MICROECONOMICS’ PROJECT ON

ELASTICITY
PRESENTED BY:-

AYUSH SWAYAM SHAKTI SHIVA KANOJIYA ADITYA KUMAR AKASH KUMAR

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 ELASTICITY
A measure of responsiveness of quantity demanded or quantity
supplied to a change in one of its determinants.

1. ELASTICITY OF DEMAND
2. ELASTICITY OF SUPPLY
 ELASTICITY OF DEMAND

“Elasticity of demand is the responsiveness of the quantity demanded of a

commodity to changes in one of the variables on which demand depends. In
other words, it is the percentage change in quantity demanded divided by the
percentage in one of the variables on which demand depends.”

The variables on which demand can depend on are:

• Price of the commodity / Price elasticity
• Prices of related commodities / Cross price elasticity
• Consumer’s income / Income elasticity.
 PRICE ELASTICITY OF DEMAND
The price elasticity of demand is the response of the quantity demanded to
change in the price of a commodity. It is assumed that the consumer’s income,
tastes, and prices of all other goods are steady. It is calculated as follows:-
MID POINT ELASTICITY FORMULA :- The method is used to
calculate price elasticity of demand between two point on a demand
curve, it is calculated as follows:-
 INCOME ELASTICITY OF DEMAND

The income elasticity of demand is a concept which shows how changes

in consumer’s income affect the quantity demanded of a particular
good. It is calculated by dividing percentage change is income by
percentage change in quantity demanded. Symbolically,
 CROSS PRICE ELASTICITY OF DEMAND

It is concept which shows how changes in prices of one good affects the
quantity demanded of another good. It can be calculated as follows:-
 SUBSTITUTE AND COMPLIMENTARY GOODS
•Positive – It is positive when the changes are directly proportional to each other.
This means the increase in the price of product A leads to an increase in the
demand for product B. Such instances occur when the products are a substitute
for each other.

•Negative – The value tends to be negative when the changes are inversely
proportional to each other. This means the increase in the price of product A leads
to a decrease in the demand for product B. Such instances occur in the case of
complementary products.

•Zero – When the elasticity of demand comes to zero, it indicates that the changes
in the price and demand of the products do not affect each other in any manner.
This happens when two products in question are completely unrelated to each
other.
 TYPES OF DEMAND CURVES BASED ON
ELASTICITY
Perfectly Elastic Demand (Elasticity = Infinity):In this case, consumers are
willing to buy a product only at a specific price, and any increase in price
would result in zero quantity demanded.

Perfectly Inelastic Demand (Elasticity = 0):This occurs when the quantity

demanded remains constant regardless of changes in price. Products with
essential uses, like life-saving medications, often exhibit perfectly inelastic
demand.

Unitary Elastic Demand (Elasticity = 1):When the percentage change in

quantity demanded is equal to the percentage change in price, the demand is
unitary elastic
Relatively Elastic Demand (Elasticity > 1):When a change in price leads to a
proportionally greater change in quantity demanded, the demand is
considered relatively elastic. This is common for non-essential goods or
services.

Relatively Inelastic Demand (0 < Elasticity < 1):In this case, the quantity
demanded changes less than proportionally to a change in price. Necessities
and products with limited substitutes tend to have relatively inelastic
demand.
PERFECTLY ELASTIC PERFECTLY UNITARY ELASTIC
INELASTIC

RELATIVELY ELASTIC RELATIVELY

INELASTIC
 ELASTICITY OF SUPPLY
The price elasticity of supply is a measure of the degree of responsiveness of the
quantity supplied to the change in the price of a given commodity. It is an
important parameter in determining how the supply of a particular product is
affected by fluctuations in its market price.It can be calculated as follows:-
 TYPES OF SUPPLY CURVES BASED ON ELASTICITY
Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity
of supply is infinite. This means that even for a slight increase in price, the supply
becomes infinite. For a perfectly elastic supply, the percentage change in the price
is zero for any change in the quantity supplied.
Unit Elastic Supply: A product is said to have a unit elastic supply when the
change in its quantity supplied is proportionate or equal to the change in its price.
The elasticity of supply, in this case, is equal to 1.
Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the
percentage change in the quantity supplied is zero irrespective of the change in its
price. This type of price elasticity of supply applies to exclusive items.
More than Unit Elastic Supply: When the percentage change in the
supply is greater than the percentage change in price, then the
commodity has the price elasticity of supply greater than 1.

Less than Unit Elastic Supply: When the change in the supply of a
commodity is lesser as compared to the change in its price, we can say
that it has a relatively less elastic supply. In such a case, the price
elasticity of supply is less than 1.
PERFECTLY ELASTIC PERFECTLY UNITARY ELASTIC
INELASTIC

RELATIVELY ELASTIC RELATIVELY

INELASTIC
 FACTORS AFFECTING ELASTICITY OF DEMAND

• Substitutability: The availability of close substitutes affects elasticity. If many

substitutes exist, demand tends to be more elastic because consumers can easily switch
to other products if the price changes.
• Necessity vs. Luxury: Necessities tend to have inelastic demand because consumers
need them regardless of price changes, while luxuries often have elastic demand as
consumers can forgo them if prices rise.
• Income Level: For normal goods, an increase in consumer income can lead to more
elastic demand. For inferior goods, an increase in income can lead to more inelastic
demand.
• Brand Loyalty: Products with strong brand loyalty may have more inelastic demand
because consumers are less likely to switch to alternatives in response to price changes.
• Complementary Goods: The elasticity of demand for a product can be influenced by
the demand for complementary goods. If a product has strong complementary goods,
its demand may be more inelastic.
• Market Definition: The definition of the market can affect elasticity. A narrowly
defined market might have more elastic demand, while a broader market might have
more inelastic demand.
• Habit Formation: Products that are associated with strong habits or routines in
consumers' lives may have more inelastic demand as people are less likely to change
their consumption patterns.
• Government Regulations and Taxes: Policies such as taxes or subsidies can influence
elasticity. For example, a tax on a product may make its demand more inelastic as
consumers absorb some of the cost.
• Perceived Necessity: Consumers' perception of a product's necessity can impact
elasticity. If a product is perceived as essential, its demand may be less elastic.
 FACTORS AFFECTING ELASTICITY OF SUPPLY

• Time Horizon: Short-run and long-run supply elasticities differ. In the short run, supply
may be less elastic as firms have limited time to adjust production. In the long run,
supply can become more elastic as firms can adapt and invest in capacity.
• Resource Availability: The availability of key resources, such as labor, raw materials, or
technology, can affect supply elasticity. Limited resources can constrain the ability to
increase supply quickly.
• Production Technology: The ease of adjusting production methods and technology can
impact supply elasticity. Flexible technology allows for more rapid supply adjustments.
• Market Structure: In competitive markets, supply is often more elastic because firms
can enter or exit the market easily. In monopolistic or oligopolistic markets, supply may
be less elastic.
• Inventory Levels: Firms with higher inventory levels may have more elastic supply as
they can quickly respond to changes in demand or price.
• Government Regulations: Government policies, like price controls or production
quotas, can affect supply elasticity by limiting a firm's ability to adjust output in
response to market conditions.
• Production Costs: If production costs increase significantly with higher output,
supply may be less elastic as firms are less willing to produce more when prices rise.
• Perishability: Perishable goods may have inelastic supply because they cannot be
stored for extended periods, making it challenging to respond to price changes.
• Infrastructure: Adequate transportation and distribution infrastructure can impact
supply elasticity. Good infrastructure can make it easier for producers to respond to
market changes.
• Seasonality: Some goods have highly seasonal supply, leading to less elasticity
during the off-season and more during peak demand periods.