Elasticity and its Applications
Sessions 4 & 5
Elasticity and Its y Applications
Readings
Hirschey: Economics for Managers, 2009 (Fifth Indian
Reprint), South-Western Cengage Learning – Chapter 5
Hubbard & O’Brian: Microeconomics (First Edition), Pearson
Education India – Chapter 6
Mansfield, Allen,
Mansfield Allen Doherty and Weigelt: Managerial
Economics: Theory, Applications and Cases (Fifth Edition), W.
W. Norton and Company – Chapter 3
Thomas and Maurice: Managerial Economics: Concepts and
Applications (Eighth Edition), Tata McGraw-Hill – Chapter 6
Session Objectives
What is elasticity? What kinds of issues can elasticity help us understand?
What is the price elasticity of demand? How is it related to the demand curve? How is it related to revenue & expenditure?
What is the price elasticity of supply? How is it related to the supply curve?
What are the income and cross-price elasticities of demand? An Example
You design websites for local businesses.
You charge Rs 50 000 per website, and currently
Rs.50,000
website design 12 websites per month, so that your total revenue is Rs. 6,oo,ooo. Earlier you were designing
15 websites per month @ Rs 30 000 per website
Rs.30,000
Your costs are rising (including the opportunity cost of your time) so you re thinking of raising the price time), you’re to Rs. 80,000.
The law of demand says that you won’t sell as many won t websites if you raise your price. How many fewer websites? What will be the impact on your revenue?
Elasticity of Demand
Basic idea: Elasticity measures how much one variable responds to changes in another variable.
In the given example, elasticity measures how much demand for your websites will fall if you raise your price
Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good computed as good, Price
Elasticity and Its y Applications
Readings
Hirschey: Economics for Managers, 2009 (Fifth Indian
Reprint), South-Western Cengage Learning – Chapter 5
Hubbard & O’Brian: Microeconomics (First Edition), Pearson
Education India – Chapter 6
Mansfield, Allen,
Mansfield Allen Doherty and Weigelt: Managerial
Economics: Theory, Applications and Cases (Fifth Edition), W.
W. Norton and Company – Chapter 3
Thomas and Maurice: Managerial Economics: Concepts and
Applications (Eighth Edition), Tata McGraw-Hill – Chapter 6
Session Objectives
What is elasticity? What kinds of issues can elasticity help us understand?
What is the price elasticity of demand? How is it related to the demand curve? How is it related to revenue & expenditure?
What is the price elasticity of supply? How is it related to the supply curve?
What are the income and cross-price elasticities of demand? An Example
You design websites for local businesses.
You charge Rs 50 000 per website, and currently
Rs.50,000
website design 12 websites per month, so that your total revenue is Rs. 6,oo,ooo. Earlier you were designing
15 websites per month @ Rs 30 000 per website
Rs.30,000
Your costs are rising (including the opportunity cost of your time) so you re thinking of raising the price time), you’re to Rs. 80,000.
The law of demand says that you won’t sell as many won t websites if you raise your price. How many fewer websites? What will be the impact on your revenue?
Elasticity of Demand
Basic idea: Elasticity measures how much one variable responds to changes in another variable.
In the given example, elasticity measures how much demand for your websites will fall if you raise your price
Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good computed as good, Price