Page 53 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes ice cream would be highly elastic. One the other hand, there are no good substitutes for
salt, hence it is likely to be inelastic.
2. Number of uses the commodity satisfi ed: The greater the number of uses of the commodity,
the greater is its price elasticity of demand. For example, aluminium, which has several
uses, is likely to be highly elastic. Thus, if the price of aluminium fell by a small amount,
the quantity demanded would increase substantially since it can be put to so many uses.
Since the percentage change in price is small and the percentage change in quantity large,
aluminium has a high price elasticity of demand. On the other hand, salt (which is only a
food) has only a single use and hence is inelastic.
3. Time period: The greater the time period, the greater is the price elasticity of demand. For
example, if the price of diesel increases, the quantity demanded by a firm will decrease by

a very small amount because in the short run the firm uses equipment that runs on diesel.

In the long run (greater time period), the firm can replace its existing equipment (which
runs on diesel) for one which runs on electricity. Thus, the percentage change in quantity
demanded is greater in the long run for the same percentage change in price. Thus, any
commodity is likely to be more elastic when its “adjustment time” is longer.
4. Proportion of income spent on the commodity: The greater the proportion of income
spent on a commodity, the larger is the price elasticity of demand. The reason is that the
proportion of income previously being spent on the commodity determines what amount
of income will be released as a result of the fall in price of the commodity. The income thus
released will be spent on increasing the purchase of the commodity as well as all other
commodities. Hence cars, refrigerators, etc., are likely to be price elastic while soaps, etc.,
are likely to be inelastic.

5. How narrowly the commodity is defi ned: The more narrowly a commodity is defi ned, the
greater is its price elasticity of demand. Hence the price elasticity of Marlboro cigarettes is
greater than the price elasticity of cigarettes; the elasticity of Campa Cola is higher than that
of soft drinks, etc. The reason is that there are many other good substitutes for Marlboro
(namely the many other brands of cigarettes) than cigarettes in general (namely cigars and
pipes).
A review of the basic formula of elasticity will show that it follows from the defi nition of price
elasticity.
% change in quantity demanded
e =−
p
% change in price
where,
New Quantity − Old Quantity
% change in Quantity demanded = × 100
Old Quantity
New price – Old price
and % change in price = Old price × 100

Let, P = Old price
Q = Old quantity
∆Q = New quantity – Old quantity
∆P = New price – Old price
Δ Q × 100
Q Δ Q P
e = (-) =− ×
()
p Δ P Δ P Q
P × 100

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