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ELASTICITY OF DEMAND-PPT

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Avyuktha Raju
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21 views

ELASTICITY OF DEMAND-PPT

Uploaded by

Avyuktha Raju
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ELASTICITY OF DEMAND

Elasticity of demand is defined as the rate of responsiveness in the demand of


a commodity for a given change in any one of the determinants of demand.

Proportionate change in quantity demanded


Elasticity of demand = _______________________________________
Proportionate change in any one of the
determinants of demand
Types of Elasticity of Demand

There are four types of Elasticities of Demand:

1. Price Elasticity of Demand


2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Promotional/Advertising Elasticity of Demand
Price Elasticity of Demand
“The extent of response of demand for a certain commodity to a given change in
price, other demand determinants remaining constant, is termed as the price
elasticity of demand”.
Proportionate change in quantity demanded
Price Elasticity of Demand (Ep) = ____________________________________
Proportionate change in price
Q2 - Q1
Q1
Ep =
P2 – P1
P1
ILLUSTRATION:
The quantity demanded of a simple product X is 1000 units at a price of Rs. 100/-
each.
The price reduced by 10%, and the quantity demanded increased to 1500 units.
From the above details, calculate Price Elasticity of Demand?
Q2 - Q1
Q1
Ep =
P2 – P1
P1
Ep = 1500 – 1000/1000
90-100/100
Price Elasticity of Demand - Types

There are five types of Price Elasticity of Demand:

1. Perfectly Elastic Demand


2. Perfectly Inelastic Demand
3. Relatively Elastic Demand
4. Relatively Inelastic Demand
5. Unit Elasticity of Demand
Perfect Elasticity
In this state, at the given price demand is endless.
It implies that no change in price leads to an infinite changes in demand.

Perfect Elasticity: Ep= ∞


Perfect Inelasticity
In this stage, any change in price will not change the demand.
The response of demand to a change in price is nil.

Perfect Inelastic state of Demand: Ep = 0


Relative Elasticity
During this state, the proportionate change in quantity demanded is greater than that
of price.

Relative Elastic state of Demand: Ep = >1


Relative Inelasticity
In Relative Inelastic state of Demand, the proportionate change in the quantity
demanded is less than that of price.
Relative Inelasticity: Ep is <1
Unit Elasticity

If the proportionate change in the quantity demanded is exactly same as the change
in price, the demand is said to be Unitary elastic.
Unit Elasticity: Ep = 1
Income Elasticity of Demand
Income Elasticity of Demand measures the degree of responsiveness in quantity
demanded due to change in income.
It is defined as the proportionate change in quantity demanded of a certain commodity
due to the proportionate change in income level, while other determinants are constant.
Proportionate change in quantity demanded
Income Elasticity of Demand (Ei) = ____________________________________
Proportionate change in Income
Q2 - Q1
Q1
Ei =
I2 – I1
I1
Income Elasticity of Demand-Types
There are five types of Income Elasticity of Demand

1. High Income Elasticity of Demand


2. Low Income Elasticity of Demand
3. Unit Income Elasticity of Demand
4. Zero Income Elasticity of Demand
5. Negative Income Elasticity of Demand
High Income Elasticity

Here, an increase in income brings about a more than proportionate increase in


quantity demanded.
Symbolically it can be written as Ey > 1
Low Income Elasticity
When income increases quantity demanded also increases but less than
proportionately.
Low Income Elasticity value Ey is < 1
Unit Income Elasticity
The rise in income is proportionate to the increase in the quantity demanded.
Unit Income Elasticity Ey = 1
Zero Income Elasticity
The Quantity bought or demanded is the same even if income changes

Zero Income Elasticity Ey = 0


Negative Income Elasticity
An increase in incomes comes with a decrease in the quantity demanded.
Negative Income Elasticity Ey is less than 0
Cross Elasticity of Demand
Cross Elasticity of Demand is defined as “The proportionate change in the
quantity demanded of a particular commodity in response to a change in the
price of a related good, which might be a substitute or complementary good”.
Proportionate change in quantity demanded of
commodity ‘X’
Cross Elasticity of Demand (Ec) = ____________________________________
Proportionate change in the price of commodity ‘Y’

Q2x- /Q1x /Q1x


Ec =
P2y – P1y / P1y
A Case of Substitutes

In case of Substitutes, Cross Elasticity of Demand is positive


Ex: An increase in price of Coffee leads to an increase in demand for
tea.
A Case of Complementaries

While dealing with Complementary goods, Cross Elasticity of Demand


will be negative.
Ex: When price of car goes up, demand for fuel slightly slips.
Promotional/Advertising Elasticity of Demand

Promotional / Advertising Elasticity of Demand is defined as “The proportionate


change in quantity demanded of a certain commodity due to the proportionate
change in advertising effort, while all other determinants are constant”.

Proportionate change in quantity demanded


Advertising Elasticity of Demand (EA) = ____________________________________
Proportionate change in Advertising effort
Q2- /Q1 /Q1
EA =
A2 – A1 / A1
Factors determining Elasticity of Demand
1. Nature of the Commodity
2. Availability of Substitutes
3. Income Level
4. Variety of uses
5. Proportion of Income spent on the commodity
6. Durability of a commodity
7. Possibility of postponement
8. Time period

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