APPLICATION
Elasticity
Inelastic Demand
Percentage change in price is greater than percentage change in
quantity demand.
Price elasticity of demand is less than one.
Elastic Demand
Percentage change in quantity demand is greater than percentage
change in price.
Price elasticity of demand is greater than one.
In the case of demand curve Da,
when the price changes from $5 to
Perfectly Inelastic $10, the quantity demanded does not
Demand respond at all and remains at 50.
All such demand curves where
quantity demanded is totally
unresponsive to changes in price are
called perfectly inelastic demand
curves. Further, such demand curves
imply that when price increases, the
total revenue increases and vice-
versa.
Elasticity is equals to 0
Relatively Inelastic In the case of demand curve Da,
Demand when the price changes from $5 to
$10 (50%), the quantity demanded
decrease (28%).
Demand curves which have an
elasticity coefficient between 0 and 1
are called relatively inelastic or simply
inelastic. When the price falls, the
quantity demanded expands but total
revenue still decreases.
Elasticity is less than 1
It occurs when consumer’s demand for a
Unitary Elastic product is proportionally related to the
Demand product’s price.
Elasticity is equals 1
Relatively Elastic In the case of Db when price
Demand increases from $5 to $10 (50%), the
quantity demand decreases (67%).
Such demand curves have an
elasticity coefficient above 1 and
have the property that when price
decreases total revenue increases
and vice-versa.
Elasticity is greater than one
When the price is $10, 50 units are being
sold and the total revenue is $500. When
the price falls to $5, the quantity
Perfectly Elastic
demanded increases infinitely and so
Demand does the total revenue. On the other
hand, when price rises above $10 the
quantity demanded falls to Zero and total
revenue also falls to zero.
Such horizontal demand curves, where
quantity demanded is infinitely responsive
to price changes, are called perfectly
elastic demand curves. These perfectly
elastic demand curves have a property
that when price decreases total revenue
increases, and vice-versa.
Elasticity equals infinity
Perfectly Elastic
Demand Perfectly elastic demand is an extreme
example.
So here are the examples of highly elastic
demand:
luxury goods
goods that take a large share of
individual’s income
Good’s with many substitutes
Important factors that determines the
Elasticity of Demand
Income Elasticity
Complements: If the price of bread (Y) rose ceteris paribus, there would
be a decrease in the quantity demanded of bread (Y) and a decrease in
the quantity demanded of butter (X). Negative cross-price elasticity
Substitutes: If the price of coffee rose ceteris paribus, there would be a
decrease in the quantity demanded of coffee and an increase in the
quantity demanded of tea as consumers would readily "substitute" tea for
coffee. Positive cross-price elasticity
Elasticity of Supply
Spare production Capacity- high Pes when business or the economy has
plenty of spare capacity.
Stocked of finished product and components: high level of stocks means
that supply can quickly be adjusted to meet changes in demand
The ease and cost of factor substitution- if both capital and labor
resources are occupationally mobile the elasticity of supply for a product
tends to be high because capital and labor can be swapped with little
loss of efficiency and productivity.
Time period involved in the production process-Pes is higher the longer the
time period that a firm is allowed to adjust its production levels.
Price Elasticity of Supply
Supply of a commodity is
said to be unit elastic, if the
percentage change in
quantity supplied is equal
to the percentage change
in price.
Price Elasticity of Supply