Presentation On: Elasticity OF Demand
Presentation On: Elasticity OF Demand
ELASTICITY
OF
DEMAND
Prepared By
Vyas Harshal
Definition Of Price Elasticity Of Demand
y
When the
Perfectly elastic
P demand curve demand for a
R product changes
I
D
–increases or
D
C decreases even
E when there is no
change in price,
it is known as
perfect elastic
0 x
demand.
Relatively elastic demand
y
When the
P Relatively elastic proportionate
demand curve
R
D
change in
I demand is more
C
than the
E
proportionate
D
changes in
price, it is
0 x
known as
demand
relatively elastic
demand.
Elasticity of demand equal to utility
When the
y
D
proportionate
P
change in
R
demand is equal
I Elasticity of
demand equal to proportionate
C to utility curve changes in price,
E
D
it is known as
unitary elastic
0 demand
x demand
Relatively inelastic demand
Y
D When the
Relatively inelastic
demand curve
proportionate
change in demand
P
is less than the
R proportionate
I changes in price, it
C is known as
relatively inelastic
E
demand
D
O X
demand
Perfectly inelastic demand
Y
D
When a change in
price, howsover
Perfectly inelastic
P demand curve large, change no
R
changes in quality
demand, it is known
I
as perfectly inelastic
C demand
E
0 D X
demand
ALL KINDS OF DEMAND CAN BE SHOWN
IN ONE DIAGRAM AS FOLLOW
Y
WHERE
P D1) Perfectly elastic
R demand
D
I
D1 D2)Relatively elastic
demand
C
D2 D3)Elasticity of demand
E D3
equal to utility
D4
D4)Relatively inelastic
0 D5 X demand
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
= Proportionate change in demand for x
elasticity of
demand Proportionate change in Price for x
OR
qx px
_____ _____
/
Qx Px
Here,
qx = change in the quantity of x demanded
p4 E>1
P
R p3
E=1
I p2
C
p1 E<1
e
0 Q1 Q2 Q3 x
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
y d
e=
8
b
e>1
c e=1
e<1 d
e=0
0 a x
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
WHERE,
Q1 = original quantity demanded
Q2 = new quantity demanded
p1 = original price
p1 = new price
(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
P
A
D
Income
B S
O Quantity Demanded X
Positive Income elasticity of demand
Total Revenue
B S
O X
D
Quantity Demanded
All Income Graphs Representation
Y
F
E
D
Income
C
B
A
O X
Quantity Demanded
Measurement Of Income Elasticity Of
Demand
= (5/20) + (500/2500)
= 1.5
therefore here the IED is 1.5 which is more
than one.
Factors Affecting Income Of Demand
• 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
Types of Elasticity Of Substitution on
Graph
Change in QUANTITIY ratio of good x & y
Y
E4
E3
E5
E2
E1
X
O
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:
O X
Demand for Y
Cross Elasticity of Demand For
Y Complementary Products
D
Price of Y
D
O X
Demand for Y
Cross Elasticity of Demand For Neutral
Y Products
D
Price of Y
O X
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
∆qx ∆a
Advertising Elasticity of Demand = ÷
Q A
Relationship Between Advertising
Y
Expenditure and Sales
S
Sales
O X
Advertising Expenditure
Factors Affecting Advertising Elasticity
Of Demand
• The stage of the Product’s 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 co-
relationship 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
******THE END******