0 views

Uploaded by Pankaj

PPt

- Demand Analysis
- Economic Principle That Describes a Consumer’s Desire and Willingness To
- Elasticity of Demand and Supply_Synthesis
- Elasticity
- ElasticityofDemand-- Price and Income Elasticity
- Managerial Economics Notes Unit i & II-bits
- Elasticity of Demand RK.ppt
- MGEA02_TT1_2011F_A
- Chap 05
- 4 Online Elasticity 12 16 13
- Micro Economics Study Guide
- Chapter 3 - Elasticity.pptx
- Question 1
- 2281_nos_sw_2
- Theory of Consumer Behaviour
- Managerial Economics
- MRP Load Copy Merge Master Demand Schedule Training
- f5
- Economics
- D&S CURVE

You are on page 1of 19

Elasticity of Demand

“Elasticity” is a standard measure of the degree of

responsiveness (or sensitivity) of one variable to changes in

another variable.

Elasticity of Demand measures the degree of

responsiveness of demand for a commodity to a given

change in any of the independent variables that influence

demand for that commodity, such as price of the

commodity, price of the other commodities, income, taste,

preferences of the consumer and other factors.

Responsiveness implies the proportion by which the

quantity demanded of a commodity changes, in response to

a given change in any of its determinants .

Elasticity of Demand

Mathematically, it is the percentage change in quantity

demanded of a commodity to a percentage change in

any of the (independent) variables that determine

demand for the commodity.

Four major types of elasticity:

Price elasticity,

Income elasticity,

Cross elasticity

Advertising (or promotional) elasticity.

assume other variables as constant (ceteris paribus)

Price Elasticity of Demand

Price is most important among all the

independent variables that affect the demand for

any commodity.

Hence price elasticity of demand ( “ep” or “e”) is

considered to be the most important of all types of

elasticity of demand.

Price elasticity of demand means the sensitivity of

quantity demanded of a commodity to a given

change in its own price.

Degrees of Price Elasticity

Slope of demand curve is used to display Price

price elasticity of demand

Perfectly elastic demand

ep=∞ (in absolute terms). P D

Horizontal demand curve

Unlimited quantities of the commodity can

be sold at the prevailing price

O

Q1 Q2 Quantity

The other extreme of the elasticity range D

ep=0 (in absolute terms) Price

Vertical demand curve

Quantity demanded of a commodity P1

remains the same, irrespective of any

change in the price P2

Such goods are termed neutral.

O

Q1 Quantity

Degrees of Price Elasticity Contd

Highly elastic demand .

Proportionate change in quantity Price

D

demanded is more than a given change in

price P1

ep >1 (in absolute terms) P2 D

Demand curve is flatter

Unitary elastic demand O

Q1 Q2 Quantity

Proportionate change in price brings about

Price D

an equal proportionate change in quantity

demanded P1

ep =1 (in absolute terms). P2

Less elastic demand

D

Proportionate change in quantity

demanded is less than a proportionate O

Q1 Q2 Quantity

change in price

Price

ep <1 (in absolute terms) D

Demand curve is steep P1

P2

O D

Q1 Q2 Quantity

Methods of Measuring Elasticity

Ratio (or Percentage) Method

The most popular method used to measure elasticity

Elasticity of demand is expressed as the ratio of proportionate

change in quantity demanded and proportionate change in the

price of the commodity

It allows comparison of changes in two qualitatively different

variables

It helps in deciding how big a change in price or quantity is

ep =

Proportion ate change in price of commodity X

ep= Q2 Q1 / Q1

P2 P1 / P1

demanded, P1= original price level, P2= new price level

Methods of Measuring Elasticity

Contd…

Elasticity measured at a point of demand curve is referred as point

elasticity of demand.

It measures a very minute change in price and then measure the

elasticity

Ed = Lower segment of Demand Curve/Upper segment of Demand

Curve

For nonlinear demand curve we need to apply calculus to calculate

point elasticity.

As changes in price become smaller and approach zero, the ratio

becomes equivalent to the first order derivative of the demand

function with respect to price

Point elasticity can be expressed as:

dQ / Q dQ P

ep =

dP / P

= .

dP Q

Point Elasticity of

Ed = Infinite Demand

A

Ed > 1

Price Ed = 1

E

Ed <1

Ed = 0

B

Quantity

Arc Elasticity

It measures the responsiveness of demand between

two points on the demand curve such as X and Y. In

other words it is a measure of average elasticity i.e. the

elasticity at the midpoint of the chord that connects

the two points on the demand curve defined by the

initial and new price levels.

Methods of Measuring Elasticity

Contd…

Total Outlay Method (Marshall)

Elasticity is measured by comparing expenditure levels before and

after any change in price, i.e. whether the new expenditure is more

than, or less than, or equal to the initial expenditure level.

Degrees

When demand is elastic, a decrease in price will result in an

increase in the revenue (sales).

When demand is inelastic, a decrease in price will result in a

decrease in the revenue (sales).

When demand is unit-elastic, an increase (or a decrease) in

price will not change the revenue (sales)

Income Elasticity of Demand (ey)

ey measures the degree of responsiveness of demand for a

good to a given change in income, ceteris paribus.

ey =

Proportion ate change in income of consumer

Degrees:

Positive income elasticity

Demand rises as income rises and vice versa

Normal good

Demand falls as income rises and vice versa

Inferior good

Cross Elasticity of Demand

ec measures the responsiveness of demand of one

good to changes in the price of a related good

ec =

Proportion ate change in price of commodity Y

Degrees

Negative Cross Elasticity

Complementary goods

Positive Cross Elasticity

Substitute goods

Promotional Elasticity of Demand

effect of incurring an “expenditure” on advertising, vis-à-vis an increase

in demand, ceteris paribus.

Some goods (like consumer goods) are more responsive to advertising

than others (like heavy capital equipments).

ea =

Proportion ate change in advertisin g expenditur e

Degrees

ea>1

Firm should go for heavy expenditure on advertisement.

ea <1

Firm should not spend too much on advertisement

Determinants of Price Elasticity of

Demand

Nature of commodity

Necessities are relatively price inelastic, while luxuries

are relatively price elastic

Availability and proximity of substitutes

Price elasticity of demand of a brand of a product would

be quite high, given availability of other substitute

brands

Determinants of Price Elasticity of Demand

Proportion of income spent on the commodity

The greater the proportion of income spent on a commodity, the

more sensitive would the commodity be to price

Time

Demand for any commodity is more price elastic in the long run

Items of addiction

Items of intoxication and addiction are relatively price inelastic

Revenue and Price Elasticity of Demand

For relatively inelastic demand, a change in price

would have a greater effect on revenue than a

change in quantity demanded

AR is same as the price of the product

Demand curve is also the AR curve of the firm.

Marginal Revenue is the revenue a firm gains in

producing one additional unit of a commodity

Revenue and Price Elasticity of Demand

Contd…

Price,

Till ep>1 MR is positive Revenue

and TR is rising ep=

∞ ep>1

At the midpoint of the

demand curve, ep=1 ep=1

ep<1

and MR is equal to 0

and TR is at its peak ep=0

O

When ep<1, MR is Price, MR

Quantity

falling.

MR= AR[1- 1/ep]

O

TR Quantity

Importance of Elasticity

Determination of price

Elasticity is the basis of determining the price of a product keeping

its possible effects on the demand of the product in perspective

Basis of price discrimination

Products having elastic demand may be sold at lower price, while

those having inelastic demand may be sold at high prices

Determination of rewards of factors of production

Factors having inelastic demand are rewarded more than factors

that have relatively elastic demand.

Government policies of taxation

Goods having relatively elastic demand are taxed less than those

having relatively inelastic demand.

- Demand AnalysisUploaded bySidhant Anand
- Economic Principle That Describes a Consumer’s Desire and Willingness ToUploaded byRajveer Singh
- Elasticity of Demand and Supply_SynthesisUploaded byPrincess Gonzales
- ElasticityUploaded byeeqanabeella
- ElasticityofDemand-- Price and Income ElasticityUploaded bykgn78692
- Managerial Economics Notes Unit i & II-bitsUploaded byshanky22
- Elasticity of Demand RK.pptUploaded byShubham Mittal
- MGEA02_TT1_2011F_AUploaded byexamkiller
- Chap 05Uploaded byKrupa Kothari
- 4 Online Elasticity 12 16 13Uploaded byZeJun Zhao
- Micro Economics Study GuideUploaded byAdam R
- Chapter 3 - Elasticity.pptxUploaded byKhail Gooding
- Question 1Uploaded bynivikran
- 2281_nos_sw_2Uploaded bymstudy123456
- Theory of Consumer BehaviourUploaded byvickykkmr
- Managerial EconomicsUploaded byJagruti100
- MRP Load Copy Merge Master Demand Schedule TrainingUploaded byAvishek Bose
- f5Uploaded byArtem Denisiuk
- EconomicsUploaded byGunjandeep
- D&S CURVEUploaded byCharmaine Rose Inandan Triviño
- ClevelandA_KA1Uploaded byAaronT.Cleveland
- ECONOMIC (Angel).docxUploaded byPriyantoBudiLaksono
- Mg2452 Eefa Unit 2 QbUploaded bySenthil Kumar
- 05 Energy CostUploaded byMilton Tapia
- ElasticityUploaded byVikri Al-hadi
- Oil PricesUploaded bysuvenkat9
- Price Elasticity of DemandUploaded byoyelola20012178
- Chapter15.Target Costing and Cost Analysis for Pricing DecisionsUploaded byRod Lester de Guzman
- Econs CT Model Essays[1]Uploaded byKristel Claire Tey
- ElasticityUploaded byRahul Chawla

- Micro Sg 9e Chap 05976Uploaded byAnonymous AG3o20T1H
- Index Number Formation in the Chittagong Stock ExchangeUploaded bySakibSourov
- Final project (1).docxUploaded byAli Jamal Shahid
- Temporary-Tattoo Firm ThrivesUploaded byShelby Hill
- National IncomeUploaded bysubbu2raj3372
- Answer Key CH 2Uploaded byThien Huong
- ch21.pptUploaded byKIROJOH
- Walid Reda- Location Planning & Analysis -EMBAUploaded bywilzy74
- BrandsABC-Neolab Branding ProjectUploaded byKudzi Kachote
- Airport RetailingUploaded byagarwal_manvigr8
- Research Paper1 (1) of mcdonaldsUploaded byMrNoa Noa
- Acc 550 Week 4 HomeworkUploaded byjoannapsmith33
- Fin 517- Take Home ExamUploaded byJennifer Pearsall
- Impact 911 AviationUploaded byPete Andre
- BK_report[1]Uploaded byJoy Minor
- Sales of Goods Act 1930Uploaded bySoumya Mittal
- Professor McKenzie Discussion Problems and AnswersUploaded bykramakrishna1
- Termpaper Fin301 (Final)Uploaded byRatarTara
- Ethiopian Power GridUploaded byAmbachew A.
- Venezuela EconomyUploaded bypathanfor786
- Income Statements GEMS 0715.pdfUploaded byAriel Spalletti
- Sample BodyUploaded byGintoki Sakata
- SS12 Answered Problem SetsUploaded byMark Dones
- Creative Brief1Uploaded byFatima Jabeen
- UN Housing Finance Systems in South AfricaUploaded bySustainable Neighbourhoods Network
- Sales Type LeaseUploaded byjano_art21
- Spouses Rolando and Herminia Salvador vs Spouses Rogelio and Elizabeth Rabaja and Rosario GonzalesUploaded byyannie11
- Pricing Strategies in Consulting ServicesUploaded byMeenakshi
- SFMUploaded bySagar Naresh
- Week 4 Tutorial Questions Chp#3-Suggested Solutions.pdfUploaded byBowen Chen