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SUPPLY AND ELASTICITY

OF DEMAND

ELASTICITY OF
DEMAND
Definition:
Elasticity of demand is the measurement of the change in demand in response to a given change in the priceof a commodity

THERE ARE THREE BASIC TYPES USED:


Income

elasticity of demand Price elasticity of demand Cross elasticity

1. INCOME
ELASTICITY OF DEMAND
Formula: Ey = prop. Change in demand prop. Change in income

EXAMPLE:
Income 100 200 Demand 10 20

200 income

100
10 quantity 20

TYPES OF INCOME ELASTISITY OF DEMAND:


A. Perfectly inelasticity of demand:
D

income quantity B. Perfect elasticity of demand:

income

quantity

C. Unitary elasticity of demand

D income
D

quantity D. Highly elasticity of demand

income D quantity

E. HIGHILY

INELASTICITY OF DEMAND

income D quantity

2. CROSS
ELASTICITY OF DEMAND
Formula:
prop. Change in the

Ec

demand of commodity X prop. Change in the price of commodity Y

CROSS ELASTICITY OF DEMAND FOR TWO TYPES OF COMMODITY:


Sustitute

goods Complimentory goods

SUBSTITUTE GOODS:
Y
D 5 4

price 3
D

X
30 40 50

quantity

TYPES OF CROSS ELASTICITY OF SUBSTITUTE GOODS:


Y
D

Y
D

price
D

price
D

price
D

quantity Highly elasticity of demand Y D price

X quantity Unitary elasticity of Y demand

quantity
DEMAND

HIGHILY INELASTICITY OF

price
X quantity Perfect elasticity of demand

X quantity perfectly inelasticity of demand

COMPLIMENTARY GOODS:
Y
D

price

5 4 3 D

10

20

30

quantity

TYPES OF CROSS ELASTICITY OF COMPLIMENTARY GOOD:


Y Y
D D

Y
D

price
D

price
D

price
D

X quantity Highly elasticity of demand

X quantity Unitary elasticity of demand

HIGHILY INELASTICITY
OF DEMAND

quantity

Y
D

price

price

X quantity perfectly inelasticity of demand

X quantity perfectly inelasticity of demand

PRICE ELASTICITY OF DEMAND


Price elasticity of demand measures the responsiveness of demand for a commodity to change in its price.

EP = CHANGE IN QUANTITY DEMANDED


CHANGE IN PRICE

DEGREES (OR KINDS) OF PRICE ELASTICITY OF DEMAND

Perfectly Inelastic Demand Perfectly Elastic Demand Highly Inelastic Demand Highly Elastic Demand Unitary elastic demand

PERFECTLY INELASTIC DEMAND


Y

Perfectly inelastic demand is one in which a change in price produce no change in demand

Price

Ep = 0

Q Quantity Demand

PERFECTLY ELASTIC DEMAND

Perfectly elastic demand is one in which a little change in price will cause an infinite change in demand

Ep = Price
P D

O Quantity Demand

RELATIVELY INELASTIC DEMAND (HIGHLY INELASTIC DEMAND)

Proportionate change in demand is lesser than the proportionate change in price

Y
D

Ep < 1

P
Price

P1
D O

Q1

Quantity Demand

RELATIVELY ELASTIC DEMAND (HIGHLY


ELASTIC DEMAND

Proportionate change in demand is much greater than proportionate change in price

Ep > 1
D Price

P P1
D

Q1

Quantity Demand

UNITARY ELASTIC DEMAND

The percentage change in demand is equal to percentage change in price

Ep = 1

P
P1 D
O

Q1

Quantity Demand

METHODS
TOTAL OUTLAY METHOD
Value of price elasticity
Ep >1

When price Falls


Total expenditure rises Total expenditure decreases Total expenditure remains constant

When Price Rises


Total expenditure decreases Total expenditure increases Total expenditure remains constant

Y
A (Ep > 1)

Price

B
(Ep =1) C D

Ep < 1

Ep = 1

(Ep < 1)

O X Total Expenditure(Rs.)

PERCENTAGE ( OR PROPORTIONATE METHOD)

Ep = Percentage change in demand Percentage change in price Mathematically Representation :Q P P Q

Ep =

POINT METHOD
Linear demand curve Non-linear Demand Curve
Y C D

Y A

Ep = Ep > 1

Ep = 1

Price

Ep < 1

Price

A D E

Ep = 0

Quantity Demand X

O Quantity Demand

ARC METHOD

Price

P
P1

A B

Ep =
O Q Q1 X Quantity Demand

QA QA + Q1B PA PA + P1B

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