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Elasticity of Demand

1. Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. 2. Factors like the availability of substitutes, income levels, and proportion of income spent on the good determine a product's elasticity. Price elasticity can be perfectly elastic, perfectly inelastic, unit elastic, or relatively elastic/inelastic. 3. Income elasticity measures how responsive quantity demanded is to changes in consumer income. Cross elasticity measures responsiveness of one good's demand to price changes in another good. Advertising elasticity measures the effect of advertising changes on a market.

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2K views28 pages

Elasticity of Demand

1. Elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. 2. Factors like the availability of substitutes, income levels, and proportion of income spent on the good determine a product's elasticity. Price elasticity can be perfectly elastic, perfectly inelastic, unit elastic, or relatively elastic/inelastic. 3. Income elasticity measures how responsive quantity demanded is to changes in consumer income. Cross elasticity measures responsiveness of one good's demand to price changes in another good. Advertising elasticity measures the effect of advertising changes on a market.

Uploaded by

Akankshya Mishra
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ELASTICITY OF DEMAND

Prof. Sunil Das


Asst. Prof. Management
CIPET, Bhubaneswar
ELASTICITY OF DEMAND
• The demand for any commodity is depend
upon the price of the commodity , which the
condition that other things remain equal
• Whenever there is change in price, there is
change in quantity demanded.
• The change in quantity demanded as a result
of change in price is known as elasticity of
demand.
Measurement of Elasticity of Demand
• Prof.Marshall suggested a mathematical
method for measuring elasticity of demand.
• E= Percentage change is demand for a
product/ Percentage change in the price of the
product
Factors determining Elasticity of
Demand
• Nature of the product
• Extent of usage
• Availability of substitutes
• Income level of people
• Proportion of income spent on the commodity
• Urgency of Demand
Types of Elasticity of Demand
• Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
• Advertising Elasticity of Demand
Price Elasticity of Demand
• Price elasticity means the degree of
responsiveness of quantity demanded of a
good to changes in its prices.

• In other words, price elasticity of demand is a


measure of the relative change in quantity
purchased of a good in response to a relative
change in its price.
Price Elasticity of Demand
• Price elasticity can be precisely defined as “the
proportionate change in quantity demanded
in response to a small change in price, divided
by the proportionate change in price”
Price Elasticity of Demand
Types of price elasticity
• Perfectly elastic demand (ep = ∞)
• Perfectly inelastic demand (ep=0)
• Unit elasticity of demand (ep = 1)
• Relatively elastic demand (ep>1)
• Relatively inelastic demand (ep<1)
Perfectly elastic demand (ep = ∞)
When a small change in price
of a product causes a major
change in its demand, it is
said to be perfectly elastic
demand.

I In perfectly elastic demand, a


small rise in price results in
fall in demand to zero, while
a small fall in price causes
increase in demand to
infinity.

In such a case, the demand is


perfectly elastic or
ep = ∞
Perfectly inelastic demand (ep=0)

• A perfectly inelastic demand is one when there is


no change produced in the demand of a product
with change in its price.
• In case of essential goods, such as salt, the
demand does not change with change in price
Unit elasticity of demand (ep = 1)

• When the
proportionate
change in demand
produces the same
change in the price
of the product, the
demand is referred
as unitary elastic
demand.
Relatively elastic demand (ep>1)

• Relatively elastic
demand refers to
the demand when
the proportionate
change produced
in demand is
greater than the
proportionate
change in price of
a product.
Relatively inelastic demand (ep<1)

• Relatively inelastic
demand is one
when the
percentage change
produced in
demand is less
than the
percentage change
in the price of a
product.
PROBLEM

• The price elasticity of demand


for milk is 0.3, which is less
than one. Therefore, in such a
case, the demand for milk is
relatively inelastic.
2. Income Elasticity of Demand
• Income elasticity of
demand measures the
responsiveness of the
quantity demanded for
a good or service to a
change in the income
of the people
demanding the good,
other things remaining
constant.
Types of Income Elasticity of
Demand
• High income elasticity of demand (ϵ Y > 1)
• Unitary income elasticity of demand (ϵ Y = 1)
• Low income elasticity of demand (ϵ Y < 1)
• Zero income elasticity of demand (ϵ Y = 0)
• Negative income elasticity of demand (ϵ Y < 0)
High income elasticity of demand
(ϵ Y > 1)
• In this case increase in income is accompanied
by relatively larger increase in quantity
demanded.
• Here the value of coefficient ϵ Y is greater
than unity (ϵ Y > 1).
• E.g.: 20% increase in quantity demanded due
to 10% increase in income.
Unitary income elasticity of demand
(ϵ Y = 1)
• In this case increase in income is accompanied
by same proportionate increase in quantity
demanded.
• Here the value of coefficient ϵ Y is equal to
unity (ϵ Y = 1)
• E.g.: 10% increase in quantity demanded due
to 10% increase in income.
Low income elasticity of demand
(ϵ Y < 1)
• In this case proportionate increase in income
is accompanied by less than increase in
quantity demanded.
• Here the value of coefficient ϵ Y is less than
unity (ϵ Y < 1)
• E.g.: 5% increase in quantity demanded due to
10% increase in income.
Zero income elasticity of demand
(ϵ Y = 0)
• This shows that quantity bought is constant
regardless of changes in income.
• Here the value of coefficient ϵ Y is equal to
zero (ϵ Y = 0)
• E.g.: No change in quantity demanded even
with a 10% increase in income
Negative income elasticity of demand
(ϵ Y < 0)
• In this case increase in income is accompanied
by decrease in quantity demanded.
• Here the value of coefficient ϵ Y is less than
zero/negative (ϵ Y < 0)
• E.g.: 5% decrease in quantity demanded due
to 10% increase in income.
3.Cross Elasticity of Demand
• The cross elasticity of demand measures the
responsiveness of the quantity demanded for
a good to a change in the price of another
good, ceteris paribus.
• It is measured as the percentage change in
quantity demanded for the first good that
occurs in response to a percentage change in
price of the second good.
For example
• if, in response to a 10% increase in the price of
fuel, the demand for new cars that are fuel
inefficient decreased by 20%,
• the cross elasticity of demand would be:
− 20 %/ 10 % = − 2
• A negative cross elasticity denotes two
products that are complements, while a
positive cross elasticity denotes two substitute
products.
Negative and Positive Cross Elasticity
of Demand
4.Advertising Elasticity of Demand
• Advertising elasticity of demand, is an
elasticity measuring the effect of an increase
or decrease in advertising on a market.
The price elasticity of demand
measures (Quiz)

A) the slope of a budget curve.


B) how often the price of a good changes.
C) the responsiveness of the quantity demanded
to changes in price.
D) how sensitive the quantity demanded is to
changes in demand.
Thank You

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