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Definition Of Price Elasticity Of Demand <ul><li>The change in the quantity demanded of a product due to a change in its price is known as Price elasticity of demand. Thus, the sensitiveness or responsiveness of demand to change in price is as called elasticity of demand </li></ul>
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Kinds Of Price Elasticity Of Demand <ul><li>Perfectly elastic demand </li></ul><ul><li>Relatively elastic demand </li></ul><ul><li>Elasticity of demand equal to utility </li></ul><ul><li>Relatively inelastic demand </li></ul><ul><li>Perfectly inelastic demand </li></ul><ul><li>Let Us See Some Views On Them </li></ul>
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Perfectly elastic demand P R I C E y 0 x Perfectly elastic demand curve D D When the demand for a product changes –increases or decreases even when there is no change in price, it is known as perfect elastic demand.
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Relatively elastic demand Relatively elastic demand curve P R I C E demand 0 x y D D When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand .
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Elasticity of demand equal to utility Elasticity of demand equal to utility curve y x 0 demand P R I C E D D When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand
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Relatively inelastic demand Relatively inelastic demand curve X O Y demand D D P R I C E When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand
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Perfectly inelastic demand demand D D Perfectly inelastic demand curve 0 Y X P R I C E When a change in price, howsover large, change no changes in quality demand, it is known as perfectly inelastic demand
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ALL KINDS OF DEMAND CAN BE SHOWN IN ONE DIAGRAM AS FOLLOW D D1 D2 D3 D4 D5 Y X 0 DEMAND P R I C E WHERE D1) Perfectly elastic demand D2)Relatively elastic demand D3)Elasticity of demand equal to utility D4)Relatively inelastic demand D5)Perfectly inelastic demand
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Measurement Of Price Elasticity Of Demand <ul><li>There are main methods like </li></ul><ul><li>Percentage method or proportionate method </li></ul><ul><li>Total outlay method or total revenue method </li></ul><ul><li>Geometric method or point method </li></ul><ul><li>Arc elasticity of demand </li></ul>
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1 Percentage method or proportionate method <ul><li>Price elasticity of demand is measured by a ratio between the proportionate change in the quantity of a product demanded as a result of a proportionate change in its price </li></ul><ul><li>Formula for calculate this is given further as following </li></ul>
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Percentage method or proportionate method Price elasticity of demand = Proportionate change in demand for x Proportionate change in Price for x OR _____ qx Qx / _____ px Px Here, qx = change in the quantity of x demanded Qx = original quantity of x demanded px = change in the price of x Px = original price of x
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Total outlay method or total revenue method <ul><li>Total outlay means total expenditure and since total expenditure of consumers on a product implies total receipts or total revenue of sellers, it is known as total revenue method. </li></ul><ul><li>It will be clear with following table </li></ul>price quantity Total outlay Price elasticity 1 5 100 500 Elasticity of demand is greater than 1(e>1) 4 130 520 2 5 100 500 Elasticity of demand is less than 1(e<1) 4 120 480 3 5 100 500 Elasticity of demand is equal than 1(e=1) 4 125 500
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Total outlay method or total revenue method <ul><li>This can be shown in graph as given </li></ul>0 y x Total outlay Q1 Q2 Q3 p1 p2 p3 p4 P R I C e E<1 E=1 E>1
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Geometric method or point method <ul><li>This method attempts to measure numerical elasticity of demand at a particular point on the demand curve </li></ul><ul><li>Price elasticity can be measure by following method </li></ul>Price elasticity of demand = Lower segment of the demand curve upper segment of the demand curve
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Geometric method or point method <ul><li>It can be shown in graph as following </li></ul>a b c d d 0 x y e=1 e= 8 e>1 e<1 e=0
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Arc elasticity of demand <ul><li>It is the use of middle points between old and new figures in the case of both price and quantity. This method is known as arc elasticity method </li></ul><ul><li>We can measure it with formula as given </li></ul>
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Arc elasticity of demand <ul><li>WHERE, </li></ul><ul><li>Q1 = original quantity demanded </li></ul><ul><li>Q2 = new quantity demanded </li></ul><ul><li>p1 = original price </li></ul><ul><li>p1 = new price </li></ul>Price elasticity of demand = / Q1-Q2 Q1+Q2 P1-P2 P1+P2
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(5) Factors Affecting Price Elasticity Of Demand
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Factors Affecting Price Elasticity Of Demand <ul><li>Nature of the Commodity </li></ul><ul><li>Availability of Substitutes </li></ul><ul><li>Variety of uses of commodity </li></ul><ul><li>Postponement </li></ul><ul><li>Influence of habits </li></ul><ul><li>Proportion of Income spent on a commodity </li></ul><ul><li>Range of prices </li></ul>
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Factors Affecting Price Elasticity Of Demand <ul><li>Income Groups </li></ul><ul><li>Elements of time </li></ul><ul><li>Pattern of income distribu tion </li></ul>
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(6) Practical Importance of the Concept of Price Elasticity Of Demand
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Practical Importance of the Concept of Price Elasticity Of Demand <ul><li>The concept is helpful in taking Business Decisions </li></ul><ul><li>Importance of the concept in formatting Tax Policy of the government </li></ul><ul><li>For determining the rewards of the Factors of Production </li></ul><ul><li>To determine the Terms of Trades Between the Two Countries </li></ul>
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Practical Importance of the Concept of Price Elasticity Of Demand <ul><li>Determination of Rates of Foreign Exchange </li></ul><ul><li>For Nationalization of Certain Industries </li></ul><ul><li>In economic Analysis ,the concept of price elasticity of demand helps in explaining the irony of poverty in the midst of plenty. </li></ul>
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Types Of Income Elasticity Of Demand <ul><li>Positive Income elasticity of demand </li></ul><ul><li>Negative Income elasticity of demand </li></ul><ul><li>Zero Income elasticity of demand </li></ul>
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Positive Income elasticity of demand Y P A D D B S O X Quantity Demanded Income
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Positive Income elasticity of demand <ul><li>Income Elasticity Equal to Unity or One </li></ul><ul><li>Income Elasticity Greater Than Unity Or One </li></ul><ul><li>Income Elasticity Less Than Unity or One </li></ul>
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Negative Income elasticity of demand Price P B A S Total Revenue Quantity Demanded (000s)
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Zero Income elasticity of demand Y X O D D Quantity Demanded Income
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All Income Graphs Representation O Y Income A B C D E F X Quantity Demanded
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Measurement Of Income Elasticity Of Demand Income Elasticity Of Demand = Proportionate change in Demand Proportionate change in Income i.e. Income Elasticity Of Demand = ∆ q Q Y ∆ y +
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Measurement Of Income Elasticity Of Demand <ul><li>Here , ∆q = Change in the quantity demanded. </li></ul><ul><ul><ul><ul><li>Q = Original quantity demanded. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>∆ y = Change in income. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Y = Original income. </li></ul></ul></ul></ul><ul><li>For e.g. ,when Income of the consumer = 2,500/- , he purchases 20 units of X, when income = 3,000/- he purchases 25 units of X </li></ul>
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Measurement Of Income Elasticity Of Demand <ul><li>Thus </li></ul><ul><li>Income Elasticity of Demand </li></ul><ul><li>= </li></ul><ul><li>= (5/20) + (500/2500) </li></ul><ul><li>= 1.5 </li></ul><ul><li>therefore here the IED is 1.5 which is more than one. </li></ul>∆ q Q Y ∆ y +
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Factors Affecting Income Of Demand <ul><li>Income Itself Only. </li></ul><ul><li>Price Of the Commodity </li></ul>
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Importance Of the Concept of Income Elasticity Of Demand <ul><li>In production planning and management </li></ul><ul><li>In forecasting demand when change in consumers income is expected </li></ul><ul><li>In classifying goods as normal and inferior </li></ul><ul><li>In expansion and contraction of the firm by the figure of income elasticity of demand </li></ul><ul><li>Markets situations could be studied with the help of IED </li></ul>
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(8) Elasticity Of Substitution <ul><li>The selection between two product or thing is called substitution </li></ul><ul><li>So Elasticity of Substitution measures the rate at which the particular product is substituted . </li></ul><ul><li>Thus EOS is the degree to which one product could be substituted in context of price and proportion </li></ul>
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Elasticity Of Substitution <ul><li>Elasticity of Substitution </li></ul><ul><li>= Proportionate change in the quantity ratios of goods x & y DIVIDED BY Proportionate change in the price ratios of goods x & y. </li></ul>
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Types of Elasticity Of Substitut ion <ul><li>Zero Elasticity of Substitution. </li></ul><ul><li>Infinite Elasticity Of Substitution </li></ul><ul><li>Elasticity of Substitution greater than unityor1 </li></ul><ul><li>Elasticity of Substitution is equal to one </li></ul><ul><li>Elasticity of Substitution is less than one </li></ul>
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Types of Elasticity Of Substitution on Graph Change in QUANTITIY ratio of good x & y Change in PRICE ratio of good x & y O X Y E4 E1 E2 E3 E5
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Relationship Between Price Elasticity, Income Elasticity and Substitution Elasticity <ul><li>As Price is depended on income and substitution effect similarly Price Elasticity is depended on Income Elasticity an Substitution Elasticity . </li></ul><ul><li>These relationship can be represented by </li></ul><ul><li>Ep = Kx E1 + ( 1 – Kx ) es </li></ul>
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Price elasticity of demand depends on : <ul><li>Proportion of income spent on particular good say X. </li></ul><ul><li>Income elasticity of demand. </li></ul><ul><li>Elasticity of substitution. </li></ul><ul><li>Proportion of income spent on product other than X. </li></ul>
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Cross Elasticity of Demand <ul><li>Cross elasticity of demand express a relationship between the change in the demand for a given product in response to a change in the price of some other product </li></ul><ul><li>E.g. if the X tea demand reduces tremendously than it effect could be seen in demand of sugar and milk. </li></ul>
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Types of Cross Elasticity of Demand <ul><li>Cross Elasticity of Demand Equal to Unity or One </li></ul><ul><li>Cross Elasticity of Demand Greater than Unity or one </li></ul><ul><li>Cross Elasticity of demand less than unity or one </li></ul>
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Measurement Cross Elasticity of Demand Proportionate change in Demand for product X Proportionate change in Price of product Y i.e. ∆ qx Qx Py ∆ p y + Cross Elasticity of Demand = Cross Elasticity of Demand =
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Cross Elasticity of Demand For Substitutes Price of Y Demand for Y O Y X D D
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Cross Elasticity of Demand For Complementary Products Price of Y O Y X D D Demand for Y
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Cross Elasticity of Demand For Neutral Products Price of Y O Y X D Demand for Y
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Importance of Cross Elasticity Of Demand <ul><li>The concept is of very great importance in changing the price of the products having substitutes and complementary goods . </li></ul><ul><li>In demand forecasting </li></ul><ul><li>Helps in measuring interdependence of price of commodity . </li></ul><ul><li>Multiproduct firms use these concept to measure the effect of change in price of one product on the demand of their other product </li></ul>
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Advertising Elasticity of Deman d <ul><li>Advertising elasticity of demand is the measure of the rate of change in demand due to change in advertising expenditure </li></ul><ul><li>The amount of change in demand of goods due to advertisement is known as Advertisement Elasticity of Demand . </li></ul>
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Advertising Elasticity of Demand Proportionate change in Demand for product Proportionate change in Advertising expenditure i.e. ∆ qx Q A ∆ a ÷ Advertising Elasticity of Demand = Advertising Elasticity of Demand =
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Relationship Between Advertising Expenditure and Sales O X Y S S Sales Advertising Expenditure
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Factors Affecting Advertising Elasticity Of Demand <ul><li>The stage of the Product’s Market Development . </li></ul><ul><li>Reaction of market Rival Firms. </li></ul><ul><li>Cumulative Effect of Past Advertisement. </li></ul><ul><li>Influence of Other Factors. </li></ul>
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Importance of the Advertising Elasticity Of Demand in Business Decisions <ul><li>It is useful in competitive industries. </li></ul><ul><li>Though advertisement shifts the demand curve to right path but it also increases the fixed cost of the firm. </li></ul>
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Limitation of Advertising Elasticity of the Demand <ul><li>The impact of advertising on sales is different under different conditions, even if other demand determinants are constant. </li></ul><ul><li>Like wise, it is difficult to establish any co-relationship between advertising expenditure and volume of sales when there counter advertisements by rival firm in the market . The effect on sales depend on what the rivals are doing. </li></ul>
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