Measurement of Elasticity

– Its Significance

A.GOKULALAKSHMI/AP/BME / UNIT II/

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Measurement of Elasticity -its Significance
 Measurement of Elasticity
For practical Purposes it is not enough to know whether
the demand is elastic or inelastic. It is more useful to find out to
what extent it is so.
Two methods:
Ist method:
To compare the total outlay before and after the variations in Price.

Elasticity of demand is expressed in 3 ways:

1. Unity
2. Greater than unity
3. Less than Unity

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Measurement of Elasticity -its Significance
 Measurement of Elasticity
i, Unity:
Even though the price has changed, the total amount spent
remains the same.

ii, Greater than Unity:

With the fall in price the total amount spent increases
(Or)
Total amount spent decreases as the price rises .
iii, Less than Unity:
With the increase in price the total amount spent
increases
(Or)
Total amount spent decreases as the price decreases .

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Measurement of Elasticity -its Significance
 Measurement of Elasticity

S. Quantity
Price of pencils per dozen Total outlay
No Demanded

1 1/8/- 3 Dozen Rs. 4/8/-

2 1/4/- 4 Dozen Rs. 5/-/-

3 1/-/- 5 Dozen Rs. 5/-/-

4 -/12/- 6 Dozen Rs. 4/8/-

5 -/10/- 7 Dozen Rs. 4/6/-

6 -/8/- 8 Dozen Rs. 4/8/-

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Measurement of Elasticity -its Significance
 Measurement of Elasticity
ii, Method:
We compare the percentage change in price with the percentage
change in demand.

If the price rises by 50% and demand decreases by 50% -

Unity
If it decreases by more than 50% - Greater than unity.
If it decreases by less than 50% - less than unity.

%change in demand
Elasticity =
%change in price

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Measurement of Elasticity -its Significance
 Practical importance of the concept of
Elasticity of Demand
=> Government finance as well as trade and commerce.
=> Tax for commodities for which demand is inelastic.
=> Tax should be avoided for necessaries of life – public welfare

Monopolist – can fix his own price – will have to consider

the nature of demand.
Inelastic – increasing the price
Elastic – he will lower the price

When an industry is subject to increasing returns,

the manufacturer lowers the price to develop the market
so that he may be able to produce and take full advantage
of the conditions of large scale production.

A.GOKULALAKSHMI/AP/BME / UNIT II/

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Measurement of Elasticity -its Significance
 A.GOKULALAKSHMI/AP/BME / UNIT II/
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Measurement of Elasticity -its Significance
 %Elastic Demand % Inelastic Demand

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Measurement of Elasticity -its Significance
 SUMMARY

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Measurement of Elasticity -its Significance