Start the class by explaining the degree of attachment that we have with various products. For eg : Take three products – toothpaste, chocolates and clothes. If the price increases, which product do you think will have a minimal impact on the purchase and which product will have the most impact and why?
What is elasticity?
Elasticity is a measure of a variable’s sensitivity to a change in another variable. For eg: if we talk about price elasticity of demand, here we have two variables – Price of the product and demand of that product. From the above definition of elasticity, we can understand that Price elasticity of demand is the change in the demand of the product due to the change in the price of that product.
Price elasticity of Demand can be calculated as :
% change in quantity demanded
% change in price
Change in QD/ original QD
Change in price/ original price
When we started the class, we mentioned three categories of products:
Tooth paste (Necessity good): Even if the price of tooth paste increases or decreases, the consumption of tooth paste by a consumer will always remain the same. While calculating the price elasticity of demand, we assume that all the other determinants of the demand of that product are constant.
Incase of toothpaste, we observe:
% change in quantity demanded = 0
% change in price = (lets assume) = 1
Putting these values in the formula above, we get, the price elasticity of demand for toothpaste to be 0 or perfectly inelastic. In other words, the demand of toothpaste is not sensitive to its price.
The next category of product we chose was:
Chocolates (Normal good): Chocolates come under that category of product for which the consumption quantities can easily vary depending upon its price. For eg., you get 100 Rs. Every weekend to buy chocolate of your choice. You only love having Cadbury Silk and buy smallest packs to eat at regular intervals. Recently, the price of the small Cadbury silk jumped from Rs. 20 to Rs. 25. You went to the shop and came back home after buying 4 chocolates instead of 1 chocolate. Here, what happened exactly is that you were able to change the quantity of the product according to its price. If we try deriving price elasticity of demand here, we will get:
Change in QD/ original QD = 1/5
Change in Price / original Price = 5/25 = 1/5
Hence the price elasticity of demand for chocolates is :
If the price elasticity of demand is 1, it is also known as unitary elastic demand. In other words, the demand of product is said to be unitary elastic if demand of the product is equally sensitive to its price.
The third category of products that we chose were
Clothes (fashion wear): This category of product are the ones that are highly sensitive to its price because these products are bought or consumed by the buyer for fun when they have extra disposable income. For such products, consumers can stay without even buying them for months till either their price comes down or the income is enough to buy them.
For such products:
% change in QD = 1
% change in Price = 0
Thus, these products come under the category of highly elastic demand.