Presentation On

ELASTICITY OF DEMAND

Prepared By
Vyas Harshal

Definition Of Price Elasticity Of Demand

The change in the quantity demanded of a product due to a change in its price is known as Price elasticity of demand. Thus, the sensitiveness or responsiveness of demand to change in price is as called elasticity of demand

Kinds Of Price Elasticity Of Demand

1) 2) 3) 4) 5) Perfectly elastic demand Relatively elastic demand Elasticity of demand equal to utility Relatively inelastic demand Perfectly inelastic demand Let Us See Some Views On Them

Perfectly elastic demand

y P R I D Perfectly elastic demand curve

C
E

When the demand for a product changes increases or decreases even when there is no change in price, it is known as perfect elastic x demand.

Relatively elastic demand

y P R I C E D D Relatively elastic demand curve

demand

When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.

Elasticity of demand equal to utility

When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand

y P R I C E Elasticity of demand equal to utility curve D

D
0 x

demand

Relatively inelastic demand

Y

D
P R

Relatively inelastic demand curve

I
C E

When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand

D
O X demand

Perfectly inelastic demand

Y D

P R

I
C E

When a change in price, howsover Perfectly inelastic large, change no demand curve changes in quality demand, it is known as perfectly inelastic demand

D demand

ALL KINDS OF DEMAND CAN BE SHOWN IN ONE DIAGRAM AS FOLLOW

Y

P R D

I
C E D4 0 D5 DEMAND X D3

D1
D2

WHERE D1) Perfectly elastic demand D2)Relatively elastic demand D3)Elasticity of demand equal to utility D4)Relatively inelastic demand D5)Perfectly inelastic demand

Measurement Of Price Elasticity Of Demand

There are main methods like 1. Percentage method or proportionate method 2. Total outlay method or total revenue method 3. Geometric method or point method 4. Arc elasticity of demand

1 Percentage method or proportionate method

Price elasticity of demand is measured by a ratio between the proportionate change in the quantity of a product demanded as a result of a proportionate change in its price Formula for calculate this is given further as following

Percentage method or proportionate method

qx px _____ _____ / Qx Px Here,

qx = change in the quantity of x demanded Qx = original quantity of x demanded px = change in the price of x Px = original price of x

Price elasticity of demand

Proportionate change in demand for x Proportionate change in Price for x OR

Total outlay method or total revenue method

Total outlay means total expenditure and since total expenditure of consumers on a product implies total receipts or total revenue of sellers, it is known as total revenue method. It will be clear with following table

price quantity Total outlay

1 5 4 100 130 500 520

Price elasticity
Elasticity of demand is greater than 1(e>1)

2
3

5
4 5 4

100
120 100 125

500
480 500 500

Elasticity of demand is less than 1(e<1)

Elasticity of demand is equal than 1(e=1)

Total outlay method or total revenue method

This can be shown in graph as given
y p4

P
R I C p3 p2 p1
E<1

E>1

E=1

e
x

Q1

Q2

Q3

Total outlay

Geometric method or point method

This method attempts to measure numerical elasticity of demand at a particular point on the demand curve Price elasticity can be measure by following method
Price elasticity of demand
=

Lower segment of the demand curve

upper segment of the demand curve

Geometric method or point method

It can be shown in graph as following
y b e>1 e= 8 d

e=1

e<1
e=0 0 a

Arc elasticity of demand

It is the use of middle points between old and new figures in the case of both price and quantity. This method is known as arc elasticity method We can measure it with formula as given

Arc elasticity of demand

Price elasticity of demand WHERE, Q1 = original quantity demanded Q2 = new quantity demanded p1 = original price p1 = new price
Q1-Q2 = Q1+Q2 / P1+P2 P1-P2

(5) Factors Affecting Price Elasticity Of Demand

Factors Affecting Price Elasticity Of Demand

Nature of the Commodity Availability of Substitutes Variety of uses of commodity Postponement Influence of habits Proportion of Income spent on a commodity Range of prices

Factors Affecting Price Elasticity Of Demand

Income Groups Elements of time Pattern of income distribution

(6) Practical Importance of the Concept of Price Elasticity Of Demand

Practical Importance of the Concept of Price Elasticity Of Demand

The concept is helpful in taking Business Decisions Importance of the concept in formatting Tax Policy of the government For determining the rewards of the Factors of Production To determine the Terms of Trades Between the Two Countries

Practical Importance of the Concept of Price Elasticity Of Demand

Determination of Rates of Foreign Exchange For Nationalization of Certain Industries In economic Analysis ,the concept of price elasticity of demand helps in explaining the irony of poverty in the midst of plenty.

(7) Income Elasticity Of Demand

Types Of Income Elasticity Of Demand

Positive Income elasticity of demand Negative Income elasticity of demand Zero Income elasticity of demand

Positive Income elasticity of demand

D

P A Income D

B S Quantity Demanded

Positive Income elasticity of demand

Income Elasticity Equal to Unity or One Income Elasticity Greater Than Unity Or One Income Elasticity Less Than Unity or One

Negative Income elasticity of demand

Price P

Total Revenue
B S

Quantity Demanded (000s)

Zero Income elasticity of demand

Y D

Income
O

D Quantity Demanded

All Income Graphs Representation

Y F

E
Income C B A D

Quantity Demanded

Measurement Of Income Elasticity Of Demand

Proportionate change in Demand Income Elasticity Of Demand = Proportionate change in Income

i.e. q Income Elasticity Of Demand = Q

y Y

Measurement Of Income Elasticity Of Demand

Here , q = Change in the quantity demanded. Q = Original quantity demanded. y = Change in income. Y = Original income. For e.g. ,when Income of the consumer = 2,500/- , he purchases 20 units of X, when income = 3,000/- he purchases 25 units of X

Measurement Of Income Elasticity Of Demand

Thus Income Elasticity of Demand q y + = Y
Q

= (5/20) + (500/2500) = 1.5 therefore here the IED is 1.5 which is more than one.

Factors Affecting Income Of Demand

Income Itself Only. Price Of the Commodity

Importance Of the Concept of Income Elasticity Of Demand

In production planning and management In forecasting demand when change in consumers income is expected In classifying goods as normal and inferior In expansion and contraction of the firm by the figure of income elasticity of demand Markets situations could be studied with the help of IED

(8) Elasticity Of Substitution

The selection between two product or thing is called substitution So Elasticity of Substitution measures the rate at which the particular product is substituted . Thus EOS is the degree to which one product could be substituted in context of price and proportion

Elasticity Of Substitution
Elasticity of Substitution = Proportionate change in the quantity ratios of goods x & y DIVIDED BY Proportionate change in the price ratios of goods x & y.

Types of Elasticity Of Substitution

Zero Elasticity of Substitution. Infinite Elasticity Of Substitution Elasticity of Substitution greater than unityor1 Elasticity of Substitution is equal to one Elasticity of Substitution is less than one

Change in QUANTITIY ratio of good x & y

Types of Elasticity Of Substitution on Y Graph

E4

E3

E5

E2 E1 X Change in PRICE ratio of good x & y

Relationship Between Price Elasticity, Income Elasticity and Substitution Elasticity

As Price is depended on income and substitution effect similarly Price Elasticity is depended on Income Elasticity an Substitution Elasticity . These relationship can be represented by Ep = Kx E1 + ( 1 Kx ) es

Price elasticity of demand depends on:

Proportion of income spent on particular good say X. Income elasticity of demand. Elasticity of substitution. Proportion of income spent on product other than X.

Cross Elasticity of Demand

Cross elasticity of demand express a relationship between the change in the demand for a given product in response to a change in the price of some other product E.g. if the X tea demand reduces tremendously than it effect could be seen in demand of sugar and milk.

Types of Cross Elasticity of Demand

Cross Elasticity of Demand Equal to Unity or One Cross Elasticity of Demand Greater than Unity or one Cross Elasticity of demand less than unity or one

Measurement Cross Elasticity of Demand

Proportionate change in Demand for product X
Cross Elasticity of Demand = Proportionate change in Price of product Y p y

i.e.

Cross Elasticity of Demand = qx Qx

Py

Cross Elasticity of Demand For Substitutes

D

Price of Y

D O X

Demand for Y

Cross Elasticity of Demand For Complementary Products

D

Price of Y

D O Demand for Y X

Cross Elasticity of Demand For Neutral Products Y

D Price of Y O

Demand for Y

Importance of Cross Elasticity Of Demand

The concept is of very great importance in changing the price of the products having substitutes and complementary goods . In demand forecasting Helps in measuring interdependence of price of commodity . Multiproduct firms use these concept to measure the effect of change in price of one product on the demand of their other product

Advertising Elasticity of Demand

Advertising elasticity of demand is the measure of the rate of change in demand due to change in advertising expenditure The amount of change in demand of goods due to advertisement is known as Advertisement Elasticity of Demand .

Advertising Elasticity of Demand

Proportionate change in Demand for product
Advertising Elasticity of Demand = Proportionate change in Advertising expenditure

i.e.

Advertising Elasticity of Demand =

qx

Relationship Between Advertising Expenditure and Sales Y

S Sales S

Advertising Expenditure

Factors Affecting Advertising Elasticity Of Demand

The stage of the Products Market Development . Reaction of market Rival Firms. Cumulative Effect of Past Advertisement. Influence of Other Factors.

Importance of the Advertising Elasticity Of Demand in Business Decisions

It is useful in competitive industries. Though advertisement shifts the demand curve to right path but it also increases the fixed cost of the firm.

Limitation of Advertising Elasticity of the Demand

The impact of advertising on sales is different under different conditions, even if other demand determinants are constant. Like wise, it is difficult to establish any corelationship between advertising expenditure and volume of sales when there counter advertisements by rival firm in the market . The effect on sales depend on what the rivals are doing.

Thanking You All

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