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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.

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

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  • 1. Elasticity of Demand
  • 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. What are the types of Elasticity of Demand?  Price Elasticity of Demand  Income Elasticity of Demand  Cross Elasticity of Demand
  • 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. 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. Graphically
  • 7. Graphically
  • 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. 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. What are the methods of measuring Price Elasticity of Demand?  Point Elasticity Method Elasticity = Lower segment/Upper Segment
  • 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. 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. 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. Questions? Contact Us Website: www.economicsharbour.com email: admin@economicsharbour.com
  • 15. Thank You