1
00:00:17,949 --> 00:00:27,570
Good morning, welcome to the third lecture
on Economics, Management and Entrepreneurship.
2
00:00:27,570 --> 00:00:37,890
Today, we are going to talk about Elasticity
of Demand, before that I would like to go
3
00:00:37,890 --> 00:00:47,399
through the slides that I presented in my
last lecture on market equilibrium.
4
00:00:47,399 --> 00:00:56,100
This was done in the last lecture that was
on demand and supply that exists in market
5
00:00:56,100 --> 00:01:03,210
equilibrium, I will quickly go through these
slides once again, so that we can give the
6
00:01:03,210 --> 00:01:08,720
new ideas in the lecture 3 on Elasticity of
Demand.
7
00:01:08,720 --> 00:01:19,799
Here, we first gave certain definition of
market, demand, supply and market equilibrium.
8
00:01:19,799 --> 00:01:27,020
Then we said that there can be different types
of competition, perfect competition and imperfect
9
00:01:27,020 --> 00:01:34,590
competition, most of our discussion will be
assuming that perfect competition exists in
10
00:01:34,590 --> 00:01:37,609
market.
11
00:01:37,609 --> 00:01:44,719
And then we gave different characteristics
of the different types of competition, we
12
00:01:44,719 --> 00:01:54,130
talked about demand has been direct demand
for consumption or derived demand.
13
00:01:54,130 --> 00:02:01,080
Then we talked about demand function, there
we said that demand is a relationship between
14
00:02:01,080 --> 00:02:07,840
the quantity demanded in the market, and such
other factors like price, price of other goods,
15
00:02:07,840 --> 00:02:12,670
income so on and so forth.
16
00:02:12,670 --> 00:02:21,560
This is an example of a demand function, then
we talked about demand curve where we said
17
00:02:21,560 --> 00:02:26,189
that the demand is a function of price alone.
18
00:02:26,189 --> 00:02:33,049
Normally, as price increases demand for the
product falls, so this is an inverse relationship
19
00:02:33,049 --> 00:02:37,180
between demand and price which is called a
law of demand.
20
00:02:37,180 --> 00:02:44,370
This is given by a straight line with the
negative slope, we can show the demand curve
21
00:02:44,370 --> 00:02:55,379
has been shifted from its nominal value when
certain other factors other than price is
22
00:02:55,379 --> 00:03:01,370
different from the one at which the original
demand curve was plotted.
23
00:03:01,370 --> 00:03:09,379
Similarly, we talked about supply, supply
function and example of supply function.
24
00:03:09,379 --> 00:03:17,260
Then we said that supply curve is the relationship
between quantity supplied by the firm or by
25
00:03:17,260 --> 00:03:18,260
industry.
26
00:03:18,260 --> 00:03:25,230
And the market price alone are not assuming
all other factors that affect the quantity
27
00:03:25,230 --> 00:03:30,719
supplied to be fixed at certain specific levels.
28
00:03:30,719 --> 00:03:37,260
And normally when the price increases, there
is a motivation for the firms to produce and
29
00:03:37,260 --> 00:03:49,620
supply more to the market, so the slope of
the price supply curve or the supply curve
30
00:03:49,620 --> 00:03:52,550
is positive.
31
00:03:52,550 --> 00:03:57,819
And the effect of other factors can be shown
by shifting the supply curve either to the
32
00:03:57,819 --> 00:04:01,810
right or to the left.
33
00:04:01,810 --> 00:04:09,170
And then we said that market equilibrium exists
when the demand supply demand of the market
34
00:04:09,170 --> 00:04:15,180
and the quantity supplied to the market they
are equal.
35
00:04:15,180 --> 00:04:28,340
This is what we did in the last lecture, today
we talk about elasticity of demand.
36
00:04:28,340 --> 00:04:40,850
Basically, elasticity of demand will indicate
how much the demand will change or what fraction
37
00:04:40,850 --> 00:04:51,940
or what proportion demand will change for
a unit percentage change in one of the factors.
38
00:04:51,940 --> 00:05:00,030
So here we will learn a few things, first
the concepts of elasticity of demand.
39
00:05:00,030 --> 00:05:08,160
In that context we shall define point elasticity
and arc elasticity, we will introduce total
40
00:05:08,160 --> 00:05:14,760
revenue, marginal revenue and average revenue.
41
00:05:14,760 --> 00:05:22,570
And then we will introduce various types of
elasticity of demand such as price elasticity
42
00:05:22,570 --> 00:05:34,560
of demand, income elasticity of demand, advertisement
elasticity of demand and finally cross elasticity
43
00:05:34,560 --> 00:05:37,590
of demand.
44
00:05:37,590 --> 00:05:42,990
So let us take up these concepts one by one.
45
00:05:42,990 --> 00:05:55,320
As I so do just now a demand curve is basically
it will have a negative slope, we are assuming
46
00:05:55,320 --> 00:06:02,090
straight line relationship between price and
demand, so the equation of this particular
47
00:06:02,090 --> 00:06:19,180
line will be P=a-b Q, and then Q can be expressed
as a function of P, so it is a/b-1/b*P the
48
00:06:19,180 --> 00:06:29,160
price, Q is the quantity demanded in the market.
49
00:06:29,160 --> 00:06:41,250
And assuming a/b as alpha, and 1/b as beta,
we get quantity Q=alpha-beta*P.
50
00:06:41,250 --> 00:06:55,300
Now this is the demand curve equation expressing
quantity demanded as a function of price P,
51
00:06:55,300 --> 00:07:03,770
so from here we find out the first differentiation
of Q with respect to P which is basically
52
00:07:03,770 --> 00:07:14,930
the slope of the supply curve and that =-beta,
beta being positive, -beta is negative, and
53
00:07:14,930 --> 00:07:22,780
therefore, the supply curve has a negative
trend.
54
00:07:22,780 --> 00:07:35,590
We define demand elasticity as a measure of
sensitivity of the demand to a change in 1
55
00:07:35,590 --> 00:07:43,680
factor influencing the demand, assuming that
other factors remind at certain specific values.
56
00:07:43,680 --> 00:07:53,680
So basically we will try to find out is 1%
change in the factor brings in how much percent
57
00:07:53,680 --> 00:08:05,320
change in the demand Q, so basically it measures
the percentage changes in the demand due to
58
00:08:05,320 --> 00:08:18,330
1% change in 1 factor, so other factors are
held constant at specific values.
59
00:08:18,330 --> 00:08:28,560
We assume any other factor as X expecting
the quantity demanded Q, assuming this let
60
00:08:28,560 --> 00:08:39,029
us develop the expression for demand elasticity
that is we are trying to find out estimate
61
00:08:39,029 --> 00:08:52,250
the percentage change in Q demand when 1%
change is made to one of the factors X.
62
00:08:52,250 --> 00:09:06,330
Now in this context, we define 2 types of
elasticity, point elasticity and arc elasticity.
63
00:09:06,330 --> 00:09:19,050
Point elasticity is basically percentage change
in Q/percentage change in X the factor, so
64
00:09:19,050 --> 00:09:30,130
it is basically fractional change delta Q/Q/fractional
change in X delta X/X, multiplication 100
65
00:09:30,130 --> 00:09:36,740
in the numerator and multiplication 100 in
the denominator cancel out leaving only the
66
00:09:36,740 --> 00:09:41,640
fractional changes delta Q/Q/delta X/X.
67
00:09:41,640 --> 00:09:52,450
So basically we are trying to find out here,
if we give the 1% change in X or 1 fractional
68
00:09:52,450 --> 00:09:59,190
change in X, how much fractional change in
Q occurs?
69
00:09:59,190 --> 00:10:13,480
Now this can be written as delta Q/Q/delta
X/X which=delta Q/delta X multiplication X/Q,
70
00:10:13,480 --> 00:10:24,950
now we said it is a point elasticity because
this requires the value of X and Q to be known
71
00:10:24,950 --> 00:10:35,840
at a certain point, at that point the slope
is to be calculated.
72
00:10:35,840 --> 00:10:44,260
And therefore, this is the elasticity at that
point in the demand curve.
73
00:10:44,260 --> 00:10:51,020
And normally when there is a very small change
in the value of X, for example the fractional
74
00:10:51,020 --> 00:10:59,190
change is about 5% the percentage is only
just about 5% in the factor X, this is considered
75
00:10:59,190 --> 00:11:10,400
to be a small change occurring at the existing
value of X, so there point elasticity is relevant.
76
00:11:10,400 --> 00:11:23,770
However, when we bring in a substantial change
in the factor X, and conventionally suppose
77
00:11:23,770 --> 00:11:31,200
that the fractional change is more than 5%,
we consider that changed to be substantial.
78
00:11:31,200 --> 00:11:39,890
When that happens we no longer go for point
elasticity competition, we consider that will
79
00:11:39,890 --> 00:11:41,240
change its essential.
80
00:11:41,240 --> 00:11:51,760
Therefore, we try to find out the change that
has occurred from the existing value Q1 to
81
00:11:51,760 --> 00:12:00,670
a new value Q2 as a result of the factor X
changing its value from its initial value
82
00:12:00,670 --> 00:12:04,590
of X1 to its final value of X2.
83
00:12:04,590 --> 00:12:15,820
It is defined as the change/the average value
of Q/the change in X/the average value of
84
00:12:15,820 --> 00:12:23,090
X, so 2 2 cancels out leaving Q2-Q1.
85
00:12:23,090 --> 00:12:34,190
We bring in X2-X1 from here to the denominator
and take Q2+Q1 to the numerator and then division
86
00:12:34,190 --> 00:12:42,080
therefore, this becomes multiplication this
comes towards to the denominator.
87
00:12:42,080 --> 00:12:56,220
So the arc elasticity is defined as Q2-Q1/X2-X1
multiplication X2+X1/Q2+Q1, this is normally
88
00:12:56,220 --> 00:13:11,890
known as arc elasticity, whenever the change
in the factor is more than 5% we consider
89
00:13:11,890 --> 00:13:19,060
it substantial, and apply this expression
for arc elasticity.
90
00:13:19,060 --> 00:13:26,560
And when the change is small less than 5%,
we apply the concept of for the equation of
91
00:13:26,560 --> 00:13:30,920
point elasticity.
92
00:13:30,920 --> 00:13:42,570
Now in the earliest slide, I just said a factor
X without mentioning what that factor is,
93
00:13:42,570 --> 00:13:52,000
let us now consider that factor is price,
which means that we are now interested to
94
00:13:52,000 --> 00:13:56,670
know what is the price elasticity of demand.
95
00:13:56,670 --> 00:14:09,670
That means we are interested to know if a
change of 1% is given to price then, what
96
00:14:09,670 --> 00:14:10,670
is the amount of change?
97
00:14:10,670 --> 00:14:17,000
Or what is the percentage of change in the
quantity demanded?
98
00:14:17,000 --> 00:14:27,580
We designate this as epsilon P, epsilon for
elasticity and P for price elasticity, using
99
00:14:27,580 --> 00:14:39,980
the previous equation it is delta Q/Q/delta
P/P. So percentage change in P and how much
100
00:14:39,980 --> 00:14:42,920
percentage change in Q.
101
00:14:42,920 --> 00:14:53,820
Now if we assume the demand curve to be continuous,
then we can take this as the first derivative
102
00:14:53,820 --> 00:15:03,670
of Q with respect to P, so instead of writing
del Q delta Q and delta P, we can write d/dP
103
00:15:03,670 --> 00:15:15,210
of Q that is the first derivative of Q with
respect to P, and division Q/P or multiplication
104
00:15:15,210 --> 00:15:19,160
P/Q same thing.
105
00:15:19,160 --> 00:15:23,900
When we multiply P will come to the numerator
Q will go to the denominator.
106
00:15:23,900 --> 00:15:32,020
Now assuming that the relationship between
Q and P is straight line relationship, we
107
00:15:32,020 --> 00:15:42,190
give Q as =alpha-beta P, this is a straight
line relationship with a negative trend as
108
00:15:42,190 --> 00:15:54,870
we know 肪eta, so Q=alpha-beta P. And if
we take the first derivative of Q with respect
109
00:15:54,870 --> 00:16:06,770
to P, we get d/dP of Q=-beta, beta being positive,
-beta becomes negative.
110
00:16:06,770 --> 00:16:15,070
Therefore, dQ/dP is always negative meaning
that as price increases quantity demanded
111
00:16:15,070 --> 00:16:22,959
falls, as we know from our earlier knowledge
on the demand curve.
112
00:16:22,959 --> 00:16:35,730
Now knowing the value of dQ/dP=-beta, we can
find out the price elasticity epsilon P, epsilon
113
00:16:35,730 --> 00:16:53,490
P from our first equation is d/dP of Q/Q/P
which becomes =this one which is dQ/dP multiplication
114
00:16:53,490 --> 00:17:05,770
P/Q, and now that we know that dQ/dP is -beta
this then becomes -beta*P/Q.
115
00:17:05,770 --> 00:17:20,069
And since P is positive, Q is positive, beta
is positive, but -beta makes it negative.
116
00:17:20,069 --> 00:17:32,519
Therefore, epsilon P is negative, this means
that the price elasticity of demand epsilon
117
00:17:32,519 --> 00:17:37,120
P is always negative.
118
00:17:37,120 --> 00:17:49,010
So and from here we can also have an intermediate
result which we shall use later which is that
119
00:17:49,010 --> 00:18:01,940
Q/beta, we take this to the left hand side
Q/beta=-P/epsilon P, so this comes to the
120
00:18:01,940 --> 00:18:06,919
denominator this goes this side to the numerator
beta comes here.
121
00:18:06,919 --> 00:18:20,480
This is an intermediate result that we shall
use in our next slide, so here we learn that
122
00:18:20,480 --> 00:18:31,070
price elasticity of demand is always negative,
as we know as price increases demand falls.
123
00:18:31,070 --> 00:18:38,559
So the price elasticity of demand is expected
to be negative, which is so as we have seen
124
00:18:38,559 --> 00:18:41,549
in this case.
125
00:18:41,549 --> 00:18:52,080
Now before we go further, we would like to
now define certain other concepts of total
126
00:18:52,080 --> 00:18:59,899
average and marginal revenue, total and average
revenue first.
127
00:18:59,899 --> 00:19:10,639
Total revenue is the total sale in terms of
rupees per year and is given by the quantity
128
00:19:10,639 --> 00:19:22,110
sold multiplication unit price P, that is
the total sales or just sales or total revenue
129
00:19:22,110 --> 00:19:24,480
also called only revenue.
130
00:19:24,480 --> 00:19:35,200
So basically we are assuming here that whatever
quantity is demanded it is also sold at a
131
00:19:35,200 --> 00:19:49,080
unit price P rupees per unit*Q is rupees per
year making it P*Q and that is TR total revenue.
132
00:19:49,080 --> 00:20:02,039
If total revenue is P*Q, the average revenue
will be =TR/Q which=P, it is given by the
133
00:20:02,039 --> 00:20:06,249
total revenue/the quantity demanded.
134
00:20:06,249 --> 00:20:19,889
So average revenue=P when price changes do
not occur.
135
00:20:19,889 --> 00:20:31,460
Now here let us relate the total and average
revenue and bring in the concept of MR, MR
136
00:20:31,460 --> 00:20:40,649
is here and that is marginal revenue which
is basically defined as first derivative of
137
00:20:40,649 --> 00:20:50,309
total revenue, it says derivative with respect
to Q. That means for unit change in the value
138
00:20:50,309 --> 00:21:00,239
of Q, what is the rise in the value of total
revenue that is d/dQ of TR, unit change in
139
00:21:00,239 --> 00:21:07,830
Q gives rise to how much change in total revenue
that is called the marginal revenue.
140
00:21:07,830 --> 00:21:21,119
Now total revenue as we know=unit price*quantity
demanded or quantity sold P*Q.
141
00:21:21,119 --> 00:21:40,070
Now we assume or we have already shown that
P=alpha/beta-1/beta*Q, so P*Q becomes alpha/beta
142
00:21:40,070 --> 00:21:47,149
Q-1/beta Q square.
143
00:21:47,149 --> 00:22:04,080
Now marginal revenue as I said is the first
derivative of TR with respect to Q, so taking
144
00:22:04,080 --> 00:22:18,789
the first derivative of this expression, we
get this as alpha/beta-2/beta Q, this can
145
00:22:18,789 --> 00:22:31,899
be written as alpha/beta-1/beta Q put that
within the parenthesis and 1/beta Q we bring
146
00:22:31,899 --> 00:22:33,460
it outside.
147
00:22:33,460 --> 00:22:41,379
And this is nothing but this which=P
148
00:22:41,379 --> 00:22:56,270
therefore, we can write this as P, and we
can write this as 鵬/beta.
149
00:22:56,270 --> 00:23:19,489
So marginal revenue=P the unit price-Q/beta,
and by a previous result we have already seen
150
00:23:19,489 --> 00:23:33,019
that Q/beta=-P/epsilon P, epsilon P is the
price elasticity.
151
00:23:33,019 --> 00:23:52,609
Now this result we now use here Q/beta is-1/epsilon
P, and - and - makes it +, so we see we get
152
00:23:52,609 --> 00:24:07,840
a relationship between the marginal revenue
and the price elasticity of demand.
153
00:24:07,840 --> 00:24:22,359
And it is related to in this fashion it is
1+1/epsilon P, now we already know that price
154
00:24:22,359 --> 00:24:32,249
elasticity is always negative, we have already
seen that as price increases demand falls
155
00:24:32,249 --> 00:24:43,830
and epsilon P is negative, therefore, this
quantity is negative and therefore, MR is
156
00:24:43,830 --> 00:24:57,629
negative MR 00:25:07,659
is P multiplication Q that/Q=P.
158
00:25:07,659 --> 00:25:19,080
So we can write a relationship between MR
and AR with the use of epsilon P.
159
00:25:19,080 --> 00:25:36,429
So marginal revenue=average revenue multiplication
1+1/epsilon P, and as I told you epsilon P
160
00:25:36,429 --> 00:25:48,409
is always negative and therefore, MR 00:25:58,149
is AR-AR into something, so it is always 00:26:07,889
Now use this relationship further, and let
us analyze that what happens when epsilon
163
00:26:07,889 --> 00:26:14,369
P takes different value.
164
00:26:14,369 --> 00:26:28,929
Now we will discuss elastic and inelastic
demand cases, here first of all we see that
165
00:26:28,929 --> 00:26:48,480
MR is always negative, and 00:26:58,200
Now if epsilon P mod value=1, then what happens?
167
00:26:58,200 --> 00:27:09,610
Epsilon is negative therefore, epsilon P if
it is mod value is 1, then epsilon P is -1,
168
00:27:09,610 --> 00:27:20,989
and therefore, 1-1 makes it 0, and therefore,
MR=0.
169
00:27:20,989 --> 00:27:32,059
So MR=0 and TR if MR=0, then what is the meaning
of TR?
170
00:27:32,059 --> 00:27:43,369
TR remains constant because the d/dQ of the
TR=MR=0, this means that TR is constant, it
171
00:27:43,369 --> 00:27:49,740
means that even when price changes the total
revenue does not change.
172
00:27:49,740 --> 00:27:59,190
Now this is the case of unit elastic demand
that means when price increases their demand
173
00:27:59,190 --> 00:28:08,009
falls in such a manner that price in to demand
remains constant, price in to demand equals
174
00:28:08,009 --> 00:28:17,590
total revenue that does not change, this is
the case of unit elastic demand.
175
00:28:17,590 --> 00:28:29,590
Now we take the next case which is epsilon
P mod value is<1, and we already know that
176
00:28:29,590 --> 00:28:40,549
epsilon P is negative, now it takes the value
if mod value of epsilon P<1, then it is MR
177
00:28:40,549 --> 00:28:55,169
has to be <0, and TR therefore will fall,
which means that as price increases the total
178
00:28:55,169 --> 00:29:03,529
revenue will fall, and this is a case of inelastic
demand.
179
00:29:03,529 --> 00:29:13,109
We will explain these things in more detail
little later, now take the case of mod value
180
00:29:13,109 --> 00:29:17,289
of epsilon P>1.
181
00:29:17,289 --> 00:29:31,419
Epsilon P>1 but epsilon P is negative the
mod value being >1 this quantity MR will rise,
182
00:29:31,419 --> 00:29:38,720
and the demand therefore, is elastic.
183
00:29:38,720 --> 00:29:47,159
Now let us take the limiting cases, the limiting
case 2 cases are there.
184
00:29:47,159 --> 00:29:54,659
One is a demand is perfectly inelastic, and
the other cases that the demand is perfectly
185
00:29:54,659 --> 00:29:57,509
elastic.
186
00:29:57,509 --> 00:30:08,009
In a perfectly inelastic demand case, the
mod value of epsilon P is taken as =0, whereas
187
00:30:08,009 --> 00:30:18,159
in case of perfectly elastic demand the mod
value of epsilon P is taken as infinity.
188
00:30:18,159 --> 00:30:28,759
Now in this case when we say that the demand
is perfectly inelastic, it means the firm
189
00:30:28,759 --> 00:30:36,820
can change any price and sell the same number
of units.
190
00:30:36,820 --> 00:30:49,090
That is the demand curve is vertical, no matter
what the price the firm sets, the number of
191
00:30:49,090 --> 00:30:57,519
good that it can sell will always remain constant,
a perfectly inelastic case.
192
00:30:57,519 --> 00:31:07,639
The other extreme is the perfectly elastic
case, where epsilon P mod value is extremely
193
00:31:07,639 --> 00:31:17,649
high, it means that the form can sell an unlimited
amount at the market price, but if it changes
194
00:31:17,649 --> 00:31:32,219
its price anything from the market price anything
different, then its quantity comes to 0.
195
00:31:32,219 --> 00:31:39,179
This means that it is a demand curve is completely
horizontal.
196
00:31:39,179 --> 00:31:52,129
Now let us look at these first 2 are the limiting
cases of perfectly inelastic demand and perfectly
197
00:31:52,129 --> 00:32:04,090
elastic demand, this says the first diagram
says that no matter what price a firm makes
198
00:32:04,090 --> 00:32:19,960
for its good for its product, it can always
supply and sell the demand the quantity same
199
00:32:19,960 --> 00:32:21,250
quantity.
200
00:32:21,250 --> 00:32:28,950
This is a case of perfectly inelastic demand,
the demand does not change price is changing
201
00:32:28,950 --> 00:32:38,119
but the quantity demanded in the market is
not changing, this is very unrealistic cases
202
00:32:38,119 --> 00:32:40,570
but this is a limiting case.
203
00:32:40,570 --> 00:32:54,649
Here, on the other hand we are saying that
at some price P the market the demand and
204
00:32:54,649 --> 00:33:01,590
the firm can supply any amount of demand,
but if it changes its price then the demand
205
00:33:01,590 --> 00:33:13,299
becomes 0 that means it is a case where the
demand is extremely sensitive to price change,
206
00:33:13,299 --> 00:33:16,190
perfectly elastic demand case.
207
00:33:16,190 --> 00:33:25,700
And this is a case where I said the same percentage
change in price leads to same percentage change,
208
00:33:25,700 --> 00:33:31,820
1% change in price leads to 1% change in the
demand.
209
00:33:31,820 --> 00:33:40,690
Therefore, the total revenue remains constant,
total revenue which is P*Q remains constant,
210
00:33:40,690 --> 00:33:50,169
this is P and this is Q, PQ remaining constant
is basically a rectangular hyperbola case,
211
00:33:50,169 --> 00:33:57,090
for this situation the total revenue will
remain constant no matter what the price is
212
00:33:57,090 --> 00:34:06,590
set, price may be made more in that case demand
will fall so that price*demand is constant,
213
00:34:06,590 --> 00:34:19,680
and if price falls demand is more the multiplication
of price and quantity remains the same.
214
00:34:19,680 --> 00:34:27,200
So these are these 2 are extreme cases, and
this case can occur.
215
00:34:27,200 --> 00:34:38,810
But in reality there are many situations where
the demand is elastic, the demand is also
216
00:34:38,810 --> 00:34:46,839
slightly inelastic in case of items that are
considered as necessity items say for example
217
00:34:46,839 --> 00:34:48,710
food materials.
218
00:34:48,710 --> 00:34:57,920
Even if the price is increased the demand
for food materials does not fall to that extent,
219
00:34:57,920 --> 00:35:08,500
so to a large extent the food materials are
inelastic in nature.
220
00:35:08,500 --> 00:35:19,180
Now this gives the slide gives an explanation
of these 3 cases, effect of 1% change in price
221
00:35:19,180 --> 00:35:31,200
here we are saying that an inelastic demand
results in <1% change in the demand, for a
222
00:35:31,200 --> 00:35:34,400
1% change in the price.
223
00:35:34,400 --> 00:35:46,890
That means if we change the price by 1% suppose
that we reduce the price by 1% the increase
224
00:35:46,890 --> 00:35:59,280
in the demand is not by 1%, but <1%, this
is a case of inelastic demand.
225
00:35:59,280 --> 00:36:13,400
Here, marginal revenue is negative, and when
price is reduced, the quantity sold increases.
226
00:36:13,400 --> 00:36:21,850
But because the marginal revenue is negative,
the total revenue declines.
227
00:36:21,850 --> 00:36:33,710
Similarly, or rather unlike this in an elastic
demand case, the demand is elastic it means
228
00:36:33,710 --> 00:36:46,420
that when 1% change is made in the price,
this leads to more than 1% change in the demand.
229
00:36:46,420 --> 00:36:57,349
This is the case of elastic demand, here the
marginal revenue is positive, and when prices
230
00:36:57,349 --> 00:36:58,440
is reduced.
231
00:36:58,440 --> 00:37:07,130
This is an example when price is reduced the
quantity sold increases as it should following
232
00:37:07,130 --> 00:37:10,579
the demand curve.
233
00:37:10,579 --> 00:37:20,740
And also unlike in the case of inelastic demand,
the total revenue increases.
234
00:37:20,740 --> 00:37:32,440
Now in the case of unitary or unit elastic
demand case, the marginal revenue is 0, the
235
00:37:32,440 --> 00:37:42,029
total revenue is maximum.
236
00:37:42,029 --> 00:37:51,520
Now here in this slide we shall illustrate
that along the different points of the demand
237
00:37:51,520 --> 00:38:03,200
curve, the price elasticity is would differ
with the concrete example we are illustrating
238
00:38:03,200 --> 00:38:06,340
this case.
239
00:38:06,340 --> 00:38:14,470
We are first of all assuming that the relationship
between quantity demanded in the market or
240
00:38:14,470 --> 00:38:22,559
quantity sold in the market and the unit price
is a linear function with the negative slope
241
00:38:22,559 --> 00:38:40,290
25-2.5 P. Therefore, taking the first derivative
dQ/dP =-2.5 which <0.
242
00:38:40,290 --> 00:38:51,670
Now I have taken 2 points let us take this
is the first point, if price is 2 then putting
243
00:38:51,670 --> 00:39:02,440
this value here 2.5*2=5, 25-5 is 20, therefore,
the demand is 20.
244
00:39:02,440 --> 00:39:16,730
So this is the point of price 2 and quantity
20, now at this point if I calculate my point
245
00:39:16,730 --> 00:39:34,410
elasticity, the equation is dQ/dP multiplication
P/Q, now already we have found out dQ/dP that
246
00:39:34,410 --> 00:39:50,270
=-2.5, so this value I put here as -2.5 multiplication
the values of P and Q at this point P is 2
247
00:39:50,270 --> 00:40:05,880
this one, and Q is 20, so I put -2.5*2/20
which is -2.5*1/10 which is -0.25.
248
00:40:05,880 --> 00:40:26,019
So the point elasticity at the point 2, 10
price 2 and demand 20 2 and 20 is -0.25.
249
00:40:26,019 --> 00:40:32,610
Now consider another points 3, this point
second points, but second point let us say
250
00:40:32,610 --> 00:40:41,309
that the price is more and that=3, so if price
is 3 then the corresponding value of the quantity
251
00:40:41,309 --> 00:40:49,140
will be 2.5*3-7.5 that brings it down to 17.5.
252
00:40:49,140 --> 00:40:59,450
So as price increases demand falls, if the
demand falls we once again now use the same
253
00:40:59,450 --> 00:41:18,029
equation for finding the elasticity at that
point 3 and 17.5, price=3 and demand=17.5.
254
00:41:18,029 --> 00:41:29,359
As before dQ/dP=-2.5 this one, this one, this
one multiplication the value of P is 3 and
255
00:41:29,359 --> 00:41:45,339
the value of Q is 17.5 therefore 3/17.5 approximately
=-0.428.
256
00:41:45,339 --> 00:41:56,240
So we see that at different points in the
demand curve the elasticity of demand changes,
257
00:41:56,240 --> 00:42:05,920
in fact at this point it is more negative
than at this point.
258
00:42:05,920 --> 00:42:22,319
Now suppose that we consider a substantial
change from 2 to 3 as substantial is actually
259
00:42:22,319 --> 00:42:33,309
50% change from 2 to 3, so the change is delta
X 3-2 which is 1/2 which is 50% change.
260
00:42:33,309 --> 00:42:40,480
Now if there is a 50% change in price this
is considered a substantial, and for such
261
00:42:40,480 --> 00:42:52,089
a substantial change we should not apply the
concept of the point elasticity, instead we
262
00:42:52,089 --> 00:42:58,190
should use our arc elasticity concept.
263
00:42:58,190 --> 00:43:07,980
Arc elasticity if you recall the corresponding
equation is the change in Q/the change in
264
00:43:07,980 --> 00:43:18,590
the price multiplication average price of
course 2 has eliminated 2/2, divided by 2
265
00:43:18,590 --> 00:43:28,900
here, divided by 2 here they cancel out leaving
P2+P1 and division Q2+Q1.
266
00:43:28,900 --> 00:43:48,980
Now in this case Q2-Q1 is 17.5-20 which is
-2.5, P2-P1 is 1 from 2 to 3, so this is P2
267
00:43:48,980 --> 00:43:59,780
3-2 is 1 multiplication addition of the 2
is 5, and addition of the 2 is 37.5, this
268
00:43:59,780 --> 00:44:12,279
value comes as -0.33 lying somewhere between
these 2 values.
269
00:44:12,279 --> 00:44:23,069
So this slide tells you or gives you a complete
example of how to calculate the point elasticity
270
00:44:23,069 --> 00:44:27,510
and the arc elasticity.
271
00:44:27,510 --> 00:44:42,500
Now we go further, we are assuming that the
demand is a function of price, and that we
272
00:44:42,500 --> 00:44:50,360
are trying to find out how much what fraction
or what percentage the demand changes for
273
00:44:50,360 --> 00:44:55,500
a unit percent change in price, that is called
the price elasticity of demand.
274
00:44:55,500 --> 00:45:04,230
Now the price elasticity of demand values
will differ from one good to another good
275
00:45:04,230 --> 00:45:07,309
or one product to another product.
276
00:45:07,309 --> 00:45:14,299
Say for example, we have a product which we
consider highly necessary for our daily life
277
00:45:14,299 --> 00:45:25,079
such as food materials, compared to a product
let us say a car or television or an air conditioner
278
00:45:25,079 --> 00:45:32,390
which is probably a luxury to certain society.
279
00:45:32,390 --> 00:45:43,079
Now if the product is a necessity then a change
in the price of the product a small change
280
00:45:43,079 --> 00:45:50,180
in the price in the product will not change
the quantity so much, because we need it as
281
00:45:50,180 --> 00:45:53,010
a necessity of life.
282
00:45:53,010 --> 00:46:00,230
So this is the case of inelastic demand, demand
does not change much as price changes.
283
00:46:00,230 --> 00:46:11,750
But if the car price rises, then probably
the demand in the market may fall, so these
284
00:46:11,750 --> 00:46:20,260
are situations or cases where the price elasticity
figures can change from type of good from
285
00:46:20,260 --> 00:46:26,099
one type of product to another type of product.
286
00:46:26,099 --> 00:46:38,869
Price elasticity will also depend on the availability
of a substitute, if for example the substitute
287
00:46:38,869 --> 00:46:45,240
there is a substitute for a product that you
are manufacturing, and its price reduces or
288
00:46:45,240 --> 00:46:56,049
falls then it is likely that your product
demand will be affected.
289
00:46:56,049 --> 00:47:04,170
Because many demands in the market will be
met by your competitors who sell the substitute
290
00:47:04,170 --> 00:47:09,930
product, so your demand for your product will
fall.
291
00:47:09,930 --> 00:47:16,850
Therefore, if in the presence of substitutes
elasticity value will differ from product
292
00:47:16,850 --> 00:47:18,470
to product.
293
00:47:18,470 --> 00:47:28,250
The is the proportion of income spent on the
product, if families spend a large percentage
294
00:47:28,250 --> 00:47:38,170
of their funds for the product under consideration
that will have one type of elasticity value
295
00:47:38,170 --> 00:47:46,000
compared to when the family spends less.
296
00:47:46,000 --> 00:47:51,049
Now there are different other types of demand
elasticities, let us spend some time we have
297
00:47:51,049 --> 00:47:59,420
been talking about only price elasticity of
the demand, we will now consider different
298
00:47:59,420 --> 00:48:02,900
other types of elasticity.
299
00:48:02,900 --> 00:48:13,650
In particular we would like to talk about
these 3 types of elasticities, 1 income elasticity
300
00:48:13,650 --> 00:48:23,740
of demand, 2 advertisement elasticity of demand,
3 cross elasticity of demand.
301
00:48:23,740 --> 00:48:34,140
As you know in general whenever a factor value
changes by certain fraction a percentage,
302
00:48:34,140 --> 00:48:43,260
the elasticity of demand can be calculated
to find out how much percent change occurs
303
00:48:43,260 --> 00:48:47,059
in the demand that is the elasticity of demand.
304
00:48:47,059 --> 00:48:57,930
Now when that factor is income we call it
income elasticity, when that factor is advertisement
305
00:48:57,930 --> 00:49:07,640
we call it advertisement elasticity and when
that factor is a substitute or a compliment
306
00:49:07,640 --> 00:49:10,910
then we call it cross elasticity.
307
00:49:10,910 --> 00:49:22,560
Just as we had defined price elasticity as
delta Q/Q/del P/P, here we say it is delta
308
00:49:22,560 --> 00:49:33,630
Q/Q/delta I/I where I is the income disposable
income.
309
00:49:33,630 --> 00:49:43,230
In case of advertisement it is delta Q/Q/delta
A/A, where A is the amount of advertisement
310
00:49:43,230 --> 00:49:48,150
expenses.
311
00:49:48,150 --> 00:50:00,900
And this is as I said this is the another
products price, particularly as I have told
312
00:50:00,900 --> 00:50:09,930
you a substitute product let us say a compliment
complimented product, its prices change.
313
00:50:09,930 --> 00:50:17,000
And to what extent the quantity demanded for
your product changes for a unit or a 1% change
314
00:50:17,000 --> 00:50:22,470
in the price of another product which is a
substitute or a compliment, or another product
315
00:50:22,470 --> 00:50:26,779
in general is called the cross elasticity
of demand.
316
00:50:26,779 --> 00:50:34,569
Let us elaborate these cases in some detail.
317
00:50:34,569 --> 00:50:41,200
Income elasticity of demand, it measures the
responsiveness of demand to changes in income
318
00:50:41,200 --> 00:50:49,279
holding all other variables constant, and
if this elasticity is positive that means
319
00:50:49,279 --> 00:50:55,589
it is expected that as income increases, the
demands should rise.
320
00:50:55,589 --> 00:51:00,549
And if this elasticity is positive this is
called a normal or a superior goods sales
321
00:51:00,549 --> 00:51:10,789
rising with rising personal income, and that
normally occurs when economic growth occurs,
322
00:51:10,789 --> 00:51:13,750
this is income elasticity.
323
00:51:13,750 --> 00:51:18,980
Advertisement elasticity of demand, it measures
the responsiveness of demand to changes in
324
00:51:18,980 --> 00:51:24,930
advertisement expenditure holding all other
variables constant, usually this elasticity
325
00:51:24,930 --> 00:51:31,670
is positive as we know it is expected that
as we increase our advertisement expenses.
326
00:51:31,670 --> 00:51:38,790
The awareness in the market about your product
rises, and therefore, the quantity sold in
327
00:51:38,790 --> 00:51:42,000
the market are demanded in the market rises.
328
00:51:42,000 --> 00:51:46,590
So we expect this elasticity to be positive.
329
00:51:46,590 --> 00:51:54,240
Now if its value >1, it means that the sales
rise more than proportionately with rising
330
00:51:54,240 --> 00:51:58,950
levels of advertisement expenditures.
331
00:51:58,950 --> 00:52:06,900
Now we come to the cross elasticity of demand,
it measure the impact of the prices of a substitute
332
00:52:06,900 --> 00:52:08,579
or a compliment on demand.
333
00:52:08,579 --> 00:52:14,819
Now this is an example of what we you mean
by substitute, and what we mean by compliment.
334
00:52:14,819 --> 00:52:22,849
Let us say that the product in under consideration
is tea that a company is manufacturing, the
335
00:52:22,849 --> 00:52:26,809
substitute for tea in the market is coffee.
336
00:52:26,809 --> 00:52:34,670
Now if coffee price goes up, then the demand
of tea is likely to go up.
337
00:52:34,670 --> 00:52:42,190
Because as the price of coffee rises, the
demand for coffee reduces demand for tea rises,
338
00:52:42,190 --> 00:52:47,789
and therefore, price of tea is expected to
also go up, this is the case of positive cross
339
00:52:47,789 --> 00:52:50,270
elasticity of demand.
340
00:52:50,270 --> 00:52:58,230
Now consider a case of petrol and car, car
is the product under our consideration, to
341
00:52:58,230 --> 00:53:05,220
run a car we need petrol which is prepared
or which is sold by another company, and there
342
00:53:05,220 --> 00:53:06,220
is a compliment.
343
00:53:06,220 --> 00:53:14,750
Petrol is a compliment of car, now if petrol
prices go up then it is likely that the demand
344
00:53:14,750 --> 00:53:22,020
of car may go down, this is the case of negative
cross elasticity of demand.
345
00:53:22,020 --> 00:53:29,420
Whereas if 2 products are unrelated, the cross
elasticity is 0.
346
00:53:29,420 --> 00:53:39,579
Gentleman and ladies, basically we introduced
to you the concept of elasticity of demand
347
00:53:39,579 --> 00:53:48,160
where we said or where we wanted to quantify
or measure give a measure of how much fraction
348
00:53:48,160 --> 00:53:58,490
or how much percentage change is brought about
in the quantity demanded for 1% change in
349
00:53:58,490 --> 00:54:05,819
one of the factors, when all other factors
are assumed to be held constant.
350
00:54:05,819 --> 00:54:13,030
We gave certain examples, we gave certain
illustration, particularly saying how point
351
00:54:13,030 --> 00:54:17,509
elasticities are calculated, and how arc elasticities
are calculated.
352
00:54:17,509 --> 00:54:25,350
We also gave examples of different factor
elasticities price elasticity, income elasticity,
353
00:54:25,350 --> 00:54:29,160
advertisement elasticity and finally cross
elasticity of demand.
354
00:54:29,160 --> 00:54:36,240
In this context, we also defined substitutes
and compliments, thank you very much.