Documentos de Académico
Documentos de Profesional
Documentos de Cultura
[MNG 609]
Trupti Mishra
Shailesh J Mehta School Of
Management
IIT Bombay
Session Outline
Elasticity of Demand
Price ceiling and Price Floor
Utility Analysis
Price, Income and Substitution Effect
Consumer Surplus
Elasticity of Demand
Price Elasticity of Demand
Income Elasticity of Demand
Cross Elasticity of demand
Elasticity of Demand
%Q
E
%P
Price
D
D
Quantity
Perfectly Elastic
Quantity
Perfectly Inelastic
Inelastic Demand
Price
Demand
E<1
5.00
4.00
1. A 25%
increase in
price
90
100
Quantity
Price
Demand
5.00
4.00
1. A 25%
increase in
price
75
100
Quantity
Elastic Demand
E>1
Price
Demand
5.00
4.00
1. A 25%
increase in
price
50
100
Quantity
10
Measurement
Demand
of Price Elasticity of
Point Elasticity of
Demand
Q
100
Q
P
%Q
Q
E
P
P
Q
%P
100
P
Q Average P
E
P Average Q
Nature of Commodity
Availability and proximity of Substitutes
Proportion of Income Spent on the Commodity
Time
Durability of the Commodity
Items of addiction
Total Revenue
Price
4.00
P x Q = 400
(revenue)
Demand
100
Quantity
13
3.00
P x Q = 240
(revenue)
1.00
P x Q = 100
(revenue)
0
Demand
80
100
Quantity
14
5.00
4.00
Demand
Revenue = 200
Revenue = 100
20
50
Quantity
15
Unitary elastic
Inelastic
%
Q % P
%
Q % P
%
Q % P
No dominant effect
P-effect dominates
Price
rises
TR falls
No change in TR
TR rises
Price
falls
TR rises
No change in TR
TR falls
Q-effect dominates
16
P = A + BQ
17
18
Total revenue
Price elasticity of
demand
MR > 0
TR increases as Q
increases
Elastic ( E >
Elastic
( E > 1)
1)
MR = 0
TR is maximized
MR < 0
TR decreases as Q
increases
Unit
elastic
Unit
elastic
E = 1)
( E =( 1)
Inelastic
Inelastic
( E <
( E < 1)
1)
19
Income Elasticity of
Demand
Income elasticity (EM) measures the responsiveness
of quantity demanded to changes in income,
holding the price of the good & all other demand
determinants constant.
EM
%Qd
Qd
M
%M
M
Qd
Income Elasticity of
Demand
If Em > 1, Luxury good
If Em < 1, Necessity Goods
If Em = 1, Semi Luxury goods
E XY
%Q X
Q X
PY
%PY
PY
QX
22
24
25
26
27
Price controls
Price ceiling: a legal maximum on the price
of a good or service. Example: rent control.
Price floor: a legal minimum on the price of
a good or service. Example: minimum wage.
Taxes
The govt can make buyers or sellers pay a
specific amount on each unit bought/sold.
Rental
price of
apts
$800
Eqm
Eqm w/o
w/o
price
price
controls
controls
D
300
Quantity of
apartments
it has no
effect on the
market
outcome.
Price
ceiling
$1000
$800
D
300
$800
Price
ceiling
$500
shortage
250
400
$800
Price
ceiling
$500
shortage
150
450
D
Q
$4
Eqm
Eqm w/o
w/o
price
price
controls
controls
D
500
Quantity of
unskilled workers
it has no
effect on the
market
outcome.
$4
Price
floor
$3
D
500
labor
surplus S
Price
floor
$5
$4
D
400
550
unemployment
S
Min.
wage
$5
$4
D
400
550
Taxes
D1
500
A Tax on Buyers
A
A tax
tax on
on
buyers
buyers
shifts
shifts the
the D
D
curve
curve down
down
by
by the
the
amount
amount of
of
the
the tax.
tax.
The
The price
price
buyers
buyers pay
pay
rises,
rises, the
the
price
price sellers
sellers
receive
receive falls,
falls,
eqm
eqm Q
Q falls.
falls.
Tax
S1
$10.00
PS = $9.50
D1
D2
430 500
PB = $11.00
Tax
S1
$10.00
PS = $9.50
D1
D2
430 500
A Tax on Sellers
A
A tax
tax on
on
sellers
sellers
shifts
shifts the
the S
S
curve
curve up
up by
by
the
the amount
amount
of
of the
the tax.
tax.
The
The price
price
buyers
buyers pay
pay
rises,
rises, the
the
price
price sellers
sellers
receive
receive falls,
falls,
eqm
eqm Q
Q falls.
falls.
PB = $11.00
Tax
S1
$10.00
PS = $9.50
D1
430 500
Tax
S1
D1
430 500
In
In this
this case,
case,
buyers
buyers bear
bear
most
most of
of the
the
burden
burden of
of
the
the tax.
tax.
Buyers share
of tax burden
PB
Tax
Price if no tax
Sellers share
of tax burden
PS
D
Q
Buyers share
of tax burden
PB
Price if no tax
Sellers share
of tax burden
In
In this
this case,
case,
sellers
sellers bear
bear
most
most of
of the
the
burden
burden of
of
the
the tax.
tax.
Tax
PS
D
Q