Team members

• Tanvi Pawaskar P38• Anuj Chitale P46• Mugdha Kulkarni P49• Puja Patil P56• Neha Nalawade P59

Elasticity of Demand measures the degree of responsiveness of the quantity demanded of a commodity to a given change in any of the determinants of demand.

Short Run V/s Long Run

Short Run = Less Elastice.g.. All basic necessity goods like food,medicine,clothes etc.

Long Run = Highly ElasticE.g.. All Luxury goods like car, laptop,jewellery etc.

Petroleum Industry

• One of the Luxurious Necessity

• Contributes 15 % in the total GDP

• Steep Prices of petrol

• Balance Of Payment Problem

Energy Crisis

• An Energy Crisis is any great shortfall in the supply or rise in the price of energy to an economy.

• It usually refers to the shortage of oil, electricity or other natural resources

• Sudden fall in supply of petrol.

• Demand went up .• Government increased

prices by 25% to 30% in order to control the demand.

• Demand decreased by only 5 to 6 %.

• Preference to fuel efficient Vehicles.

• (Eg: Maruti 800)

Oil Shock of 1973 and 1979 &

Consumer behavior

Question 1

Why do you think the absolute value of demand elasticity is less in the short

run than in the long run?

Solution

• Short Run = ep < 1• Eg. House rent = 0.75 Clothing =0.68

• Long Run = ep > 1• Eg. House rent =1.82 Clothing =1.22

Question 2

Do you think jewellery as a commodity can also be categorized in the same

group as the others in the given table?In other words, will it also exhibit change

in the demand elasticity between the short run and the long run?

Explain why?

Solution

• Jewellery is a luxury commodity.• Highly Elastic or sensitive to slight

price change.• Eg. As price of gold rises by 1% , the

quantity demanded falls by 2.6%• Ep = 2.6

Question 3

Look around yourself and try to find other similar goods or services where the value of elasticity changes with the time horizon?By what extent does it change?

SolutionGoods + Services

Short run Demand Elasticity

Long run Demand Elasticity

Movies 0.87 3.67

Tires and Tubes

0.86 1.19

Housing 0.30 1.88

Foreign Travel 0.14 1.77

Question 4

The change in the value of demand elasticity between short and long run is much smaller in case of food than in clothing, what does this reflect about the consumer behaviour.

Solution

Price Demand Price Demand

Initial 10 100 10 100

Changed 11 97 11 96

10% 3% 30% 4%

0.30 0.40

Short Run Long Run

FOOD

Price Demand Price Demand

Initial 10 100 10 100

Changed 11 93 11 88

10% 7% 30% 12%

0.70 1.20

Short Run Long Run

CLOTHING

Question 5

What implication does the shift in rent elasticity from 0.75 to 1.82 have for landlord and house owners?

5th Question

Price Demand Price Demand

Initial 10 100 10 100

Changed 11 93 11 88

10% 7% 30% 12%

0.70 1.20

Short Run Long Run

Conclusion

• Less flexibility by consumers in short run• Even if price of commodity increases

consumer buy it- by habit- by need

• High flexibility by consumers in long run• Choice of alternatives making demand highly

elastic