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BY:
DURGESH, FARAZ SHAHID, GAURAV, HIMANI
SHARMA, HUMA RAFI, JITENDER
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INTRODUCTION OF CASELET
y India faced two oil shocks in 1973 and 1979 as price of
petrol was hiked up.
y Resulted in two kinds of demand elasticity:-
y Short Run elasticity of demand.
y Long run elasticity of demand.
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Consequences of oil shocksOn the short run basis:
y Consumers started cutting down their vacation trips by
car.
y Started going to office in car pools.
y Started using public transport system.
y Even paid higher prices.
y Average petrol consumption decreased by 5-7%
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On the long run basis
y
People started showing different pattern after severalyears, as they started moving to jobs closer to their
residents.
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MARUTI 800 CASEy Demand was inelastic in the mid 1980s because of its
lower running cost.
y By late 1980s the price elasticity demand for maruti 800fall by more than 20%. The reasons may be:
(1) Indian industry was highly regulated till the mid-1980s
(2) The market structure in most manufacturing sectors was
largely shaped by government policy.(3) Deregulation after 1985 allowed greater scope for
competitive processes.
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ELASTICITY OF DEMANDIt is the measure of the responsiveness in the quantity
demanded of the commodity to a change in its price.
e = % change in dependent variable
%change in independent variable
If substitutes are available then, demand is elastic (Ep>1).
Eg: coke, sugar.
If substitutes are not available then, demand is inelastic(Ep
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SHORT RUN ELASTICITY OF
DEMAND IS LESS ELASTIC THANTHE LONG RUN ELASTICITYy Its difficult to substitute a commodity instantly(short run)
but longer the time period greater can be the ease ofsubstitution (long run).
y It usually takes some time for consumers to learn of the
availability of substitutes and to adjust their purchases to
the price change.y So, In the short run demand is likely to be less elastic
than the long run elasticity.
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EXAMPLEy Introduction of mobile phones in India.yNearly 20 years back, the price elasticity for the same was
much inelastic as they were of very high prices and were
unaffordable for common people.
y Over the period of several years(long run), when other
alternatives came into market with economical prices, the
price elasticity of the demand increases.
y Thus for a given price change and over a period of time,
the quantity demanded response is likely to be much
larger in the long run than in the short run.
y So, the price elasticity of demand is likely to be much
greater in the long run than in the short run.
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CONCLUSIONy The price elasticity of demand is greater when longer is
the time period allowed for consumers to respond to the
change in the commodity price.y If people are used to buying a good or a commodity, then
when the price goes up, they will buy it out of habit.
However, when they realize the price rise is permanent
they will expend energy in looking for alternatives.