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    Elasticity: - Dr. Shubhada A. Joshi

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    Vijay Khandare
    Elasticity is a measure of how responsive one variable is to changes in another variable. There are several types of elasticity including: 1) Price elasticity of demand which measures the responsiveness of quantity demanded to changes in price. Demand is more elastic when there are substitutes, the product is a larger budget item, or over a longer time period. 2) Income elasticity which measures the responsiveness of quantity demanded to changes in consumer income. Goods with elasticity over 1 are luxuries while those under 1 are necessities. 3) Cross price elasticity which measures the responsiveness of the quantity of one good to price changes of another. Negative values mean goods are complements

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    Elasticity: - Dr. Shubhada A. Joshi

    Uploaded by

    Vijay Khandare
    40 views20 pages
    Elasticity is a measure of how responsive one variable is to changes in another variable. There are several types of elasticity including: 1) Price elasticity of demand which measures the responsiveness of quantity demanded to changes in price. Demand is more elastic when there are substitutes, the product is a larger budget item, or over a longer time period. 2) Income elasticity which measures the responsiveness of quantity demanded to changes in consumer income. Goods with elasticity over 1 are luxuries while those under 1 are necessities. 3) Cross price elasticity which measures the responsiveness of the quantity of one good to price changes of another. Negative values mean goods are complements

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    Elasticity is a measure of how responsive one variable is to changes in another variable. There are several types of elasticity including: 1) Price elasticity of demand which measures the responsiveness of quantity demanded to changes in price. Demand is more elastic when there are substitutes, the product is a larger budget item, or over a longer time period. 2) Income elasticity which measures the responsiveness of quantity demanded to changes in consumer income. Goods with elasticity over 1 are luxuries while those under 1 are necessities. 3) Cross price elasticity which measures the responsiveness of the quantity of one good to price changes of another. Negative values mean goods are complements

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    40 views20 pages

    Elasticity: - Dr. Shubhada A. Joshi

    Uploaded by

    Vijay Khandare
    Elasticity is a measure of how responsive one variable is to changes in another variable. There are several types of elasticity including: 1) Price elasticity of demand which measures the responsiveness of quantity demanded to changes in price. Demand is more elastic when there are substitutes, the product is a larger budget item, or over a longer time period. 2) Income elasticity which measures the responsiveness of quantity demanded to changes in consumer income. Goods with elasticity over 1 are luxuries while those under 1 are necessities. 3) Cross price elasticity which measures the responsiveness of the quantity of one good to price changes of another. Negative values mean goods are complements

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 20

    Elasticity

    Dr. Shubhada A. Joshi

    Elasticity concept:Elasticity is a sensitiveness of one variable to changes in some other variable. Devoid of any unit of measurement. Expressed in percentage terms. Direction of relationship(here- inverse) is important but also the strength/magnitude of the relationship.)

    Price elasticity of demand


    The percentage change in quantity demanded resulting from a percent change in price. Usually a negative figure.

    Q P P Q

    (called eta)

    Important for pricing decisions.

    Calculating elasticities
    Point estimate:- calculated at a specific point of demand.

    Q P P Q
    Arc elasticity: uses average values of Q and P as reference points
    Q ( P1 P2 ) / 2 (Q2 Q1 ) ( P1 P2 ) / 2 P (Q1 Q2 ) / 2 ( P2 P1 ) (Q1 Q2 ) / 2

    Types of demand elasticity


    Perfectly Inelastic demand:-no response of demand to price changes. Relatively Inelastic demand:-e.g. necessities Relatively Elastic demand:-e.g. luxuries. Perfectly Elastic demand:- Infinite response of demand to price Unitary Elastic Demand:-

    Determinants of demand elasticity


    -Nature of the good, -What proportion of outlay (income) on the good is spent, -Availability of substitutes, - Time horizon,

    In other words,

    Determinants of price elasticity of demand


    Elasticity is greater (in absolute values, i.e more elastic) when:

    there are more substitutes for the product. the product is a more important part of a consumers budget. the time period under consideration is greater.

    Graphically
    Draw A relatively elastic demand curve and A relatively inelastic demand curve and A unitary elastic demand curve. Repeat the exercise for the supply curve.

    Numerical:An equation of a demand curve is given.

    as Qd=100-2p Whats the price elasticity of demand at P=20 if price increases by Re.1.
    Another example: Qd=100-2p (same demand function) Whats the price elasticity of demand at P=40 if price increases by Re.1

    Income elasticity
    The percentage change in quantity demanded resulting from a percent change in consumer income (I)

    Q I I I Q

    Interpretation of Income elasticity of demand


    Elasticity if greater than one, indicates that the good is a luxury good. Elasticity if less than one and more than zero indicates that the good is a normal good. Elasticity if less than zero, indicates that the good is an inferior good.

    Estimates of Income Elasticities for the UK


    Foreign Travel Wines and spirits Dairy Produce Recreational goods 1.14 2.60 0.53 1.99

    Study by NCAER (India)


    income elasticity for certain goods Commodities Minor Cereals Major Cereals Handloom Cloth Mill made Cloth Bidi Tobacco Cigarette Tobacco Rural -0.83 0.55 -0.12 0.66 0.64 1.51 Urban -1.32 0.12 0.21 0.70 -0.19 1.17

    Cross price elasticity


    The percentage change in quantity demanded of good X resulting from a percent change in the price of good Y

    X ,Y

    Q X PY PY QX

    How does demand for your product react to other companies price hikes?

    How will you interpret the sign of the cross elasticity of demand ?

    Cross-price elasticity of demand


    If this number is, negative the goods are complements. If positive, they are substitutes.

    Advertising elasticity
    The percentage change in quantity demanded resulting from a percent change in advertising expenditure.

    Q A A A Q

    It becomes worth studying as it tells you is it worth to spend on advertising?

    Demand-Revenue Relationship
    What can you say about demand-revenue relationship?

    Exercises:If the demand is relatively inelastic, then is it worth decreasing the price of that good? If the demand is greater than one, then is it worth increasing the price of that good?

    What are the conditions in which a firms revenue will go up?

    Remember .
    If demand is elastic, the price and revenue move in opposite direction. If demand is inelastic, the price and revenue move in the same direction.

    If demand is unitary elastic, then the revenue remains unchanged.

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