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Inelastic demand 0< Є < 1

Inelastic demand 0< Є < 1. Price rises: As P , Q percentage change in P > percentage change in Q. Now TR = P x Q TR will also . Price falls: As P , Q percentage change in P > percentage change in Q. Now TR = P x Q TR will also.

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Inelastic demand 0< Є < 1

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  1. Inelastic demand 0< Є < 1 • Price rises: As P , Q percentage change in P > percentage change in Q. Now TR = P x Q TR will also . • Price falls: As P , Q percentage change in P > percentage change in Q. Now TR = P x Q TR will also . 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.

  2. Recap

  3. Elastic demand Є > 1 • Price rises: As P , Q percentage change in P < percentage change in Q. Now TR = P x Q TR will also . • Price falls: As P , Q percentage change in P < percentage change in Q. Now TR = P x Q TR will also . 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.

  4. Unit elastic demand Є = 1 • Price rises: As P , Q percentage change in P = percentage change in Q. Now TR = P x Q TR will remain unchanged. • Price falls: As P , Q percentage change in P = percentage change in Q. Now TR = P x Q TR will remain unchanged. NOTE :In case of unit elastic demand TR remains unchanged.

  5. Example

  6. TR = 40 x 25 = 1000 TR = 100 x 10 = 1000 TR Remains Unchanged

  7. 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

  8. Totally inelastic demand Є = 0 TR 1 P P2 TR 2 P1 Qd Q1 TR1 at P1 > TR2 at P2 e.g. Water at sale.

  9. Infinitely elastic demand Є = 1 P TR 1 TR 2 P Qd Q1 Q2 TR1 at Q1 > TR2 at Q2 e.g. Small scale grain farmers who are price takers.

  10. Determinants of price elasticity of demand 1.The number & closeness of substitute good The price elasticity of demand for a particular ‘brand’ of a product will probably be fairly high

  11. Example • Rank the following in ascending order of elasticity. • Trousers . 1 • Jeans . 2 • Black Jeans . 3 • Levis black Jeans . 4

  12. Example Arranged In ascending order of elasticity Cold drink Least Elastic Soda Black soda Most Elastic Pepsi

  13. Determinants of price elasticity of demand The higher the proportion of our income spent on a good, the more we will be forced to cut consumption when its price rises. 2. The proportion of income spent on a good 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.

  14. 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.

  15. 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 P2 C K P1 A B D2 D1 Q1 Q3 Q2 Q

  16. Pricing bus tickets

  17. Price elasticity of supply 8 Є = 0 Є = P P Qs O O Qs

  18. Less elastic S1 P S2 More elastic P2 P1 Qs O Q1 Q2 Q3

  19. S1 P S2 b 6 S3 d a 3 f c 2 e 1 O 2 3 4

  20. Supply in different time periods SS Si P Immediate = I Short run = S b P2 c SL P3 d Long run = L P4 P1 a D2 Qs D1 O Q1 Q2 Q3

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