Demand for a commodity Implies

3. Desire to acquire it.

4. Willingness to pay for it.
5. Ability to pay for it.
 Is a measure of how much buyers and sellers respond to
changes in market conditions

 Allows us to analyze supply and demand with precision.

 Price elasticity of demand is a measure of how much
the quantity demanded of a good responds to a change
in the price of that good
 Ped measures the responsiveness of
demand fora product following a c h a n g e i n
its own
p r i c e.
 1.The number of close substitutes for a good /
uniqueness of the product .
 2. The cost of switching between dif ferent
 products .
 3. The degree of necessity or whether the good
is a luxury.
 4.The % of a consumer’s income allocated to spending on
 the good .
5.Whether the good is subject to habitual consumption .
6.Peak and of f-peak demand .
 A company considering a price change must know
what effect the change in price will have on total
revenue. Generally any change in price will have
two effects

 The Price ef fect: An increase in unit price will

tend to increase revenue a decrease in price will
tends to decrease revenue.

 The Quantity ef fect: if price increases fewer

units are sold; for price decreases more units are
sold.
 Identification of objective
 Determining the nature of goods under

consideration
 Selecting a proper method of forcasting

 Interpretation of results
 The price elasticity of demand is computed as the
percentage change in the quantity demanded
divided by the percentage change in price.

P rice elastici Pe r c e nta ge c ha nge in qua

ty of dem and ntity demandedPerce
= n t a g ec h a n g e i n p r i c e
 Example: If the price of an ice cream cone
increases from Rs2.00 to Rs2.20 and the amount
you buy falls from 10 to 8 cones, then your
elasticity of demand would be calculated as

(10  8)

( 2. 12 00 0 2 . 0 0 
2
)  211.000 20
00 %
10
 The midpoint formula is preferable when calculating
the price elasticity of demand because i t gives the
same answer regardless of the direction of the
change.
 he formula used to calculate coefficients of price elasticity of
demand for a given product .

( Q2  Q 2 1
) /
P rice elastici
[(Q P2  Q 1 )/ P2]
ty of dem and
= 1 ) / [ ( P 2 P
1 ) / 2 ]
 ELASTIC DEMAND
 Quantity demanded responds strongly to changes in
price.
 Price elasticity of demand is greater than one.

 INELASTIC DEMAND
 Quantity demanded does not respond strongly to
price changes.
 Price elasticity of demand is less than one.
 If PEoD > 1 then Demand is Price Elastic (Demand is sensitive
to price changes)
 If PEoD = 1 then Demand is Unit Elastic
 If PEoD < 1 then Demand is Price Inelastic (Demand is not
sensitive to price changes)
 (100 -
E D  50) (100  50)/2
(4.00 -
5.00)
(4.00 
Price
 67 percent  5.00)/2
5 3
4 22 percent
Demand

0 50 100 Quantity
Demand is price elastic
 Price of the good Quantity demanded per week
Rs 5 100
Rs 4 110

1) % change in the price = 10%

2) % change in the quantity = 20%

Price Elasticity Of Demand= 10% / 20%

= 0.5

The demand is price inelastic because the % change in the demand of 20% is
greater than the % change in quantity demanded of 10%.
 Perfectly Inelastic
 Quantity demanded does not respond to price
changes.
 Perfectly Elastic
 Quantity demanded changes infinitely with any
change in price.
 Unit Elastic
 Quantity demanded changes by the same
percentage as the price.
 (a) Perfectly Inelastic Demand: Elasticity Equals 0

Price
Demand

4
1. An
increase
in price . . .

0 100 Quantity
2. . . . leaves the quantity demanded unchanged.
 (b) Inelastic Demand: Elasticity Is Less Than 1

Price

4
1. A 22% Demand
increase
in price . . .

0 90 100 Quantity
2. . . . leads to an 11% decrease in quantity demanded.
 (c) Unit Elastic Demand: Elasticity Equals 1
Price

4
1. A 22% Demand
increase
in price . . .

0 80 100 Quantity
2. . . . leads to a 22% decrease in quantity demanded.

Copyright©2003 Southwestern/Thomson Learning

 (d) Elastic Demand: Elasticity Is Greater Than 1
Price

4 Demand
1. A 22%
increase
in price . . .

0 50 100 Quantity
2. . . . leads to a 67% decrease in quantity demanded.
 (e) Perfectly Elastic Demand: Elasticity Equals Infinity
Price
1. At any price
above Rs 4, quantity
demanded is zero.

$4 Demand

2. At exactly Rs 4,
consumers will
buy any quantity.

0 Quantity
3. At a price below Rs 4,
quantity demanded is infinite.
 Total revenue is the amount paid by buyers and
received by sellers of a good.
 Computed as the price of the good times the

quantity sold.

TR = P x Q
Price

P × Q = Rs 400
P
(revenue) Demand

0 100 Quantity

Q
Copyright©2003 Southwestern/Thomson Learning
 With an inelastic demand curve, an increase in
price leads to a decrease in quantity that is
proportionately smaller. Thus, total revenue
increases.
Price Price
An Increase in price from … leads to an Increase in
Rs 1 to Rs 3… total revenue from RS 100 to
Rs 240

$3

Revenue = RS 240
$1
Revenue = Rs 100 Demand Demand

0 100 Quantity 0 80 Quantity

Copyright©2003 Southwestern/Thomson Learning

Cross Price Elasticity of demand measures the
responsiveness of demand for a product to a change in the price of
other related products.We normally focus on the links between
changes in the prices of substitutes and complements.

The formula for cross price elasticity of demand

Cross Price Elasticity of Demand (CPed) = % change in the
demand for Good X % change in the price of Good Y.

When there is no relationship between two products, the cross

price elasticity of demand is zero.
The usefulness of price elasticity for producers .

Firms can use price elasticity of demand (PED) estimates to predict:

The effect of a change in price on the total revenue & expenditure on a product.
The likely price volatility in a market following unexpected changes in supply – this
is important for commodity producers who may suffer big price movements from time to
time.

The effect of a change in a government indirect tax on price and quantity

demanded and also whether the business is able to pass on some or all of the tax onto the
consumer.

Information on the price elasticity of demand can be used by a business as part of a policy
of price discrimination (also known as yield management). This is where a monopoly
supplier decides to charge different prices for the same product to different segments of the
market e.g. peak and off peak rail travel or yield management by many of our domestic and
international airlines.
The price elasticity of demand can be applied toa
variety of problems in which one wants to know the
expected change in quantity demanded or revenue
given a contemplated change in price.
Elasticity is an important concept in understanding the incidence of
indirect taxation,distribution of wealth and different types of good
s as they relate to the theory of consumer choice.
Elasticity is also crucially important in any discussion of welfare
distribution, in particular consumer surplus, producer surplus, or go
vernment surplus.
Elasticity of Supply
The responsiveness of supply to changes
in price
If es is inelastic (<1)- it will be difficult for suppliers to react swiftly to
changes in price
If es is elastic(>1) – supply can react quickly to changes in price

% Δ Quantity Supplied
____________________
es =
% Δ Price
Factors affecting price elasticity of
supply
1. Nature of industry
2. Nature constraint
3. Time period
4. Risk taking
5. Nature of good
DUOPOLY INTRODUCTION:
Two Words
Duo---Two
Polies---Sellers
Market with TWO sellers
Just below Monopoly
Simplest Form of Oligopoly
Have Power to control Market
Super Normal Profits
Two Classifications:
One in which there is coordination b/w duopolists.
One in which there is no coordination.