Inelastic demand 0< Є < 1
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Inelastic demand 0< Є < 1
• Price rises:Price rises:As P , Q percentage change in P > percentage change in Q.Now TR = P x Q TR will also .
• Price falls:Price falls:As P , Q percentage change in P > percentage change in Q.Now TR = P x Q TR will also .
NOTE :NOTE : In the case of inelastic demand TR and Price always change in the same direction or percentage change in P dominates percentage change in Q.
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Recap
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Elastic demand Є > 1
• Price rises:Price rises:As P , Q percentage change in P < percentage change in Q.Now TR = P x Q TR will also .
• Price falls:Price falls:As P , Q
percentage change in P < percentage change in Q.Now TR = P x Q TR will also .
NOTE : NOTE : In the case of elastic demand TR and Quantity always change in the same direction or percentage change in Q dominates percentage change in P.
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Unit elastic demand Є = 1
• Price rises:Price rises:As P , Q percentage change in P = percentage change in Q.Now TR = P x Q TR will remain unchanged.
• Price falls:Price falls:As P , Q percentage change in P = percentage change in Q.Now TR = P x Q TR will remain unchanged.
NOTE :NOTE :In case of unit elastic demand TR remains unchanged.
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Example
P Q TR
2.5 400 1,000
5 200 1,000
10 100 1,000
20 50 1,000
40 25 1,000
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Rectangular Hyperbola
0
10
2030
40
50
0 100 200 300 400 500
Quantity Demanded
Pri
ce
TR Remains Unchanged
TR = 40 x 25 = 1000
TR = 100 x 10 = 1000
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Є = ∆ Q ÷ ∆ P Q P
Formula for elasticity
As ∆P , To maintain Є = 1 ,
P
∆ Q should rise enough to compensate the increase in ∆P
Q P
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Totally inelastic demand
ЄЄ = 0 = 0P
QdQ1
P1
P2
TR1 at P1 > TR2 at P2
e.g. Water at sale.
TR 2
TR 1
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Infinitely elastic demand
ЄЄ = 1 = 1P
QdQ1
P
Q2
TR1 at Q1 > TR2 at Q2
e.g. Small scale grain farmers who are price takers.
TR 1
TR 2
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1.The number & closeness of substitute good
The price elasticity of demand for a particular ‘brand’ of a product will probably be fairly high
Determinants of price elasticity of demand
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Example
• Rank the following in ascending order of elasticity.
• Trousers . 1
• Jeans . 2
• Black Jeans . 3
• Levis black Jeans . 4
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Example
Cold drinkCold drink
SodaSoda
Black soda Black soda
Pepsi Pepsi
Least Elastic
Most Elastic
Arranged
In
ascending
order
of
elasticity
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Compiled by Ministry of Agriculture
FoodPrice Elasticity of
Demand
Milk -0.29
Cheese -1.20
Broiler Chicken -0.13
Sugar -0.24
Bread -0.09
Fruit Juices -0.80
Fresh Potatoes -0.21
Fresh Green Vegetables -0.58
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Determinants of price elasticity of demand
2. The proportion of income spent on a good
The higher the proportion of our income spent on a good, the more we will be forced to cut consumption when its price rises.
E.g.: Income effect of price rise of salt would be small and of petrol would be high as the proportion of income spent on petrol is high as compared to salt.
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Determinants of price elasticity of demand
3. The Time Period
When price increases or decreases people may take time in adjusting their consumption patterns and finding alternatives.
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Advertising & its effect on demand curves.
• Advertisers are trying to:
a. Shift the product’s demand curve to the right.
b. Make it less price elastic
AP1 B
D1
C
QQ1
P2
D2
K
Q3 Q2
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Pricing bus tickets
Fare ( Rs Per Mile)
EstimatedDemand
Total Revenue
(in rupees)
Old Total Cost
(in rupees)
New Total Cost
( in rupees)
8 6 480,000 360,000 440,000
10 4 400,000 360,000 440,000
12 3 360,000 360,000 440,000
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Price elasticity of supply
ЄЄ = = P
ЄЄ = 0 = 0
P
Qs
QsO O
8
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P
QsO
P1
P2
S1
S2
Q1 Q2 Q3
More elastic
Less elastic
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P
O
3
S1
3
S2
d S3
4
f
e
6
c
b
1
2
a
2
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Supply in different time periods
P
O
P1
P2
Si
Q1 Q2 Q3
P4
P3
a
dc
b
Qs
SS
SL
D1
D2
Immediate = I Short run = S
Long run = L