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 A measure of the extent to which the quantity demanded of
a good changes when the price of the good changes, ceteris
paribus.
 We know if we raise a price, the Qd will decline, but we
donǯt know how much.
 Elasticity answers the Dzhow muchdz question.
 In Business, we want to know the relationship between Qd
and Price
 Ep = % Change in Quantity Demanded
% Change in Price
 m


 In case of wheat the committee thought that the farmers

would prefer a good crop instead the farmers preferred a
widespread crop faliure. Because if the production is low as
per the quantity demanded then the price of the wheat will
rise automatically and this will benefit the farmers as their
total revenues are rising and when the production is high
the farmers inspite of having a good harvest cannot earn
more because wheat is a necessity product and farmers
cannot influence its price.
 î
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 Percentage Change measures how much a value has

changed from one time period to another
 For Example, if a farmerǯs sales for the current year
amounted to $100 and the previous year, the same farmerǯs
sales were $90. What was the percentage change?
 There are two methods of calculating the percentage
change
Ȉ Simple Method
Ȉ Midpoint Method
 î
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 Simple Method

Percentage Change = Current Value-Previous Value

Previous Value
0 or, = $100 - $90 = $10 = 11.1%
$90 $90
0 Very Common Usage, especially in the business world
 î
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 Midpoint Method
Percentage Change = Current Value Ȃ Previous Value
(Current Value + Previous Value)/ 2

0 Or, = $100 -$90 = $10 = 10.5%

($100+ $90)/2 $95

0 The midpoint method is the better method because it gives

similar results whether we are measuring forward or
backward
 m



 

 From Formula Ep = % Change in Qd

% Change in Price

 If Price Elasticity of Demand > 1, demand is elastic

 If Price Elasticity of Demand = 1, demand is unit elastic
 If Price Elasticity of Demand < 1, demand is
inelastic
 


 Elastic Demand Ȃ When % Change in Quantity Demanded

> % Change in Price
 Unit Elastic Demand Ȃ When % Change in Quantity
Demanded = % Change in Price
 Inelastic Demand Ȃ When % Change in Quantity
Demanded < % Change in Price
 Perfectly Elastic Demand Ȃ When Quantity Demanded
Changes by a very large percentage in response to an almost
zero Change in Price
 Perfectly Inelastic Demand Ȃ When the Quantity
Demanded remains constant as Price changes
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 Profit maximization requires that business set a price that

will maximize the firmǯs profit
 Elasticity tells the firm how much control it has over using
price to raise profit
 If Ep > 1, then the % Change in Qd > % Change is Price and
demand is said to be elastic
Ȉ An increase in price will reduce total revenue
Ȉ A decrease in price will increase total revenue
 ½


m



 

 If Ep < 1, then the % change in Qd < % change in price, and

demand is said to be inelastic
Ȉ An increase in price will increase total revenue
Ȉ A decrease in price will decrease total revenue

0 If Ep = 1, then the % change in Qd = % change in Price, and

demand is said to be unit elastic
Ȉ An increase in price will have no impact on total revenue
Ȉ A decrease in price will have no impact on total revenue
 m



 
 Substitute Product Availability (key determinant)
-- Luxury or Necessity (Ep for luxury items is >)
-- How narrowly it is defined (coffee is inelastic but latte may
have more substitutes and therefore is more elastic)
-- Time elapsed since price change (>time, >elasticity; more
time to find substitutes or manage consumption)
 Income Effects
-- The greater the proportion of income spent
on the good, greater a price change impacts
Quantity Demanded

          


  
 
   
 In case of Excess supply:
† Government can export
† It can store wheat in the inventory so that in case of
any shortage they can bring it out so that shortage
does not influence the price.
 In case of Shortage:
† Government should remove the middle men
because sometimes shortages are created by the
middle men to influence the price of the goods.
† It should make other regions of the country to
produce wheat by providing special benefits which
would result in a even distribution of crops
throughout the country.
† Strategy for releasing food grains in the country should be
improved, because if the food grains are not released
according to the quantity demanded it would lead to a rise
in the price of the food grains.
† The framework for the Indiaǯs food grain policy needs to be
improved because any wrong inducements will stall the
natural process of industrialization and the emergence of
labour-intensive manufacturing activities in some regions,
by keeping disproportionately large numbers of people
engaged in agricultural activity.

  

 





          



  

     






Agricultural products are a necessity to the population of the country and its
demand is inelastic with respect to the change in their price. A good government
will always try to control the prices of the agricultural product as they are the staple
food for the Indians. Government cannot influence much on the price of the
agricultural products because if they fail to make proper arrangements the price of
the products will shoot up, they will always try to keep their prices to a minimum
level that is why the Indian government had to announce MSP (Minimum Support
Price), it means the price at which the government is willing to purchase as much as
the farmers are willing to sell. Which means if the government is purchasing the
goods from the price which is lower than what is prevailing in the market then the
price of the agricultural goods will remain constant at the market price, hence for
making an impact the government has to purchase the goods from them at a
price higher than the market price which the government would sell it to the
general public at a higher price than the prevailing market price this will help
the government reduce its fiscal deficit. The net effect of this kind of
government action is to give an upward push to the price of food grains that
prevail in the open market.