Elasticity Applications

• Assuming the absence of taxes and subsidies,

  Consumer expenditure = Total Producer Revenue
• As Demand increases from DD to DD', consumer expenditure increases from p*q to p'*q'.

  
• Increase in price and quantity in response to a change in demand depends on factors such as the:

  • Magnitude of the increase in demand
  • Price elasticity of supply
• When demand increases, Qe > Qi and Pe < Pi.

  
• When supply increases, Qi < Qe and Pi < Pe.

  
• When demand is price inelastic, customer expenditure decreases by a larger magnitude than when the demand is price elastic.

  
• Customer expenditure increases by a similar magnitude when supply is price inelastic and when supply is price elastic.

  
• When demand is unitary elastic, a change in price leads to the same proportionate change in its quantity demanded in the opposite direction, ceteris paribus. Thus, consumer expenditure remains unchanged, independent of price changes.
• Limitations in the use of Elasticity Concepts:

  • Accuracy and Reliability of Data
  • Ceteris Paribus condition
  • Revenue vs Profit