Economics

SHIFTS IN DEMAND D² D¹

S

Dº

P2 P1 P0

D²

S 0

2/20/2014

Dº θ0

D¹

θ 1 θ2

1

Fuel price Hike may cut demand. Hike in price of petrol and diesel may cause a definite slowdown in demand for these items

With the prices of petrol and diesel soaring to a new high demand for used fuel efficient cars have gone up and bigger and less efficient cars like Honda Civic, Hyundai Elantra and Ford Fiesta will bring down their prices.

At present food accounts for nearly a third of Asian personal expenditure so despite rise infood prices consumption will continue to grow at the rate of 3.7% matching the supply growth of 3.7% 2/20/2014

2

Jet,Spice to cut flight routes aimed at pruning losses following hike in ATF Rates by oil companies.Record fuel costs will plunge the airline industry back into loss this year and cause a rise in prices

However the rise in costs of fuel cannot be entirely borne by the price sensitiv Customer and has to be absorbed into their own costs Glaxo Smithkline’s Consumer Healthcare’s latest offering Women’s Horlicks was the best--ever launch because of its unique product design And advertising

2/20/2014

3

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 Quantity demanded Percentage change in Advertisement expenditure 2/20/2014

4

CROSS ELASTICITY PERCENTAGE CHANGE IN QUANTITY DEMANDED OF X PERCENTAGE CHANGE IN PRICE OF Y WHERE X&Y ARE RELATED GOODS

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5

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 δQ δP



P

δQ

=

Q INFINITISMAL Δ IN QTY

δP

=

INFINITISMAL Δ IN PRICE

P

=

ORIGINAL PRICE OF GOOD

Q 2/20/2014

=

ORIGINAL QTY OF GOOD 6

PRICE ELASTICITY OF DEMAND WITHOUT USING CALCULAS

LET ep

Q1 & P1 Q 2 & P2 = Q 2 - Q1 P2 - P1

EG ASSUME P1 Q1 ep

=

So As PRICE

2/20/2014

P1 Q1 = 5 , P2 = 20 , Q 2

10 - 20 10 - 5

BE ORIGINAL VALUES BE NEW VALUES



5

= 10 = 10 = -0.5

20

ses Qty DEMANDED FALLS BY (-0.5) 50%

7

INCOME ELASTICITY (ey) δQ X δY

Y Q

=

Q2 - Q1 X Y2 - Y1

Y1 Q1

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

4000

10

2

6000

20

1.5

8000

30

0.67

16000

35

0.33

18000

25

-2.29

2/20/2014

8

INCOME ELASTICITY (ey) APPLY

δQ δγ

γ Q1

=

=

Q2 - Q1 . γ 2 - γ1 10 2000

-

γ1 Q11 4000 10

= 2

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 2/20/2014

9

BEFORE

AFTER

COMM

P

Q

P

Q

PEPSI (Y) COKE (X) SUGAR (Z) COKE(X)

13 8 10 8

30 15 10 15

11 8 11 8

40 10 9 12

e

xy

exz

= δQx δPy =

δQx . δPz

x&γ = x &z =

2/20/2014

.

Py Qx Pz Qx

= (10 -15) X 13 11-13 15 =

(12 -15) 11-10

X

= 2.17

10 15

= -2

SUBSTITUTES COMPLEMENTS

10

PROMOTIONAL

ELASTICITY

FORMULA

e

A

2/20/2014

=

δQ δA

*

A Q

11

Illustration (ELASTICITY USING DERIVATIVES) THE DEMAND FOR MEAT IS GIVEN AS FOLLOWS Qm = 5850 – 6 Pm + 2Pc + 0.15γ γ = Pm = Pc =

INCOME OF RAVI = RS. 8000 PRICE OF MEAT = RS. 125/Kg PRICE OF CHICKEN = RS. 70/Kg

CALCULATE (A) INCOME ELASTICITY

(B) CROSS PRICE ELASTICITY (C) PRICE ELASTICITY

SOLUTION

e

2/20/2014

y

= δQm x δγ

γ Qm

12

Illustration (ELASTICITY USING DERIVATIVES) Differentiating the demand function w.r.t. γ we have δQm δγ

=

0.15

FROM THE DEMAND FUNCTION WE HAVE Qm = 5850 – (6 x125) + (2 x 70) + 0.15 x 8000 = 5850 – 750 + 140 + 1200 = 6440

2/20/2014

13

SUBSTITUTING THE VALUES OF & Qm we have

ey

= 0.15 x 8000 =

0.186

δQm δγ

,γ

= 0.186

6440

CROSS

ec =

δQm

PRICE

X

ELASTICITY

Pc

δPc Qm Differentiating Qm w.r.t Pc we have δQm δPc =

ec

=

2 x

2 70 6440

= 0.02

۠Meat & Chicken are Substitutes

2/20/2014

14

c

PRICE ELASTICITY

ep =

δQm Pm X δPm Qm

Differentiating θm w.r.f. to Pm we have δQm = δPm

-6

ep = -6 x 125 = -0.11 6440

2/20/2014

15

Different computed price elasticities Salt Water Coffee Cigarettes Footwear Housing Foreign travel Restaurant meals Air Travel Motion pictures Brand of coffee

0.1 0.2 0.3 0.3 0.7 1.0 1.8 2.3 2.4 3.7 5.6

Source: Sullivan and Sherin

2/20/2014

16

If the price elasticity of demand for cable TV connections is high for example greater than 1.5 and the price elasticity of demand for movies shown in theatres is less than 1 what does this imply?

2/20/2014

17

ARC ELASTICITY LET US NOW MEASURE ELASTICITY ON A SEGMENT R S. THE PRICES AT POINT R& S ARE P0 & P1 RESPECTIVELY AND QTY DEMANDED ARE 1 AND Q0 AND Q1 RESPECTIVELY. MOVEMENT TAKES PLACE FROM R TO S AND FROM S TO R . HENCE AVERAGES OF PRICES & QUANTITY ARE TAKEN. 0 P0

R S

P1

P1 0 Q0

2/20/2014

Q1

18

ARC ELASTICITY e

p

= = =

Q1 – Q0 P1 –P0 Q1 – Q0 P1 –P0

ΔQ ΔP

X X X

(P0 +P1)/2 (Q0 + Q1)/2 P0 +P1 Q0 + Q1 P0 +P1 Q0 + Q1

MOVEMENT FROM R TO S (P1 –P0) is -ve

MOVEMENT FROM S TOR

2/20/2014

is -ve

19

ARC PRICE ELASTICITY 1)

COMPUTE ARC ELASTICITY BETWEEN C & D MONTHLY DEMAND SCHEDULE FOR RICE PRICE Qd A 10 30 B 11 25 C 12 21 D 13 18 RICE DEMANDED P1 = 12 q 1 = 21 P2 = 13 q 2 = 18 ΔP =1 ΔQ = -3 epD = -3 X (12 +13) = -3 X 25 1 (21+18) 39 = -1.92

SINCE

(ΔQX P1 +P2) (ΔP Q1 + Q2)

epD = -1.92 2/20/2014

20

MEASUREMENT OF PRICE ELASTICITY AT A POINT P A

M

LOWER SEGMENT

O

UPPER SEGMENT R O

O

B

N

θ

Let us consider a demand curve AB and measure its elascity at point R. AB – TANGENT TO THE DEMAND CURVE δP = Slope of AB = OA

δQ 2/20/2014

OB

21

MEASUREMENT OF PRICE ELASTICITY AT A POINT

ep All ep

ep

- 0B 0A δQ P = - 0B x RN --(1) δP Q 0A RM triangles AOB, AMR & NRB are all similar 0B = NB 0A RN ( SUBSTITUTING IN EQ (1) = - NB * RN RN RM = -NB RM ۠NB/RM = RB/AR) = -RB ( AR

2/20/2014

۠δQ δP =

=

22

SUMMARY OF ELASTICITY MEASURES Unitary Elastic % ΔQ=%ΔP Relatively Elastic % Δ Q > % Δ P Perfectly Elastic % Δ P = 0 Relatively Inelastic % Δ Q = < =

1 1 α 1 0

P

e

p

α

=

A

R¹

e >1 e =1

=

p

p

R¹¹ ep1,MR>0, Ep