ANALYTICAL QUESTION:

Hindustan Automobile Workers Federation

A.Mahalingam, the President of the Hindustan Automobile Workers Federation suggested an

average reduction of 4 percent in the price of a car. The automobile market was weak,
which resulted in unemployment. Lower prices would lead to greater sales and would stimulate
employment. Mahalingam believed that a 4 percent reduction in price would increase sales by
16 per cent. R.Chatterjee, representing the managements of the automobile manufacturers disagreed
with Mahalingam's estimation. Chatterjee cited studies which indicated price elasticities ranging
from 0.5 to 1.5. Chatterjee made it clear that he was referring to the elasticity of demand in response
to a permanent price change of all manufacturers. He admitted that the elasticity to a temporary
price cut might be greater. The studies to which Chatterjee referred found elasticities ranging from
0.65 to 1.53.

Questions

1. Explain the concept of elasticity of demand and the factors that affect it

2. Interpret the meaning of R. Chatterjee's demand estimate ranging from .65 to 1.53.
Explain the significance of demand elasticity in taking business decisions.