Elasticity of demand

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What do we mean by Elasticity of Demand? and what are its various types. The presentation explains all.

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Elasticity of demand

  1. 1. Elasticity of Demand
  2. 2. What is the meaning of Elasticity of Demand?  “The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and changes in consumer’s income” - Dooley
  3. 3. What are the types of Elasticity of Demand?  Price Elasticity of Demand  Income Elasticity of Demand  Cross Elasticity of Demand
  4. 4. What is Price Elasticity of Demand?  Degree of responsiveness in change in quantity demanded due to change in price; other things remaining constant.  Ratio of Percentage change in quantity to percentage change in price.  Ep = % change in Quantity demanded / % change in Price  Ep = [(Q2 – Q1)/ Q1] ÷ [ (P2 – P1)/ P1]  Formulated as EP = (∆Q / ∆P) * (P/Q)
  5. 5. What are the degrees of Price Elasticity of Demand?  Elasticity > 1; Elastic demand  Elasticity = 1; Unitary Elastic demand  Elasticity < 1; Inelastic demand  Elasticity = ∞; Perfectly elastic demand  Elasticity = 0; Perfectly Inelastic demand
  6. 6. Graphically
  7. 7. Graphically
  8. 8. What are the methods of measuring Price Elasticity of Demand?  Proportionate Method Suggested by Marshall Elasticity = Proportionate change in Quantity/ Proportionate change in price  Mid-point Method/ Arc Elasticity of Demand E = [(Q2 – Q1)/ (P2-P1)] * [(P1+P2)/ (Q1+Q2)] This method is used when price change is large
  9. 9. What are the methods of measuring Price Elasticity of Demand?  Total Expenditure Method : Evolved by Marshall Price Change Quantity Change Expenditure Change Elasticity of Demand Decrease Increase Constant E = 1 Decrease Increase Increase E > 1 Decrease Increase Decrease E < 1
  10. 10. What are the methods of measuring Price Elasticity of Demand?  Point Elasticity Method Elasticity = Lower segment/Upper Segment
  11. 11. What are the determinants of Price Elasticity of Demand?  Availability of Substitutes  Proportion of Consumer’s Income spent  Number of uses of a commodity  Complementarity between goods  Time Elasticity
  12. 12. What is Cross Elasticity of Demand?  Degree of Responsiveness of change in the quantity demanded of one good due to change in price of other good.  Elasticity = Proportionate change in quantity demanded of X / Proportionate change in price of Y Goods Elasticity Substitutes Positive Complements Negative
  13. 13. What is Income Elasticity of Demand?  Responsiveness of change in quantity demanded due to change in income.  E = Proportionate change in Quantity/ Proportionate change in Income Type of Good Elasticity Normal Goods E > 0 Inferior Goods E < 0 Type of Good Elasticity Luxuries E > 1 Necessities E < 1
  14. 14. Questions? Contact Us Website: www.economicsharbour.com email: admin@economicsharbour.com
  15. 15. Thank You

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