Demand

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Demand

  1. 1. Elasticity of Demand
  2. 2. Meaning:It shows the reaction of one variable with respect to a change in other variable on which it is dependent.
  3. 3. Kinds of Elasticity of Demand: Price Income Cross
  4. 4. Price Elasticity of Demand Change in demand as a result of change in the price of commodity is known as Price Elasticity of demand. Ep= %change in quantity demanded %change in price or
  5. 5. Types of price elasticity of demand1. Perfectly elastic demand: Demand is said to be perfectly elastic when a very small rise in the price of a commodity causes the quantity demanded of that commodity to fall to zero & very small fall in its price leads to an infinite increase in the quantity demanded of that commodity
  6. 6. 2. Perfectly inelastic demandThe price of a commodity may rise or fall considerably but the quantity demanded of that commodity remains unchanged.
  7. 7. 3. Relative elastic demand:When a small change in the price leads to a big change in the demand.
  8. 8. 4. Relatively inelastic demandWhen a big change in the price leads to a small change in the demand.
  9. 9. 5. Unitary elastic demand:When a given % change in the price leads to an equal % change in the quantity demanded.
  10. 10. 2. Income elasticity of demandIt refers to the change in the consumer income when prices & other factors remain constant.Ey= Proportionate change in quantities demanded Proportionate change in income or
  11. 11. Ex: If income of a consumer rises from Rs.1000 to Rs.1200 & his purchase of a commodity increases from 20 to 25 units.
  12. 12. Types of income elasticity of demand1. Zero income elasticity: It refers to a situation where change in income will have no effect on the quantities demanded. It is said to be zero when a change in income makes no change in the quantity demanded.
  13. 13. 2.Negative income elasticity:It is said to be negative when an increase in income of the consumer leads to a reduction in the quantity demanded of a commodity.
  14. 14. 3. Unitary income elasticity ofdemandIt is said to be unitary when an increase in income leads to a proportionate increase in the quantity demanded. Ei= 1
  15. 15. 4. Greater than one:It is greater than one when an increase in income leads to a more than proportionate increase in the quantity demanded. Ei>1
  16. 16. 5. Less than one:When an increase in income leads to a less than proportionate increase in the quantity demanded. Ei<1
  17. 17. 3. Cross elasticity of demand:It defined as the proportionate change in the quantity demanded of a particular commodity due to a change in the price of another related commodity.Ec= %change in the demand for X % change in the price of Y
  18. 18. PositiveWhen the quantity demanded of a commodity increase with the increase in the price of the other commodity.
  19. 19. NegativeIn the case of complementary goods, if the price of tea powder declines the demand for sugar increase as both of them are complementary commodities.
  20. 20. ZeroWhen the change in the price of ‘Z’ will not have any impact on the quantity demanded ‘X’. That is they are perfectly independent of each other. There is no relationship between 2 commodities.

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