1

Managerial Economics

Group members Saima (040)Arslan (31)Hassan Raza (40) Mehnaz (020)

2

• ElasticityIt shows the degree of responsiveness of the change in the one variable

due to the change in the quantity of the other variable.

Elasticity = Percentage change in the one variable Percentage change in the other variable

It is simply a way of quantifying cause of and effect relationship. The concept of elasticity can be used in demand and supply.

3

There are five types of price elasticity of There are five types of price elasticity of demand:demand:

• Unit elasticity Unit elasticity • elasticity elasticity • inelasticinelastic• Perfectly inelasticPerfectly inelastic• Perfectly elasticPerfectly elastic

4

Price elasticity can be measured with the Price elasticity can be measured with the following equation-following equation-

Price elasticity of demand =

% change in price % change in quantity

5

What is an example of unitary elasticity?

Ice cream and beef

Unitary Elastic Demand

Demand is said to be price unitary elastic if any proportionate change in the price brings a equal proportionate change in the quantity demanded. In this case the value of PED is always equal to 1.

6

Example Price = 4, 3 & Quantity Demanded= 120, 150

When price is 4 quantity demanded is 120. When price decreases from 4 to 3 then quantity demanded

is also changed but proportionately. Then the quantity demanded is 150.

7

0

D''

120 Quantity demand150

3

4ED = –1

A Unit Elastic Demand CurvePr

ice

Figure 1.1 Unit Elasticity

8

What is an example of elastic?

Bananas

Elastic Demand Demand is said to be price elastic if small proportionate change in the price brings a larger proportionate change in the quantity demanded.

9

Example Price = 4,3Quantity Demanded=120,160

When price is 4, quantity demanded is 120. When price decreases from 4 to 3 then quantity demanded is

increased at a greater rate from proportionate change that is 120 to 160.The change is more than proportionate

change.

10

0

D

Quantity demand160120

3ED > 1

A Elastic Demand Curve

Pric

e

Figure 1.2 Elasticity

4

11

What is an example of perfectly inelasticity?

Gasoline

Inelastic Demand Demand is said to be price inelastic if larger proportionate change in the price brings a small proportionate change in the quantity demanded. •In this case the value of PED is always less than 1

12

When price is 4, quantity demanded is 120. When price is 4, quantity demanded is 120. When price decreases from 4 to 3 then When price decreases from 4 to 3 then

quantity demanded is increased at a lower rate quantity demanded is increased at a lower rate from from proportionate change that is 120 to 140.

13

0D

Quantity demand

4

3

120 140

A Inelastic Demand Curve

ED < 1

Pric

e

Figure 1.3 Inelastic

14

i.e. Insulin or Medicines What is an example of perfectly elasticity?

Perfectly Inelastic Demand Demand is said to be perfectly inelastic if any proportionate change in the price brings a no change in the quantity demanded. We can say that given quantity can be demanded at any price in case of perfectly inelastic demanded. • In this case the value of PED is always zero

15

Example Price = 4, 3 & Quantity Demanded =120, 120

When price is 4, quantity demanded is 120. When price decreases from 4 to 3 then quantity demanded are still 120. There is no change in quantity demanded...

16

Quantity0

D'

ED = 0

120

3

4

Pric

e

A Perfectly Inelastic Demand Curve

Figure 1.4 Perfectly Inelastic

17

"Coal"

Perfectly Elastic Demand Demand is said to be perfectly elastic if any small proportionate change in the price brings a infinite change in the quantity demanded. We can say that at given price any quantity can be demanded in case of perfectly elastic demanded. • In this case the value of PED is infinity.

What is an example of perfectly elasticity?

18

Perfectly elastic(Ed= ∞) The prices of a commodity is totally unresponsive to

changes in quantity demanded that means there is no change in price when quantity demand changes.

Price = 4, 4 & Quantity Demanded = 120, 150

When price is 4tk, quantity demanded is 120. When no change in price brings a change in quantity demanded from 120 to 150. There is no change in price of a commodity...

19

A Perfectly Elastic Demand Curve

0

DED =

4

Quantity120 150

Pric

e

Figure 1.4 Perfectly Elastic

20

Any Question

21