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    Elasticity

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    sajannt1538
    This document defines elasticity as the responsiveness of one variable to changes in another. It specifically discusses price elasticity of demand, which measures the responsiveness of quantity demanded to changes in price. Demand can be elastic, unit elastic, or inelastic depending on whether the price elasticity is greater than, equal to, or less than one. The document also discusses how elasticity relates to total revenue and provides examples of using the arc elasticity measure to calculate price elasticity from quantity changes.

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    Elasticity

    Uploaded by

    sajannt1538
    36 views26 pages
    This document defines elasticity as the responsiveness of one variable to changes in another. It specifically discusses price elasticity of demand, which measures the responsiveness of quantity demanded to changes in price. Demand can be elastic, unit elastic, or inelastic depending on whether the price elasticity is greater than, equal to, or less than one. The document also discusses how elasticity relates to total revenue and provides examples of using the arc elasticity measure to calculate price elasticity from quantity changes.

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    Elasticity of demand

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    This document defines elasticity as the responsiveness of one variable to changes in another. It specifically discusses price elasticity of demand, which measures the responsiveness of quantity demanded to changes in price. Demand can be elastic, unit elastic, or inelastic depending on whether the price elasticity is greater than, equal to, or less than one. The document also discusses how elasticity relates to total revenue and provides examples of using the arc elasticity measure to calculate price elasticity from quantity changes.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    36 views26 pages

    Elasticity

    Uploaded by

    sajannt1538
    This document defines elasticity as the responsiveness of one variable to changes in another. It specifically discusses price elasticity of demand, which measures the responsiveness of quantity demanded to changes in price. Demand can be elastic, unit elastic, or inelastic depending on whether the price elasticity is greater than, equal to, or less than one. The document also discusses how elasticity relates to total revenue and provides examples of using the arc elasticity measure to calculate price elasticity from quantity changes.

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    Elasticity

    Elasticity
     A measure of the responsiveness of one
    variable (usually quantity demanded or
    supplied) to a change in another
    variable
     Most commonly used elasticity: price
    elasticity of demand, defined as:

    Price elasticity of demand =


    Price elasticity of demand
     Demand is said to be:
     elastic when Ed > 1,
     unit elastic when Ed = 1, and
     inelastic when Ed < 1.
    Perfectly elastic demand
    Perfectly inelastic demand
    Elasticity & slope
     a price increase from Rs1 to Rs2 represents a 100%
    increase in price,
     a price increase from Rs2 to Rs3 represents a 50%
    increase in price,
     a price increase from Rs3 to Rs4 represents a 33%
    increase in price, and
     a price increase from Rs10 to Rs11 represents a 10%
    increase in price.
     Notice that, even though the price increases by Rs1 in
    each case, the percentage change in price becomes
    smaller when the starting value is larger.
    Elasticity along a linear demand
    curve
    Elasticity along a linear
    demand curve
    Arc elasticity measure

    where:
    Example
     Suppose that quantity demanded falls from
    60 to 40 when the price rises from Rs.3 to
    Rs.5. The arc elasticity measure is given by:

    In this interval, demand is inelastic (since elasticity < 1).


    Elasticity and total revenue
     Total revenue = price x quantity
     What happens to total revenue if the
    price rises?

    Price elasticity of demand =


    Elasticity and TR (cont.)

    Price elasticity of demand =

     A reduction in price will lead to:


     an increase in TR when demand is elastic.
     a decrease in TR when demand is inelastic.
     an unchanged level of total revenue when
    demand is unit elastic.
    Elasticity and TR (cont.)

    Price elasticity of demand =

     In a similar manner, an increase in price will


    lead to:
     a decrease in TR when demand is elastic.
     an increase in TR when demand is inelastic.
     an unchanged level of total revenue when
    demand is unit elastic.
    Elasticity and TR (cont.)
    Price discrimination
     different customers are charged
    different prices for the same product,
    due to differences in price elasticity of
    demand
     higher prices for those customers who
    have the most inelastic demand
     lower prices for those customers who
    have a more elastic demand.
    Price discrimination (cont.)
     customers who are willing to pay the
    highest prices are charged a high price,
    and
     customers who are more sensitive to
    price differentials are charged a low
    price.
    Determinants of price
    elasticity
    Price elasticity is relatively high when:
     close substitutes are available,

     the good or service is a large share of

    the consumer's budget, and


     a longer time period is considered.
    Cross-price elasticity of
    demand
     The cross-price elasticity of demand
    between two goods j and k is defined
    as:
    Cross-price elasticity (cont.)

     cross-price elasticity is positive if and


    only if the goods are substitutes
     cross-price elasticity is negative if and
    only if the goods are complements.
    Income elasticity of demand

     A good is a normal good if income


    elasticity > 0.
     A good is an inferior good if income
    elasticity < 0.
    Income elasticity of demand

     A good is a luxury good if income


    elasticity > 1.
     A good is a necessity good if income
    elasticity < 1.
    Price elasticity of supply
    Perfectly inelastic supply
    Perfectly elastic supply
    Determinants of supply
    elasticity
     short run - period of time in which
    capital is fixed
     all inputs are variable in the long run
     supply will be more elastic in the long
    run than in the short run since firms
    can expand or contract their capital in
    the long run.
    Tax incidence
     distribution of the burden of a tax
    depends on the elasticities of demand
    and supply.
     When supply is more elastic than
    demand, consumers bear a larger share
    of the tax burden.
     Producers bear a larger share of the
    burden of a tax when demand is more
    elastic than supply.

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