Elasticity

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Slide 1: 

12/29/2011 1 SHIFTS IN DEMAND S S P2 P1 D¹ D² D¹ D² Dº Dº P0 0 θ1 θ0 θ2

Slide 2: 

SNIPPETS Demand for maize is expected to rise further and the price of maize Which was 6800 to 7000 a tonne is also likely to go up Farmers encouraged by a good price realisation may increase area under cultivation of maize (ET 8th June) Jewellery demand constituted about 67% of the total demand for gold In 2006 with India being the major jewellery buying countries of the world . The demand for jewellery has picked up recently after witnessing An average fall of 20% in the recent few quarters on account of postponement of purchases due to high prices has resulted in a marginal drop in prices by 0.9% Supply side:However gold prices are likely to grow up due to reduced Production of gold to the extent of 2471 metric tonnes (3 yr low) (ET 4TH June)

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Coke and Pepsi suffer their worst summer this year with a sales dip Of 15-17%. A relatively mild summer in April-May coupled with shifting consumer preferences towards functional beverages like juices And juice based drinks ARE THE REASONS FOR THIS Dabur’s real and pepsi Co’S Tropicana -18% growth (ET-6TH June} Demand for and production of imitation jewellery increases owing to fluctuation in prices Of gold and silver ET-7TH June After being highly popular in Japan , Italy and Germany Today there are nearly 160 retailers in India as compared to 12 in 2003 for PLATINUM . A record 300% rise in demand in platinum. Jewellery . Shift in taste for the more elegant and durable metal. Tanishq and Kiah have come out with platinum range to satisfy Customers

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Of the annual TV sales of about 10 million in India 90 people had Shifted from curved to flat and now manufactures are advertising the slim model to resemble the far costlier LCD.Slim category has grown 30-35% already due to advertisement-LG,Samsung and Haier. ET 4TH June Strong economic growth witnessed in emerging economies and demand for biofuels leads to increase in demand for oilseeds in india- ET 28t

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A SIMPLE NUMERICAL EXAMPLE-WORLD OIL MARKET Short run demand for oil D= 35.5 -0.03P Short run competitive supply of oil S= 18.0 +0.04P Calculate the following (ALTERNATE SCENARIOS) Equilibrium price in the market currently If OPEC supplies 14bb/year If demand for oil drops by 5bb/ year Quantity supplied by Saudi Arabia stops due to political upheaval (They contribute 3bb per year to OPEC)

ILLUSTRATIONS : 

12/29/2011 6 ILLUSTRATIONS 1) GIVEN BELOW IS THE WEEKLY DEMAND AND SUPPLY FOR MILK (A) DERIVE THE DEMAND AND SUPPLY FUNCTION (B) AT WHAT PRICES WILL NO MILK BE DEMANDED (C) FIND THE EQUILIBRIUM PRICE & QUANTITY (D) INDICATE AN INCREASE IN BOTH DEMAND AND SUPPLY (BY 6lts each) GRAPHICALLY SOLUTION FORM OF A LINEAR DEMAND FUNCTION Q = α + bP α = Qty demanded when price = 0

ILLUSTRATIONS : 

12/29/2011 7 ILLUSTRATIONS ΔQ= bΔP b = ΔQ = -2 = -2 ΔP 1 Q = α - 2P – (1) PUTTING THE VALUE OF b IN eq (1) WE GET 10 = α -2 (13) α = 36

DEMAND FUNCTION = Qd = 36-2P –(2) : 

12/29/2011 8 DEMAND FUNCTION = Qd = 36-2P –(2) SUPPLY FUNCTION : FOR EVERY ONE RS. Δ IN PRICE LEVEL SUPPLY OF MILK ses BY 2 LAKH Qs = α + 2 P – (3) ( α in this case =0) (B) WHEN NO MILK IS DEMANDED DEMAND FUNCTION IS AS FOLLOWS Q=0 Q= 36-2P 2P = 36 P = 36/2 =18

CONCEPT OF ELASTICITY : 

12/29/2011 9 CONCEPT OF ELASTICITY Responsiveness of QUANTITY DEMANDED to a) Price b) Income c) Advertisement outlay d)Cross elasticity Price elasticity Ep = Percentage change in quantity demanded Percentage change in price Income elasticity Percentage change in Quantity demanded Percentage change in Income Advertisement Elasticity : Percentage change in Advertisement expenditure Percentage change in Quantity demanded

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12/29/2011 10 CROSS ELASTICITY PERCENTAGE CHANGE IN QUANTITY DEMANDED OF X PERCENTAGE CHANGE IN PRICE OF Y WHERE X&Y ARE RELATED GOODS

PRICE ELASTICITY OF DEMAND : 

12/29/2011 11 PRICE ELASTICITY OF DEMAND RESPONSIVESS OF THE QUANTITY DEMANDED TO CHANGE IN PRICE ep = PERCENTAGE Δ in Qty demanded PERCENTAGE Δ in PRICE USING CALCULAS WE GET P δQ δP Q δQ = INFINITISMAL Δ IN QTY δP = INFINITISMAL Δ IN PRICE P = ORIGINAL PRICE OF GOOD Q = ORIGINAL QTY OF GOOD

PRICE ELASTICITY OF DEMAND : 

12/29/2011 12 PRICE ELASTICITY OF DEMAND WITHOUT USING CALCULAS LET Q1 & P1 BE ORIGINAL VALUES Q 2 & P2 BE NEW VALUES ep = Q 2 - Q1 P1 P2 - P1 Q1 EG ASSUME P1 = 5 , P2 = 10 Q1 = 20 , Q 2 = 10 ep = 10 - 20 5 = -0.5 10 - 5 20 So As PRICE ses Qty DEMANDED FALLS BY (-0.5) 50%

INCOME ELASTICITY (ey) δQ X Y Q2 - Q1 X Y1 : 

12/29/2011 13 INCOME ELASTICITY (ey) δQ X Y Q2 - Q1 X Y1 THE FOLLOWING TABLE SHOWS THE QUANTITY DEMANDED OF MEAT AT VARIOUS INCOME LEVELS . FIND ey BETWEEN SUCCESSIVE LEVELS OF INCOME INCOME QUANTITY (kg/ MONTH) DEMANDED ey 10 2 20 1.5 8000 30 0.67 16000 35 0.33 18000 25 -2.29 δY Q = Y2 - Y1 Q1

INCOME ELASTICITY (ey) : 

12/29/2011 14 INCOME ELASTICITY (ey) APPLY δQ γ Q2 - Q1 γ1 δγ Q1 γ2 - γ1 Q11 = . = 10 - 4000 = 2 2000 10 CROSS ELASTICITY (ecxy) FIND THE CROSS ELASTICITY OF DEMAND BETWEEN (a) COKE (X) AND PEPSI (Y) (b) COKE (X) AND SUGAR (Z) exy = δQx . Py δPy Qx exZ = δQx . Pz δPz Qx

Slide 15: 

12/29/2011 15 exy = δQx . Py = (10 -15) X 11-13 13 15 = 2.17 δPy Qx exz = δQx . Pz δPz Qx = (12 -15) 11-10 X 10 15 = -2 x & γ = SUBSTITUTES x & z = COMPLEMENTS

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12/29/2011 16 RELATIONSHIP BETWEEN AR, MR AND ELASTICITY TOTAL REVENUE ( TR)= PRICE(P) X QUANTITY (Q) AVERAGE REVENUE (AR) =TOTAL REVENUE PER UNIT AR= R/Q =PQ/Q MARGINAL REVENUE ( MR) = ADDITIONAL REVENUE WHICH A SELLER OBTAINS BY SELLING AN ADDITIONAL UNIT MR= δR δQ R = P.Q ……………………..eq1 Differentiating both sides of the equation we get MR= δR =P δQ +Q δP …………...eq2 δQ δQ δQ P+ Q X δP δQ

Slide 17: 

12/29/2011 17 P(1+ Q X δP) P δQ ELASTICITY OF DEMAND =/ep/= P . δQ ………….eq3 Q δP Substituting the value of ep in MR Eq WE GET.Note that elasticity Of demand has a negative sign so when modulus is removed then Minus sign appears in the formula as shown below (Since 1/e= 1/P . - δQ ) Q δP MR=P( 1-1/e) MR= AR(1-1/e)

Slide 18: 

12/29/2011 18 E=1,MR=0, TR is max and it remains same when p rises Ep>1,MR>0, TR falls as price rises Ep<1,MR<0 TR Rises when p rises RELATIONSHIP BETWEEN ep , MR ,P and TR MR=P(1-1/E)