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Managerial Economics: Elasticity of Demand

Managerial Economics discusses the elasticity of demand, which is the percentage change in quantity demanded in response to a percentage change in a determinant of demand, such as price. There are different types of elasticity, including price elasticity, income elasticity, cross price elasticity, and advertisement elasticity. Price elasticity in particular can be perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, or unitary elastic depending on the responsiveness of quantity demanded to price changes. Elasticity is measured using percentage, point, geometric, or arc methods. Factors like availability of substitutes influence a product's elasticity. Understanding elasticity helps with business planning, market strategies, and policymaking.

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66 views19 pages

Managerial Economics: Elasticity of Demand

Managerial Economics discusses the elasticity of demand, which is the percentage change in quantity demanded in response to a percentage change in a determinant of demand, such as price. There are different types of elasticity, including price elasticity, income elasticity, cross price elasticity, and advertisement elasticity. Price elasticity in particular can be perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, or unitary elastic depending on the responsiveness of quantity demanded to price changes. Elasticity is measured using percentage, point, geometric, or arc methods. Factors like availability of substitutes influence a product's elasticity. Understanding elasticity helps with business planning, market strategies, and policymaking.

Uploaded by

Savita Saraf
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Managerial Economics

Elasticity Of Demand
Concepts Of Elasticity Of Demand

Two Variables are considered while measuring the elasticity of


demand :-
 Demand
 Determinants Of Demand

Elasticity Of Demand = percentage change in quantity demanded


percentage change in determinant of demand
Types Of Elasticity Of Demand
Price
Elasticity

Advertisement Cross Price


Elasticity Demand Elasticity

Income
Elasticity
Price Elasticity Of Demand

The price elasticity of Demand may be defined as the ratio of the


relative change in demand and price variables.

e = percentage/proportional change in quantity demanded


percentage/proportional change in price
Types Of Price Elasticity

Perfectly
Elastic

Perfectly
Inelastic

Price
Elasticity
Unitary Relatively
Elastic Elastic

Relatively
Inelastic
Perfectly Elastic

Consumers have indefinite


demand at a particular
price and none at all at an
even slightly higher than
this given price, demand is
PERFECTLY ELASTIC

e=∞
Perfectly Inelastic

When the demand for a


commodity shows no response
to a change in price/ whatever
change in price, the demand
remains same, it is called
PERFECTLY ELASTIC

e=0
Relatively Elastic
When the proportion of
change in the quantity
demanded is greater than
that of price, the demand is
said to be RELATIVELY ELASTIC

e>1
Relatively Inelastic
When the proportion of change
in the quantity demanded is
less than that of price the
demand is considered to be
RELATIVELY INELASTIC

e<1
Unitary Elastic
When the proportion of
change in demand is exactly
the same as the change in
price, the demand is said to
be UNITARY ELASTIC

e=1
Measurement Of Price Elasticity

Percentage/
Proportionate
Method

Measurement
Of Price
Elasticity
Geometric/
Arc Method Point
Method
Point/Geometric Method

This method attempts


to measure the price
elasticity of demand
at a particular point
on demand curve

Point Elasticity = Lower segment of demand curve below the point


Upper segment of demand curve below the point
Arc Elasticity Of Demand

Arc Elasticity of
Demand measures the
elasticity at the mid
point between two
points on a curve
Income Elasticity Of Demand

The income elasticity is defined as a ratio percentage or proportional


change in the quantity demanded to the percentage or proportional
change in income.

Income Elasticity = percentage change in quantity demanded


percentage change in income
Cross Elasticity Of Demand

The cross elasticity of demand refers to the degree of


responsiveness of demand for a commodity to a given change in the
price of some related commodity.

Cross Elasticity Of Demand =


Proportionate/percentage change in demand for x
Proportionate/percentage change in price of y
Factors Influencing Elasticity Of Demand
• Nature of commodity
• Availability of substitutes
• Number of uses
• Consumers income
• Height of price and range of price change
• Proportion of expenditure
• Durability of the commodity
• Habit
• Complementary goods
• Time
• Recurrence of demand
• Possibility of postponement
Application Of Income Elasticity

 Long term business planning

 Market strategy

 Housing development strategies


Practical Applications

 To businessmen
 To the government and finance minister
 To international traders
 To policy makers
 To trade unionists
Thank you

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