Price Elasticity of Demand, Degrees of Elasticity, Factors determining Elasticity of Demand, Measurement of Price Elasticity, Importance of Elasticity of Demand

1. Elasticity of Demand
JITHIN K THOMAS
Berchmans Institute of Management Studies

2. Elasticity of Demand
• In economics, the demand elasticity refers to
how sensitive the demand for a good is to
changes in other economic variables.
• Demand elasticity is important because it
helps firms model the potential change in
demand due to changes in price of the good,
the effect of changes in prices of other goods
and many other important market factors.

3. Price Elasticity of Demand
• The change in the quantity demanded of a
product due to a change in its price is known
as Price elasticity of demand.
• ep=

4. Degrees of Elasticity
• Some goods and services have more elastic
demand while others have relative elastic
demand.
• Price elasticity of demand ranges from Zero to
Infinity

5. 1.Perfectly Elastic Demand
• When a small change in price lead to an
infinite change in quantity demanded.
• Demand curve is a horizontal line
• Ex:- Pink tennis ball to yellow tennis ball
• E = ∞

6. 2.Perfectly Inelastic Demand
• Under perfectly inelastic demand, irrespective
of any rise or fall in price of a commodity, the
quantity demanded remains the same.
• Demand curve is a vertical straight line.
• E = 0

7. 3.Reltively Elastic Demand
• A small change in price lead to a big change in
quantity demanded.
• Large no of perfect substitute
• Soap, paste etc.
• 1 < E < ∞

8. 4.Reltively Inelastic Demand
• A given percentage change in price produces a
relatively less percentage change in quantity
demanded.
• Small no of imperfect substitutes
• Apple to mango
• 0 < E < 1

9. 5.Unitary Elastic Demand
• A given percentage change in price brings
about an equal proportionate change in
quantity demanded.
• E = 1

10. Factors determining Elasticity of
Demand
1. Nature of commodity
– Necessities, Luxury goods
2. Substitutes
3. Proportion of income spent
4. Number of users
5. Postponement of usage
6. Income level
7. Habits
8. Duration of goods
9. Taste, preference, fashion
10. Durability of goods

11. Measurement of Price Elasticity
1. Total Expenditure Method
2. Proportionate Method
3. Point Elasticity of Demand
4. Arc Elasticity of Demand
5. Revenue Method

12. Total Expenditure Method
• By comparing the total expenditure of a
purchaser both before and after the change in
price, it can be known whether his demand for
a good is elastic, unity or less elastic.
• Total outlay is price multiplied by the quantity
of a good purchased: Total Outlay = Price x
Quantity Demanded.

13. Total Expenditure Method
• More elastic – Price 9 to 7
• Unitary elastic – Price 6 to 4
• Less elastic – Price 3 to 1

14. The Proportionate or Percentage
Method
• Price elasticity of demand is the ratio of
percentage change in the amount demanded
to the percentage change in the price of the
commodity.
– Eg:- Price =Rs.100
– Demand = 30kg
– Price falls to = Rs.50
– New demand = 60kg
– Ed = ?
– Ed>1

15. Point Elasticity of Demand
• Is a geometrical method for measuring
elasticity at a point on the demand curve.
• Ep = ∆q/∆p x p/q

16. Arc Elasticity of Demand
• When elasticity is measured between two
points on the same demand curve, it is known
as arc elasticity

17. Revenue Method
• Elasticity of Demand can be measured with the
help of average revenue and marginal revenue.
• Sales proceeds that a firm obtained by selling its
products is called its revenue
• Total revenue dividend by number of units is
Average revenue
• When addition is made to the total revenue by
sale of one more unit of the commodity is called
Marginal revenue.
• -

18. Income Elasticity of Demand
• The ratio of the percentage change in the
quantity demanded to the percentage change
in income
• There are different Degrees of Income
Elasticity of Demand

19. Positive Income Elasticity of Demand
• An increase in income of the consumer
results in the increase in demand.
– Unitary income elasticity
– Income elasticity grater than one
– Income elasticity less than one

20. Negative Income Elasticity of Demand
– An increase in income of the consumer results in
the decrease in demand for the commodity or
service.
• Zero Income Elasticity of Demand
– An increase in income of the consumer do not
results in any change in the demand for the
commodity or service.

21. Cross Elasticity of Demand
• Proportionate change in the quantity
demanded of Y to a given proportionate
change in the price of the related commodity
X.

22. Cross Elasticity of Demand
• Positive Cross Elasticity of Demand
• Negative Cross Elasticity of Demand
• Zero Cross Elasticity of Demand

23. Importance of Elasticity of Demand
• Usage in business
• Price determination
• Government policies like subsidy
• Taxation
• Wages and employment