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Law of demand gives only the direction of change in quantity demanded in response to a given change in price.
Elasticity of Demand Topics Covered Types of Elasticity Price Elasticity Degrees of Price Elasticity Methods of Measuring Elasticity Determinants of Price Elasticity of Demand Revenue and Price Elasticity of Demand
Elasticity of Demand Elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a given change in any of the determinants of demand.
Types of Elasticity
Price Elasticity
price elasticity of demand measures the proportion change in quantity demanded of a commodity to a given change in price
ep = ep = 0
ep = 1 ep < 1
ep > 1
P 200
Perfectly Inelastic
Ep=0
Unitary Elastic
Ep=1
4 5
Highly Elastic
Highly Inelastic
Ratio Method/percentage method/proportionate Method Arc Elasticity Method Total Outlay Method Elasticity at different points on a linear demand curve
Ponder!
Determinants of elasticity
Nature of the commodity Availability and proximity of substitutes Alternative uses of the commodity Proportion of income spent on the commodity Time Items of addiction etc.
Determination of price Basis of price discrimination Determination of rewards for factors of production Government policies of taxation
Income elasticity
Income elasticity of demand measures the degree of responsiveness of demand for a commodity to a given change in consumers income. Denoted as ey
ey =
Positive Income Elasticity (eg.??) Unit elastic More elastic Less elastic Perfect elastic Perfect inelastic Zero Income Elasticity (eg.????) Negative Income Elasticity (eg.???)
Which type of goods would a firm prefer to produce: those with positive income elasticity or negative income elasticity???
Cross elasticity of demand of a commodity X measures the degree of responsiveness of its demand to a given change in the price of another related commodity Y Denoted as ec
ec =
Remember Related goods can either be complements (joint demand) or substitutes (competing demand).
Positive cross elasticity Think of the goods which have positive cross elasticity. Why? Negative cross elasticity Think of the goods which have positive cross elasticity. Why?
Promotional elasticity of demand measures the degree of responsiveness of demand to a given change in advertising expenditure. Denoted as ea
ea =