Karnataka Class 12 Commerce Economics Elasticity Of Demand Complete Notes
Karnataka Class 12 Commerce Economics Elasticity Of Demand : The Karnataka University owes a lot to its erstwhile vice-chancellor, Dr. D.C. Pavate who headed the university from 1954 to 1967 as he was responsible for its rapid development. Dr. H.B. Walikar, the current vice-chancellor of the University, along with a few MLAs from the State of Karnataka are members of the Academic Council as well.
With facilities such as gardens, parks and a children park inside the campus, this university provides for an entire township in itself. A fully air-conditioned auditorium named Annaji Rao Sirur Rangamandira is suggestively one of the best of its kind in the state of Karnataka. A credit co-operative society also exists for the employees of the University, providing short- and long-term loans as and when they need it. The children of employees also get educated at a Kannada medium primary school that provides education till standard IV for the children.
In short, this University is a torchbearer in the field of education in the country, owing to its brilliant faculty and an impressive infrastructure, providing for a homely student life if one may put it that way.
Karnataka Class 12 Commerce Economics Elasticity Of Demand Complete Notes
Karnataka Class 12 Commerce Economics Elasticity Of Demand : The elasticity of demand (Ed), also referred to as the price elasticity of demand, measures how responsive demand is to changes in a price of a given good. More precisely, it is the percent change in quantity demanded relative to a one percent change in price, holding all else constant (ceteris paribus). Demand of goods can be classified as either perfectly elastic, elastic, unitary elastic, inelastic, or perfectly inelastic based on the elasticity of demand. This table shows the values of elasticity of demand that correspond to the different categories.
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Karnataka Class 12 Commerce Economics Elasticity Of Demand Complete Notes
Karnataka Class 12 Commerce Economics Elasticity Of Demand : Elastic demand is when price or other factors have a big effect on the quantity consumers want to buy. You’ll see it most often when consumers respond to price changes. If the price goes down just a little, they’ll buy a lot more. If prices rise just a bit, they’ll stop buying as much and wait for them to return to normal. Price is just one of the five determinants of demand.
If a good or service has elastic demand, it means consumers will do a lot of comparison shopping. That’s because they aren’t desperate to have it, they don’t need it every day or there are a lot of other similar choices. The law of demand guides the relationship between price and the quantity bought. It states that the quantity purchased has an inverse relationship with price. When prices rise, people buy less. The elasticity of demand tells you how much the amount bought decreases when the price increases.
Other Types
There are two other types of demand elasticity, which measures how much the quantity purchased changes when the price does.
- Inelastic demand, which is when the quantity demanded changes less than the price does.
- Unit elastic demand, which is when the quantity demanded changes the same percent that the price does.
Formula
The formula for elastic demand is the percent change in quantity demanded divided by the percent change in price. Elastic demand is when the percent change in the quantity demanded exceeds the percent change in price. That makes the ratio more than one. For example, say the quantity demanded rose 10 percent when the price fell 5 percent. The ratio is 0.10/0.05 = 2.00. Perfectly elastic demand is when the quantity demanded skyrockets to infinity when the price drops any amount. That, of course, could not happen in real life. But many commodities approach that situation because they are highly competitive. The price is pretty much the only thing that matters. Say two stores are selling identical ounces of gold. One sells it for $1,800 an ounce while the one next door sells it for $1,799 an ounce. If there were perfectly elastic demand, no one would buy the more expensive gold. The less expensive dealer sells as much as he has. In the real-life situation of almost perfect elasticity, many people will choose the cheaper gold over the more expensive, rather than all people.
Inelastic demand is when the quantity demanded rises by a lower percent than the price drops. For example, if the quantity rose 2 percent when the price fell 5 percent. That ratio is .02/.05 = .40, or less than one. Unit elastic demand is when the quantity demanded changes the same percent as the change in price. Therefore, the ratio is one. To illustrate, say the quantity demanded increased 5 percent in response to a price drop of 5 percent. The ratio is .05/.05 = 1. The price was a negative move while the quantity was a positive move. But there’s no need to include the minus sign since everyone knows that demand moves inversely to price.
Elastic Demand Curve
The demand curve is an easy way to determine if the demand is elastic. The quantity demanded will change much more than the price. As a result, the curve will look more low and flat than the unit elastic curve, which is a diagonal. The more elastic the demand, the flatter the curve. The graphic above shows the perfectly horizontal line of a perfectly elastic demand curve.
The demand curve is based on the demand schedule. This table describes exactly how many units will be bought at each price. Price is one of the five factors that determine demand. There’s a sixth, number of buyers, that drives Aggregate Demand. The important thing to know is that the demand curve only shows how the quantity changes in response to price, ceteris paribus (all other things being equal). If one of the other determinants change, it will shift the entire demand curve. That means more (or less) will be demanded, even though the price remains the same.
Examples
A good example of elastic demand is housing. That’s because there are so many different housing choices. People could live in a townhouse, condo, apartment or even with friends or family. Because there are so many options, it’s easy for people to not pay more than they want to.
Clothing also has elastic demand. True, people have to wear clothes, but there are many choices of what kind of clothing and how much to spend. When some stores offer sales, other stores have to lower their clothing prices to maintain demand. Small stores that can’t offer huge discounts go out of business. During the Great Recession, many clothing stores were replaced by second-hand stores that offered quality used clothing at steeply discounted prices.
Karnataka Class 12 Commerce Economics Elasticity Of Demand Complete Notes
Karnataka Class 12 Commerce Economics Elasticity Of Demand : The graph illustrates the demand curves and places along the demand curve that correspond to the table. The elasticity of demand changes as one moves along the demand curve. This is an important concept – the elasticity of demand for a good changes as you evaluate it at different price points. These charts are for illustration only. To determine if a demand is elastic at a given price, you have to evaluate it with the methods we’re about to discuss.
Formulas for Elasticity of Demand
The formula for elasticity of demand can be formulated two different ways depending on what is available to you at the time. To calculate the elasticity of demand in either case, you will need a demand curve for a good. This can be in graphical or equation format. Essentially, when determining the elasticity of demand, you are trying to determine the slope of the demand curve at a given point on the curve. The first method is called arc elasticity of demand. This method is used when either:
- You don’t have the exact equation for demand
- You aren’t familiar with taking derivatives
The second method is called point-price elasticity of demand. This method is used when you:
- Have the mathematical equation for demand
- Are familiar with taking derivatives of equations
As we’ve already said, the elasticity of demand is evaluating the slope of the demanded curve at a given point. The arc elasticity of demand takes the difference between two points along the curve. Therefore, there can be slight inaccuracies when using this method since it uses an arc on the curve rather than a single point, which is how the point-price elasticity of demand calculates the elasticity of demand.
The arc elasticity of demand formula is:
- E sub d = (P sub 1 + P sub 2)/(Q sub d1 + Q sub d2) * change in Q sub d/change in P, where:
- P sub 1 is the original price point, P sub 2 is the new price point,
- Q sub d1 is the quantity demanded at the original price point
- Q sub d2 is the quantity demanded at the new price point
- Change in Q sub d is the change in quantity demanded: Q sub d2 – Q sub d1
- Change in P is the change in price: P sub 2 – P sub 1
The price-point elasticity of demand formula is:
- Ed = P/Q sub d * dQ/Dp, where:
- P is the price at which you are evaluating the elasticity of demand
- Q sub d is the quantity demanded at the point you are evaluating elasticity of demand
- dQ/dP is the first derivative of quantity demanded with respect to price
When calculating the elasticity of demand for all goods with a downward sloping demand curve, you should get a negative value. Remember this as a good reality check on your work. However, in some reports and texts, people will leave off the negative sign when reporting elasticity of demand because it is almost always negative.
Example of Arc Elasticity of Demand
Follow these steps to determine the elasticity of demand via arc elasticity:
- Determine an original and new price point – for this example: P sub 1 and P sub 2.
- Evaluate the quantity demanded using the demand curve at points: P sub 1 and P sub 2; Q sub d1 and Q sub d2, respectively.
- Use this formula above and plug in the values for P sub 1 and P sub 2; Q sub d1 and Q sub d2.
- Reality check and interpret your results – you should get a negative value assuming the good is a downward sloping line!
So, assume this is the demand curve for lattes and you have to determine the elasticity of demand if prices increased from $4 per latte to $5 per latte. Since you do not have the exact formula, you have to use the arc elasticity of demand method. Following the four steps we just covered, you would get:
- P sub 1 = $4; P sub 2 = $5
- At P sub 1, Q sub d1 = 20 lattes (this is the quantity demanded at $4); at P sub 2, Q sub d2 = 10 lattes (quantity demanded at $5)
- Using the formula provided: Ed = (P sub 1 + P sub 2)/(Q sub d1 + Q sub d2) * change in Q sub d/change in P; and the values in steps one and two, you would get Ed = ($4 + $5)/(10 + 20) * (10 – 20)/($5 – $4) = $9/30 * (-10)/$1 = 0.3 * -10 = -3
- It’s a negative value. For every percent increase in price, quantity demanded will decrease by 3 lattes. Also, please note that the units (dollars and lattes) cancel out.
Karnataka Class 12 Commerce Economics Elasticity Of Demand Complete Notes
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