Elasticity Ppt

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MicroeconoMicroeconomicsmics

Price Elasticity of Price Elasticity of DemandDemand

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Preparing this term paper on Preparing this term paper on “Price Elasticity of Demand” “Price Elasticity of Demand” was a wonderful experience was a wonderful experience for us. We would like to thank for us. We would like to thank our faculty, Mrs. Monsura our faculty, Mrs. Monsura Zaman, Lecturer in Zaman, Lecturer in Economics,Economics, Faculty of Faculty of Business ASA University Business ASA University Bangladesh for giving us this Bangladesh for giving us this opportunity as well as for her opportunity as well as for her guidance. Finally we would guidance. Finally we would like to thank our family and like to thank our family and almighty Allah for supporting almighty Allah for supporting us the courage to carry on our us the courage to carry on our work.work.

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MicroeconoMicroeconomicsmics Price Elasticity of Price Elasticity of

DemandDemand The responsiveness or The responsiveness or

sensitivity of consumers to a sensitivity of consumers to a price change is measured by a price change is measured by a product’s Price elasticity of product’s Price elasticity of demanddemand Price elasticity of Price elasticity of demand shows that how much demand shows that how much quantity demanded of a quantity demanded of a commodity changes when its commodity changes when its price changes. The most price changes. The most common elasticity common elasticity measurement is that of price measurement is that of price elasticity of demand. It elasticity of demand. It measures how much measures how much consumers respond in their consumers respond in their buying decisions to a change in buying decisions to a change in price.price.

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There are five types of price elasticity There are five types of price elasticity of demand:of demand:

Unit elasticity Unit elasticity More elasticity More elasticity More inelasticMore inelastic

Perfectly inelasticPerfectly inelasticPerfectly elasticPerfectly elastic

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Price elasticity can be measured Price elasticity can be measured with the following equation-with the following equation-

Price elasticity of demand =

% change in price

% change in quantity

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Unit elasticity(Ed=1)

Unit elasticity(Ed=1)

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MicroeconoMicroeconomicsmicsUnit

elasticity(Ed=1)

A change in the price of a A change in the price of a good will bring about a good will bring about a proportionate change in proportionate change in the quantity demanded. the quantity demanded. That means the rate of That means the rate of

change between price and change between price and quantity demanded is quantity demanded is

same. If price decrease 50 same. If price decrease 50 percent then quantity percent then quantity

demanded will be demanded will be increased 50 percent.increased 50 percent.

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MicroeconoMicroeconomicsmicsPrice = 4, 3 & Quantity Price = 4, 3 & Quantity

Demanded= 120, 150Demanded= 120, 150

When price is 4tk, quantity When price is 4tk, quantity demanded is 120. When demanded is 120. When

price decreases from 4tk to price decreases from 4tk to 3tk then quantity 3tk then quantity

demanded is also changed demanded is also changed but proportionately. Then but proportionately. Then the quantity demanded is the quantity demanded is

150.150.

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MicroeconoMicroeconomicsmicsHere,Here,

Price=4, Qd=120Price=4, Qd=120 Price=3, Qd=150Price=3, Qd=150 Qd=150-120=30Qd=150-120=30

P = 4-3= 1P = 4-3= 1By using equation we can say,By using equation we can say,

Ed= (Ed= (Qd/Qd/P) × (P/Qd)P) × (P/Qd) = (30/1 × 4/120)= (30/1 × 4/120)

=1

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0

D''

120 Quantity demand150

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4ED = –1

A Unit Elastic Demand Curve

Price

Figure 1.1 Unit Elasticity

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More Elasticity(Ed>1)More Elasticity(Ed>1)

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MicroeconoMicroeconomicsmicsMore

Elasticity(Ed>1) A small change in the price of A small change in the price of

the commodity leads to a the commodity leads to a more than proportionate more than proportionate change in the quantity change in the quantity demanded. That means demanded. That means change in the quantity change in the quantity

demanded is greater than demanded is greater than change in price.change in price.

Luxurious goods like video Luxurious goods like video

cassette and television and cassette and television and substitutes goods are included substitutes goods are included

in more elastic demand. in more elastic demand.

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MicroeconoMicroeconomicsmicsPrice = 4,3Quantity Price = 4,3Quantity

Demanded=120,160Demanded=120,160When price is 4tk, quantity When price is 4tk, quantity

demanded is 120. When demanded is 120. When price decreases from 4tk to price decreases from 4tk to

3tk then quantity 3tk then quantity demanded is increased at a demanded is increased at a

greater rate from greater rate from proportionate change that proportionate change that

is 120 to 160.The change is is 120 to 160.The change is more than proportionate more than proportionate

change.change.

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P = 4-3= 1P = 4-3= 1

By using equation we can say,By using equation we can say, Ed= (Ed= (Qd/Qd/P) × (P/Qd)P) × (P/Qd)

= (40/1 × 4/120)= (40/1 × 4/120) =1.33=1.33

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0

D

Quantity demand160120

3ED > 1

A More Elastic Demand Curve

Price

Figure 1.2 More Elasticity

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More Inelastic(Ed<1)More Inelastic(Ed<1)

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MicroeconoMicroeconomicsmicsMore

Inelastic(Ed<1)A change in price will bring about a A change in price will bring about a

less than proportionate change in less than proportionate change in the quantity demanded. That the quantity demanded. That

means the change in the quantity means the change in the quantity demanded is lower than change in demanded is lower than change in

price.price.Basic necessities goods (rice, salt) Basic necessities goods (rice, salt)

are included in this case.are included in this case.

Price = 4, 3 Quantity Demanded = Price = 4, 3 Quantity Demanded = 120, 140120, 140

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MicroeconoMicroeconomicsmics When price is 4tk, quantity demanded When price is 4tk, quantity demanded

is 120. When price decreases from is 120. When price decreases from 4tk to 3tk then quantity demanded is 4tk to 3tk then quantity demanded is

increased at a lower rate from increased at a lower rate from proportionate change that is 120 to proportionate change that is 120 to

160.160.

Here,Here, Price=4, Qd=120Price=4, Qd=120 Price=3, Qd=140Price=3, Qd=140 Qd=140-120=20Qd=140-120=20

P = 4-3= 1P = 4-3= 1


= (20/1 × 4/120)= (20/1 × 4/120) =0.66=0.66

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0

DQuantity demand

4

3

120 140

A More Inelastic Demand Curve

ED < 1

Price

Figure 1.3 More Inelastic

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Perfectly Inelastic(Ed=0)

Perfectly Inelastic(Ed=0)

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MicroeconoMicroeconomicsmicsPerfectly

Inelastic(Ed=0)

The quantity demanded is totally The quantity demanded is totally unresponsive to changes in price that unresponsive to changes in price that means there is no change in quantity means there is no change in quantity demanded when its price changes.demanded when its price changes.

Price = 4, 3 & Quantity Demanded Price = 4, 3 & Quantity Demanded =120, 120=120, 120

When price is 4tk, quantity demanded When price is 4tk, quantity demanded is 120. When price decreases from 4tk is 120. When price decreases from 4tk to 3tk then quantity demanded are to 3tk then quantity demanded are still 120. There is no change in still 120. There is no change in quantity demanded...quantity demanded...

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P = 4-3= 1P = 4-3= 1


= (0/1 × 4/120)= (0/1 × 4/120) =0=0

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Quantity0

D'

ED = 0

120

3

4

Price

A Perfectly Inelastic Demand Curve

Figure 1.4 Perfectly Inelastic

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Perfectly elastic(Ed= ∞)

Perfectly elastic(Ed= ∞)

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MicroeconoMicroeconomicsmicsPerfectly elastic(Ed= ∞)

The prices of a commodity is The prices of a commodity is totally unresponsive to changes in totally unresponsive to changes in

quantity demanded that means quantity demanded that means there is no change in price when there is no change in price when

quantity demand changes.quantity demand changes.

Price = 4, 4 & Quantity Demanded = Price = 4, 4 & Quantity Demanded = 120, 150120, 150

When price is 4tk, quantity When price is 4tk, quantity demanded is 120. When no demanded is 120. When no change in price brings a change in change in price brings a change in quantity demanded from 120 to quantity demanded from 120 to 150. There is no change in price of 150. There is no change in price of a commodity...a commodity...

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Price=4, Qd=120Price=4, Qd=120 Price=4, Price=4, Qd=150Qd=150 Qd=150-120=30Qd=150-120=30

P = 4-4= 0P = 4-4= 0

By using equation we can By using equation we can say,say,

Ed= (Ed= (Qd/Qd/P) × (P/Qd)P) × (P/Qd) = (30/0 × 4/120)= (30/0 × 4/120)

= ∞= ∞

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MicroeconoMicroeconomicsmicsA Perfectly Elastic Demand Curve

0

D

ED =

4

Quantity120 150

Price

Figure 1.4 Perfectly Elastic

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MicroeconoMicroeconomicsmicsFactors that determine Factors that determine the price the price

Elasticity of Elasticity of demanddemand

1. Availability of close substitutes - 1. Availability of close substitutes - price elasticity of demand will price elasticity of demand will

tend to be: tend to be: - High if there are close - High if there are close

substitutes.substitutes. - Low if there are no - Low if there are no

close substitutes.close substitutes.2. Necessities vs. luxury goods - price 2. Necessities vs. luxury goods - price

elasticity of demand tend to be: elasticity of demand tend to be:

- Low if the good is a - Low if the good is a necessitynecessity

- High if the good is a - High if the good is a luxuryluxury

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3. Time - long-run p rice elasticity of 3. Time - long-run p rice elasticity of demand is often higher than the demand is often higher than the

short-run elasticityshort-run elasticity

4. Price relative to income - price 4. Price relative to income - price elasticity of demand will tend to be: elasticity of demand will tend to be:

- High if the price of the good is high - High if the price of the good is high relative to incomerelative to income

- Low if the price of the good is low - Low if the price of the good is low relative to incomerelative to income

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Elasticity Ppt

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