CCT Unit 3 Elasticity of Demand Butwl: P P Q P P Q Q e Elasticity
CCT Unit 3 Elasticity of Demand Butwl: P P Q P P Q Q e Elasticity
CCT Unit 3 Elasticity of Demand Butwl: P P Q P P Q Q e Elasticity
Butwl
Elasticity of demand
The law of demand explains about the inverse relationship
between price and quantity demanded. The elasticity of
demand explains about how much the quantity demanded
changes to the price. In short the elasticity of demand is
the measure of relative change in amount purchase in
response to relative change in price. The term elasticity
expresses the degree of correlation between demand and
price. Elasticity of demand are price elasticity of demand,
cross elasticity of demand and income elasticity of
demand.
Suresh Gahire 1
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 2
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 3
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 4
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 5
CCT Unit 3 Elasticity of demand
Butwl
Measurement of elasticity
Three methods have been suggested to measure the
elasticity of demand are total outlay, proportional and
geometrical (point and arc).
Suresh Gahire 6
CCT Unit 3 Elasticity of demand
Butwl
5 100 500
4 150 600
Suresh Gahire 7
CCT Unit 3 Elasticity of demand
Butwl
5 100 500
4 125 500
Suresh Gahire 8
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 9
CCT Unit 3 Elasticity of demand
Butwl
5 100 500
4 120 480
Suresh Gahire 10
CCT Unit 3 Elasticity of demand
Butwl
Geometrical method
Point Method
Point elasticity of demand is defined as the proportionate
change in quantity demanded resulting from very small
change in price. If the change in price is very small we use
point elasticity to measure elasticity.
We know,
Q
Q Q P
Elasticity (e p ) …………1
P P Q
P
Suresh Gahire 11
CCT Unit 3 Elasticity of demand
Butwl
dQ
Its slope b1 substituting in 1 we get,
dP
P
e p b1
Q
If we move from C to D,
dQ = Q1Q2 = ED
Q = OQ1
dP = P1P2 = CE
P = OP1
Substituting in 1 we get
dQ P
ep
dP Q
ED OP1
ep .........2
CE OQ1
Suresh Gahire 12
CCT Unit 3 Elasticity of demand
Butwl
BQ1 OQ1
BC AC
BQ1 BC
OQ1 AC
Substituting in 2 we get,
ED OP1
ep
CE OQ1
BQ1 OP1
ep
OP1 OQ1
BQ1
ep
OQ1
BC
ep
AC
Suresh Gahire 13
CCT Unit 3 Elasticity of demand
Butwl
Arc elasticity
According to Baumol “arc elasticity is a measure of the
average responsiveness to price changes exhibited by a
demand curve over some finite stretch of the curve. Any
two points of demand curve makes an arc. If the change in
price is very small we use point elasticity if the change in
price is appreciable we use arc elasticity to measure
elasticity of demand. This can be explained with the help
of following diagram.
Suresh Gahire 14
CCT Unit 3 Elasticity of demand
Butwl
If we move from C to D,
dQ P
ep
dP Q
86 3
ep
23 6
e p 1
If we move from D to C,
dQ P
ep
dP Q
68 2
ep
32 8
1
ep
2
Suresh Gahire 15
CCT Unit 3 Elasticity of demand
Butwl
dQ P
ep
dP Q
P1 P 2
dQ 2
ep
dP Q1 Q 2
2
Q1 Q 2 P1 P 2
ep
P1 P 2 Q1 Q 2
Q1 Q 2 P1 P 2
ep
Q1 Q 2 P1 P 2
Suresh Gahire 16
CCT Unit 3 Elasticity of demand
Butwl
1 12 12
3 8 24 50 20 Ep<1
4 6 24 33.33 25 Ep=1
5 4 20 25 33.33 Ep>1
6 2 12 Ep>1
7 0 0
Suresh Gahire 17
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 18
CCT Unit 3 Elasticity of demand
Butwl
Conclusions
At very low level of price demand is relatively inelastic so
any increase in price increases the total revenue. Above
diagram shows when price increases from 1 to 2 total
revenue increases from 5 square unit to 8 square unit
(total revenue = price ×quantity).
At very high level of price demand is relatively elastic so
any increase in price decreases the total revenue. So to
increase total revenue price must cut down.
When elasticity equals 1 total revenue becomes maximum
and change in price do not changes total revenue.
Suresh Gahire 19
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 20
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 21
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 22
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 23
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 24
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 25
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 26
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 27
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 28
CCT Unit 3 Elasticity of demand
Butwl
Suresh Gahire 29
Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.
Alternative Proxies: