uh welcome back to the next module of elasticity we have introduced the concept of elasticity
of demand and in the previous module we saw how elasticity is calculated and we said that
this general uh definition of elasticity or the calculation it can be used to look at
elasticity of demand or the responsiveness of demand to various determinants of demand
so uh that kind of sounds uh uh easy so let us look at what are the determinants of demand
what what determines and how if if a commodity is or a product is going to be highly elastic
or is it going to be uh going to have low elasticity .
so these are certain things we are interested to know and again repeating what i said in
the previous module that elasticity of demand or price elasticity of demand is less than
0 always because of the law of demand that whenever price increases quantity is going
to decrease and when price decreases the quantity demanded is going to increase
so this is always going to be less than 0 but when i say that elasticity is uh high
or low what i mean by that is the absolute value of the price elasticity of demand so
this is price elasticity of demand and not any elasticity say only price elasticity of
demand is less than 0 . so what determines price elasticity or what
determines uh how the elasticity is going to be what kind of elasticity can we uh expect
for a certain product so this is what we are trying trying to study here so responsiveness
of demand to price chain price changes varies across commodities price ranges and other
factors so how much demand is going to respond to any price change that depends on a lot
of factors and so we are going to discuss a few of the factors here which are which
are kind of more obvious what factors determine if price elasticity
should be high or low so here are some principles determining price elasticity so following
are some principles determining price elasticity and uh i am going to explain using some examples
so as i show the examples uh i would actually uh encourage you to try to imagine before
actually going to the next slide i would encourage you to imagine which of the commodities should
show higher elasticity that is the question that we are i am going
to show 2 commodities and the question that i am trying to ask is which of the 2 products
should be more sensitive to price changes this is what so the more sensitive to price
change it is higher the elasticity that is the quantity adjustment happens more in response
to price changes so lets look at the first example say breakfast
cereal versus sunglasses so in case of so which one of these 2 products is going to
have probably higher elasticity so what the the logic that goes on here is look at breakfast
cereal what is breakfast cereal breakfast cereal is a option for your breakfast so is
it that you cannot have breakfast without breakfast cereal no it is not so there are
whole lot of substitutes of breakfast cereal and this is just one of the choices
and on the other hand i have sunglasses what is sunglasses sunglasses are basically what
you wear to protect your eyes from the sun rays especially during summer are there any
substitutes of sunglasses can you uh so when you are going out in the sun and you would
like to protect your eyes do you have any other alternative no you dont have any choice
uh if you need it you have to buy sunglasses so the principle that we are talking about
here is price elasticity is higher when substitutes are available what i mean to say is for breakfast
cereal if the price of breakfast cereal increases people are more likely to shift to other breakfast
choices so when people move to other breakfast choices the little bit increase in price of
breakfast cereal is going to lead to a huge amount of decline in quantity of breakfast
cereal demanded in the market because people have other choices
but what happens in case of sunglasses so say say for example in the summertime if there
is a increase in sunglasses uh probably the sale of sunglasses is not going to go down
too much if it is really required by the people who are wearing it so they are not going to
demand less sunglasses uh because there are no choices there are they have no alternatives
to sunglasses so second example is chocolate ice cream versus
ice cream so what is the logic here which one has higher price elasticity and which
one has lower price elasticity i am sure many of you have already figured out here that
chocolate ice cream is one type of ice cream so there are various alternatives of chocolate
ice cream so if the price of chocolate ice cream goes up uh many of the people are likely
to shift to other flavours of ice cream that is possible
so but if and exact substitute of ice cream is not really available in the market so that
is a that is a more uh broader concept of product so ice cream is a more broad concept
of product and so the elasticity of demand of ice cream in general is likely to be less
than the elasticity of demand for a particular flavor of ice cream same holds true for lot
of other things say say imagine that uh say blue jeans uh
the price elasticity of demand of blue jeans in particular is probably going to be higher
than overall clothing in general or even jeans in general so uh the the more specific a product
is uh or more highly defined or narrowly defined a good is more narrowly defined a good is
the higher is its price elasticity of demand my third example is insulin versus meal at
a 5 star restaurant so i am very sure that by now you have kind of figured out how to
find out the elasticity of demand if it is going to be high or low you know very well
and you can imagine that uh any product if the price is going to increase or decrease
how am i going to respond to it and that kind of gives you a clue about what is the price
elasticity of demand so in this case i am sure you have figured
out that insulin has a very low price elasticity of demand because its a its absolutely absolutely
necessary for people who buy insulin no one buys insulin for pleasure they buy because
it is a lifesaving drug it is required for people who have diabetes so insulin is required
for them and they cannot go without insulin and if the price of insulin goes up they are
not going to reduce their demand for insulin on the other hand meal at a 5 star restaurant
its a its a luxury commodity its a its a luxury service or product or whatever you call it
so meal at a 5 star restaurant if the price really goes up a person is going to or the
people are going to cut back on visits to these restaurants his visit to the 5 star
hotels for uh meals and so the price elasticity of demand is much higher in case of 5 star
meal at 5 star restaurant so price elasticity is higher for luxuries
than necessities the the price elasticity is higher for luxuries than necessities another
example is petrol in the short run versus petrol in the long run what does this mean
this means say the government increases the price of petrol suddenly suddenly there is
a price hike in petrol uh how much people are going to respond to the price hike is
the respond response to the price hike going to be more in the near future or is it going
to be more in the longer future or the distant future
in all likelihood response to something like this is going to be uh slower in the short
run and much more effective in the long run or much more of the the the governments policy
of increasing the petrol prices to probably cut down on the consumption of petrol that
is going to make itself felt in the market more in the long run why because in the short
run it is not easy for people to adjust their demand because say the demand for petrol it
depends on what kind of cars they are driving what is the way of travelling to work every
day so all these are quite uh sticky situations
you cannot change your petrol car overnight because price of petrol has increased but
in the long run probably you may plan to buy a diesel car so in that case in the long run
the economy is going to adjust to a higher price of petrol but in the short run probably
a price hike is only going to uh lead to more revenue for the people selling petrol than
a reduction in consumption of petrol so price elasticity is higher in the long
run than the short run so in this way it is possible to imagine various situations where
the elasticities would be high or low depending on the kind of determinant we are talking
about depending on the kind of situation we are talking about depending on the nature
of the product the price ranges say for example elasticity is more if uh if the price range
is very high but if the price range is low elasticity is probably low or uh in other
the the the intuition behind it is if the price is very high uh people are going to
respond quicker to a reduction in price but if the price is too low uh probably people
have already adjusted their consumption or further fall in price or rise in price is
not going to probably change the too much of the quantity but that that again depends
on what kind of commodity one is selling . next next we are going to talk about so all
this was about the price elasticity of demand etc what we discussed in the previous uh slide
is price elasticity of demand depending on the kind of product that one is selling in
the market but every of each of these products all the products they all have a negatively
sloping demand curve . say all of them have a negatively sloping
demand curve now what does this demand curve tell us about the elasticity of demand if
i draw the demand curve in a certain way is it going to tell me if the elasticity is high
or low yes it is this is this is just any negatively sloping demand curve that i have
drawn and i am going to see that obviously how much my price is changing with (resp)
how much my quantity is changing with respect to price that depends on this slope of the
demand curve so the movement from this price to this price
p 1 to p 2 if there is a price fall how much my quantity is going to increase that depends
on the slope of the demand curve so so if this is a steeper demand curve say ya this
is a steeper demand curve so if it is a steeper demand curve so this was my initial price
and this is my new quantity so the distance is lesser so uh lets look at the slides so
flatter the demand curve larger the elasticity and steeper the demand curve more inelastic
the demand is let me draw a neater picture .
so flatter the demand curve so this is a very flat demand curve this is a very flat demand
curve and this is my initial price and this is my so so a little bit of fall in price
is leading to a huge amount of increase in quantity so the response is so response of
quantity to price is quite big so a flat demand curve gives me a high elasticity of demand
on the other hand i if i have a this is a very steep demand curve this is
a steep demand curve and the same price change p 1 p 2 so p 1 my quantity was q 1 p 2 my
quantity is q 2 so in case of a steep demand curve when my price falls from p 1 to p 2
my output increases output is going to increase its not that its a inelastic demand curve
so output is not responding no output is responding and output is increasing or not output i should
not call it output this is product or the amount quantity uh purchased by the people
by the consumer so the amount the the quantity purchased by
the consumer is increasing but by only a little bit so the same amount of price fall is leading
to a huge increase in quantity sold in the market but the same amount of price fall is
leading to a very small increase in quantity sold in the market so flatter the demand curve
larger the elasticity now what does a perfectly inelastic demand
curve look like what does a perfectly inelastic demand curve look like now a perfectly inelastic
demand curve means that there is no response of quantity to prices there is no response
of quantity to change in prices . so perfectly inelastic demand curve is where
perfectly inelastic demand curve basically shows that percentage change in by percentage
change in p is equal to 0 by percentage change in p so there is no change in quantity no
matter what the price is so what does the perfectly inelastic demand curve look like
it looks like this its a vertical demand curve its a so quantity does not change quantity
demanded does not change no matter what the prices are so can one imagine such a demand
curve in the market probably no probably there is no perfectly inelastic demand curve in
the market but one example that comes to mind is say for example uh at some point of time
when there is too much pollution in the air and uh there are producers or suppliers of
clean fresh air so they are going to there is a market for
air and the air that you breathe in you have to pay a price for it so are you going to
breathe more air because the price is less or are you going to breathe in less air because
the price is more no you are going to breathe in the exactly same amount of air no matter
what the price is so this could be a example of a perfectly inelastic demand curve okay
so next is a perfectly elastic demand curve perfectly elasticity demand curve means that
change in quantity is infinite if there is a little bit of change in price or on the
other hand that price does not change it someone can look at it in the opposite way that uh
no matter what the people are willing to consume price does not change in the market so perfectly
elasticity demand curve is little bit of change in price in the market your demand is going
to change infinitely . so a perfectly elasticity demand curve is
just the opposite of the perfectly inelastic demand curve and it looks like this so it
looks like this so at this price infinite amount of quantity is sold in the market can
be sold in the market and there is no price change or in other words if the price changes
a little bit also the the if the price changes little bit also and people are consuming more
they completely there is a uh if if say for example price falls then every there there
is the the quantity increase in quantity in the market that will be demanded is going
to increase infinitely and if price increases everyone is going to go out of the market
so its 0 by so its basically the the the quantity that
is demanded in the market basically falls to 0 or there is infinite reduction in quantity
so uh what is a so before i go to the next so what is an example of this kind of demand
curve uh again this kind of demand curve is not
really uh again not a very its more of a theoretical concept than a real concept but we introduced
a concept of perfect competition in the previous class in the previous week and if you may
remember uh we discussed that there are plenty of buyers and sellers or infinite number of
buyers and sellers in the market and they are not price uh they are not price makers
they dont decide what the price is and they are not going to decide if they can increase
or decrease the price and this price is basically what has been determined in the market
so if any seller goes into a market like that a perfectly competitive market he goes there
and decides that i am going to sell my product here the kind of demand curve that he is facing
in a perfectly competitive market is basically a perfectly elasticity demand curve he cannot
change the price he cannot change the price but he can sell as much as he wants because
he sees that this is the amount that people are willing to buy at this given price
so let me give you a little uh explain a little more see imagine that a its a its a huge agricultural
products are basically uh come as close to perfectly competitive market as possible and
imagine that uh its its a local mandi that we have seen the all the agricultural wholesale
happens in those mandis and say someone is uh selling spinach and the the rate decided
in that market goes by the supplier there are whole lot of farmers who are coming to
the market to sell spinach and the the demand and supply in the market that determines that
this is the price of spinach say 10 rupees per bundle
so now if any seller goes into the market its a perfectly competitive market which means
that in that mandi there are whole lot of buyers and if he offers a price which is less
than p its not possible to meet all the demand because if it is less than 10 the entire infinite
amount of people in the the the buyers in the market will rush to him and if he sells
a if he charges a higher price he is not going to be able to sell anything
so basically he sticks to p and he can sell as much as he wants so this is the inelastic
the perfectly elasticity demand curve that a a producer in a perfectly competitive market
faces we will be doing more of this when we talk about perfect competition so right now
this is you you can just uh consider this as an example and probably if it is not too
clear right now uh it will be clearer when we talk about perfect competition in a later
class . so elasticity in this case elasticity in this
case is 0 elasticity in this case is infinite so and we have talked about (inela) and anything
in between these 2 is inelastic demand curve elastic demand curve we have seen that if
it is a steep slope it is inelastic curve if it is a if it has a flat slope it is a
elasticity demand curve and and this is a special special case of elasticity is the
unit elasticity of demand which is just uh has one uh particular has a one specific case
it it is worth a mention . say for example uh unit elasticity of demand
is not something which is uh hugely important or interesting since its a special case of
elasticity of demand uh we are including it here i am showing that say 20 40 60 say this
is the demand curve and 20 40 so uh now elasticity what is the elasticity in this region when
price drops from 30 to 20 the elasticity in this region is uh 5.0 the
elasticity in this region is 67 percent by 67 percent when price falls from 20 to 10
and quantity increases from 20 to 40 and this is equal to 1 so this region the is of interest
because in this region elasticity is 1 basically the same percentage change in price is going
to lead to same percentage change in quantity and what is the elasticity in this region
at a low price it is 40 percent by 200 percent which is equal to 0.2
so this is also illustration of something i said earlier that if you are higher up on
the demand curve or where the price is too high your elasticity is probably too high
you are more uh sensitive to price changes and if you are in the lower part of the demand
curve where price is low you are less sensitive to price changes and elasticity is low so
although the slope of a linear demand curve is constant it’s elasticity varies at different
points of the curve so this is a perfect example one should not
believe that one should not uh mistake that since the slope of the demand curve is same
every same your uh elasticity is going to be the same everywhere no that is not the
case so that ends our discussion on elasticity of demand and in the next module we are going
to talk about elasticity of supply and the determinants of elasticity of supply etc thank
you