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.

Recap

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.

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.

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

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

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

Totally inelastic demand

ЄЄ = 0 = 0P

QdQ1

P1

P2

TR1 at P1 > TR2 at P2

e.g. Water at sale.

TR 2

TR 1

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

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

Example

• Rank the following in ascending order of elasticity.

• Trousers . 1

• Jeans . 2

• Black Jeans . 3

• Levis black Jeans . 4

Example

Cold drinkCold drink

SodaSoda

Black soda Black soda

Pepsi Pepsi

Least Elastic

Most Elastic

Arranged

In

ascending

order

of

elasticity

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

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.

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.

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

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

Price elasticity of supply

ЄЄ = = P

ЄЄ = 0 = 0

P

Qs

QsO O

8

P

QsO

P1

P2

S1

S2

Q1 Q2 Q3

More elastic

Less elastic

P

O

3

S1

3

S2

d S3

4

f

e

6

c

b

1

2

a

2

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