GROUP 1

ANKITA SINGHANIA 21BSP1186

ASHWINI SINGH 21BSP1192
ANKITA SAHA 21BSP1185
PARTH SABOO 21BSP1220
ECONOMICS PROJECT
SAHIL PODDAR 21BSP1244
 ELASTICITY
Elasticity is a general measure of the responsiveness of an economic variable in response to a change in
another economic variable. Economists utilize elasticity to gauge how variables affect each other. In other
words;

 Elasticity measures the sensitivity of one variable to another.

 It is a number that tells us the percentage change that will occur in one variable in response to a 1
(one)percent increase in another variable.
 If price increases by 10 percent, how much will quantity demanded change?
 Elasticity Percentage change in one variable resulting from a 1 percent change (increase/decrease)
in another.
 Use percentages.
 Unit free measure.
 Easier to compare elasticities.

TYPES OF ELASTICITY:
The three major forms of elasticity are price elasticity of demand, cross-price elasticity of demand, and
income elasticity of demand –

1. Income elasticity of demand - Percentage change in the quantity demanded resulting from a 1-
percent increase in income.
2. Cross-price elasticity of demand - Percentage change in the quantity demanded of one good
resulting from a 1-percent increase in the price of another.
3. Price elasticity of demand - Tells you “how much” quantity demanded changes when price
changes. It shows the responsiveness of a change in quantity demanded to a change in price.

PRICE ELASTICITY OF DEMAND

Price elasticity of demand demonstrates how a change in price affects the quantity demanded. It is
computed as the percentage change in quantity demanded over the percentage change in price, and it will
commonly result in a negative elasticity because of the law of demand.

The law of demand states that an increase in price reduces the quantity demanded, and it is why demand
curves are downwards sloping. It is common to simply drop the negative of the quotient.

 Measures buyers’ responsiveness to price changes.

 Elastic demand:
o Sensitive to price changes.
o Large change in quantity to a given change in price.

 Inelastic demand:
o Insensitive to price changes.
o Small change in quantity to a given change in price.

Arc price elasticity - The midpoint method is a commonly used technique to calculate the percent
change of price. The primary difference is that it calculates the percentage change of quantity demanded
and the price change relative to their average.

 Use the midpoint formula.

 Ensures consistent results.

FORMULA & TYPES FOR PRICE ELASTICITY OF DEMAND

  Ed > 1 demand is elastic.
 Ed = 1 demand is unit elastic.
 Ed < 1 demand is inelastic.
 Extreme cases:
o Perfectly inelastic.
o Perfectly elastic.
 Price elasticity depends upon the availability of substitutes.

CASE LET

The board of trustees of a leading private college is faced with a critical financial
problem. At present, tuition rates the college is losing Rs. 75 lakhs per year. The
chairman of the college urges that fee be raised by Rs. 750 over the present rate of
Rs. 3000. At present the total number of students being 10000, he projects that
this increase would cover the Rs. 75 lakhs shortfall in revenue. Student leaders
protest that they cannot afford a fee hike but the chairman and the faculty support
the fee hike. The students estimate that elasticity for enrolment at the college is
-1.3 with respect to tuition fee changes. Faced with this startling information, the
board of trustees rejects the tuition increase and orders the chairman to find some
other way to meet the revenue deficiency.

Discuss the above case with respect to the following:

a) Explain the statement “elasticity for enrolment at the college is -1.3 with respect
to tuition fee changes.”
b) Explain why the board of trustees rejected the proposal to increase the tuition
fees.

Solution
Ans a) The college administration sees a tuition increase as a means of increasing
total revenue. The board of trustees is likely to reject the administration’s proposal
only if the students can demonstrate that it would not achieve this purpose.
As per the case-let,
The elasticity for enrollment at the college is – 1.3 with respect to tuition changes.
That is, a 1 percent increase in tuition fees would decrease enrollments by 1.3
percent. The data are current and the paper was written by a highly respected
scholar. Based on the elasticity estimate from the paper, the students calculate
that the proposed tuition hike of 25 percent would decrease enrollment by 32.5
percent, or nearly 3,300 students. This would result in a decrease in total revenue
from Rs. 3 crores at present (i.e., Rs. 3,000 x 10,000) to about Rs. 2.5 crores after
the tuition increase
(i.e., Rs. 3,750 x 6,700).

GRAPHICAL REPRESENTATION OF THE CASE-LET

Ans b)

Faced with this startling information, the board of trustees asks the college
chairman if the cost savings from fewer students would compensate for the
revenue drop. The chairman replies that most of the college’s costs are
independent of enrollment and, hence, there would not be a significant cost
saving. By a unanimous vote, the board of trustees rejects the tuition increase
and orders the chairman to find some other way to meet the revenue
deficiency.

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