity
    Ratio?
    • Determine the Probable demand in both
    the scenarios?
    • (Consider the Base Level Shift from Price
    Points, while ER remaining the same)
    Practice Question - 2
    Given – Price of Product K was revised last
    month from 16$ to 13$ and the demand
    increased from 120 Units to 145 Units. The
    management is considering the revision of
    price from 13$ to 11$.
    • Identify the Type of Elasticity?
    • Calculate the Point and Arc Elasticity
    Ratio?
    • Determine the Probable demand in both
    the scenarios?
    (Consider the Base Level Shift from Price
    Points, while ER remaining the same)-
    Henceforth applicable to all problems
    Other Types of Elasticity and Examples

    Change in Price Change in Income Change in Price of Change in


    Other Product Advertisement
    (Substitute or Expenses
    Complementary)
    Type of Demand-A perspective
    Summary and Recap of Key Learnings
    1 Law – Price directly related to Supply, but inversely related to Demand

    2 In real life situations there are many exceptions to the Law of Demand and Supply

    3 5 Variations of Elasticity- Perfectly Elastic, Perfectly Inelastic, Relatively Elastic, Relatively Inelastic,
    Unitary Elastic

    4 Elasticity – Broadly 2 ways to calculate – Point Elasticity and Arc Elasticity

    5 Key Types – Price , Income, Cross, Advertising Elasticity of Demand

    6 Application in Pricing Decisions, Price Discrimination, Price+Supply Control Measures

    7 Number of Market Forces team up along with Price Changes. Subjective Aspects e.g. Culture

    8 Combo Quiz

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