1 DEMAND SUPPLY DEMAND SUPPLY 2 Price Elasticity

1 DEMAND SUPPLY

DEMAND SUPPLY 2 Price Elasticity of Demand “Measures the degree of responsiveness of the quantity demanded of a commodity to changes in its prices, ceteris paribus. It involves a movement along the demand curve in response to price change” Tutorial Notes

DEMAND SUPPLY 3 Price Elasticity of Demand PED of a Good A = % % quantity demanded of good A in price of good A Tutorial Notes

DEMAND SUPPLY Price Elasticity of Demand 4 Price Elasticity of 2 Product/Service In India P P Bu rg Rice P 1 er P 0 D 1 D 0 Q 1 Q 2 Q

DEMAND SUPPLY 5 Price Elasticity of Demand (PED) Quantity Demanded For 2 Types of Food Rice Vs Burgers in India 1. For a price inelastic product, rice in this example, a big change in price does not extensively affect the quantity demanded of the product. P P Elastic Rice Inelastic P 1 P 0 2. For the producer of rice, his lost in revenue, red shade, is lesser than the revenue gained (yellow shade) when Bu price is increased for rice. rg er *Revenues is calculated as PXQ P 0 D 1 D 0 Q Q

DEMAND SUPPLY 6 Factors that Influence PED Availability of Substitutes -The more substitutes there are the greater the PED ie. the more elastic the PED of the good. The slope of the demand curve would not be very steep. -The less substitutes there is for the product, the steeper the slope of the demand curve. Time - When there is a sudden change in price of say, rice, people cannot react as fast in the short run so they will still have to suffer the increase in prices of rice. This makes the slope of the demand curve steep. But with time, when substitute for rice can be found or perhaps there is a change in taste and preference for rice, the demand curve will become less steep. Proportion of Income Spent on Commodity If you only spend a small portion of your income on the good like say a pen, the change in its price by 10% is not going to make you change your quantity demand for it by much as it is cost very little unlike a car or clothing. So the slope for these items can be steep. P D 1 D 0 Qty