Elasticity

Type of Elasticities
Important are:
 Price Elasticity
 Income elasticity
 Cross elasticity
 Market supply and demand
The effect on price of a
shift in supply depends on
the responsiveness of
demand to a change in S1
price.
Price

a
P1

D
O Q1
Quantity
 Market supply and demand
S2
S1

b
P2
Price

a
P1

D
O Q2 Q1
Quantity
 Market supply and demand
S2
S1

b
P2
Price

a
P1
D'

D
O Q2 Q1
Quantity
 Market supply and demand
S2
S1

b
P2
Price

c
P3
a
P1
D'

D
O Q3 Q2 Q1
Quantity
 Price Elasticity
 Measure of responsiveness of demand to
changes in the commodities own price.
 If the change in price are small – point elasticity.
 If the change in price are not small – arc elasticity
Defined as
 A proportionate change in quantity demanded
resulting from a very small proportionate
change in price.
 Price Elasticity

Proportionate (or %) QD

Proportionate (or %) P

Q P
ep 
Q P

ep Q P

P Q
 Price Elasticity
If demand curve is linear,

Q  b0  b1 P D

P
e p  b1.
F
P1

Q
ΔP
F`
P2
E

O
Q1
Q2 D1
ΔQ
 Price Elasticity
P Ep = ∞
D
Ep > 1
Ep = 1

Ep < 1

Ep = 0

O D` Q
P P If ep=0, demand is perfectly inelastic
D
If ep=∞, demand is perfectly elastic

a b
P1
D P2 b

P1 a

O Q1 Q2 Q
fig
O Q1 Q
fig
P

O Q
fig
 If ep=0, demand is perfectly inelastic
 If ep=1, demand is unitary elastic
 If ep=∞, demand is perfectly elastic
 If 0<ep<1, demand is inelastic
 If 1<ep< ∞, demand is elastic
Price elasticity (Arc) of demand

Proportionate (or %) QD

Proportionate (or %) P

QD P
mid QD
÷
mid P
 Measuring elasticity using the arc method
10

m
8

n
6

P (Rs.)

2 Demand

0
0 10 20 30 40 50
Q (000s)
 Measuring elasticity using the arc method
10
ep = Q P
mid Q
 mid P
m
8

7 P = –2
n
6
Q = 10
P (Rs.) Mid P
4

2 Demand

0
0 10 15 20 30 40 50
Mid Q Q (000s)
 Measuring elasticity using the arc method
10
ep = Q P
mid Q
 mid P
m
8 10 2
=
15
 7
7 P = –2
n
6
Q = 10
P (Rs.) Mid P
4

2 Demand

0
0 10 15 20 30 40 50
Mid Q Q (000s)
 Measuring elasticity using the arc method
10
ep = Q P
mid Q
 mid P
m
8 10 2
=
15
 7
7 P = –2 = 10/15 x 7/2
n
6
Q = 10
P (Rs.) Mid P
4

2 Demand

0
0 10 15 20 30 40 50
Mid Q Q (000s)
 Measuring elasticity using the arc method
10
Q P
ep =  mid P
mid Q
m
10 2
8 =
15
 7
7 P = –2 = 10/15 x 7/2
n
6 = 70/30
Q = 10
P (Rs.) Mid P
4

2 Demand

0
0 10 15 20 30 40 50
Mid Q Q (000s)
 Measuring elasticity using the arc method
10
Q P
ep =  mid P
mid Q
m
10 2
8 =
15
 7
7 P = –2 = 10/15 x 7/2
n
6 = 70/30
Q = 10 = 7/3 = 2.33
P (Rs.) Mid P
4

2 Demand

0
0 10 15 20 30 40 50
Mid Q Q (000s)
 Problem 1:
 Yesterday, the price of Mangoes was
Rs. 300 a box, and Julie was willing to
buy 10 boxes. Today, the price has
gone up to Rs.375 a box, and Julie is
now willing to buy 8 boxes. Is Julie's
demand for mangoes elastic or
inelastic? What is Julie's elasticity of
demand?
 Problem 2:
 The demand equation for a product is
Qd = 50 – 2.25P
Calculate the price elasticity if P = 2
 Elasticity

Demand, consumer expenditure

and firm’s revenue
 Expenditure/ Revenue
4

P(Rs.) 2

Consumers’ total expenditure

=
1 firms’ total revenue
= D
RS.2 x 3m = Rs.6m
0
0 1 2 3 4 5
Q (millions of units per period of time)
 Elastic demand between two points

Expenditure falls
as price rises

P(Rs.)
b
5
a
4
D

0 10 20
Q (millions of units per period of time)
 Inelastic demand between two points
Expenditure rises
as price rises

c
8

P(Rs.)

a
4

0 15 20
Q (millions of units per period of time)
P Totally inelastic demand (ep = 0) P
D Infinitely elastic demand (ep =∞)

a b
P2 b P1 D

P1 a

O Q1 O Q1 Q2
fig Q fig Q

P
Unit elastic demand (PD = –1)

Expenditure stays
the same as price
a changes
20

b
8
D

O 40 100 Q
fig
 Elasticity

Price elasticity of demand and

time
Response of demand to an increase in supply
P
S1

S2

a
P1

O Q1 Q
Response of demand to an increase in supply
P
S1

S2

a
P1

P2 b

D short-run

O Q1 Q2 Q
Response of demand to an increase in supply
P
S1

S2

a Demand is more
P1 c elastic in the long
P3 run.
P2 b
D long-run

D short-run

O Q1 Q2 Q3 Q
 Application

 You are the manager of a theater.

The owner of the theater tells you
that the it is running short of funds
and suggests you to consider a
change in the price of admission to
increase total revenue.
What do you do?