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Elasticity
 

Elasticity

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    Elasticity Elasticity Presentation Transcript

      • ELASTICITY OF DEMAND EXPLAINS THE MAGNITUDE OF THE IMPACT OF THE CHANGES IN THE FACTORS INFLUENCING DEMAND ON THE QUANTITY DEMANDED.
      • ELASTICITY IS THE REACTION OF ONE VARIABLE, WITH RESPECT TO CHANGES IN OTHER VARIABLES.
      • PRICE ELASITICITY OF DEMAND
      • INCOME ELASITICITY OF DEMAND
      • CROSS ELASITICITY OF DEMAND
      • ADVERTISING ELASITICITY OF DEMAND
      • EXPECTATION ELASITICITY OF DEMAND
      • FACTORS AFFECTING ELASTICITY OF DEMAND
        • NATURE OF THE COMMODITY.
        • NUMBER OF SUBSTITUTES.
        • NUMBER OF USES OF A COMMODITY.
        • PRICE LEVEL OF THE COMMODITY.
        • POSITION OF COMMODITY IN CONSUMER’S BUDGET.
        • POSTPONEMENT OF DEMAND.
        • JOINT DEMAND.
        • CONSUMER’S BEHAVIOUR.
      • ELASTICITY OF DEMAND IN DECISION MAKING PROCESS
      • (a) BUSINESS DECISIONS.
      • (b) ECONOMIC POLICIES OF GOVERNMENT.
      • (c) DETERMINATION OF PUBLIC UTILITIES.
      • (d) TAXATION POLICY.
      • (e) DETERMINATION OF FACTOR PRICING.
      • (f) INTERNATIONAL TRADE
      • SLOPE AND ELASTICITY
      • THE ELASTICITY OF DEMAND IS DEFINED AS
      • e p = Δq x p = 1 x p
      • Δp q Δp/Δq q
      • AS SLOPE OF THE DEMAND CURVE IS Δp/Δq (CHANGE IN ‘Y’ DIVIDED BY CHANGE IN ‘X’), THE ABOVE FORMULA CAN BE REWRITTEN AS
      • e p = 1 x p
      • Slope q
      •  e p  1 if p is constant
      • Slope q
      • INCOME ELASTICITY OF DEMAND
      • THUS, INCOME ELASTICITY OF DEMAND, e y 6 OF ANY COMMODITY IS
      • e Y = Percentage change in the quantity demanded of commodity ‘X’
      • Percentage change in income of the consumer
      • Δq
      • q
      • e p = Δy = Δq x y = Δq x y
      • y q Δy Δy q
      • Where,
      • q stands for the quantity demanded.
      • y stands for the income of the consumer.
      • Δq stands for the change in the quantity demanded.
      • Δy stands for the change in income of the consumer.
      • CROSS ELASTICITY OF DEMAND
      • LET THE QUANTITY DEMANDED OF COMMODITY ‘X’ DEPENDS UPON THE PRICE OF COMMODITY ‘Y’. CROSS ELASTICITY OF DEMAND (e c ) BETWEEN ‘X’ AND ‘Y’ IS :
      • Percentage change in the quantity demanded of commodity ‘X’
      • Percentage change in the price of commodity ‘Y.
      • Δq x
      • q x
      • Or, e c = Δp y = Δq x x p y = Δq x x p y
      • p y q x Δp y Δp y q x
      • ADVERTISING ELASTICITY OF DEMAND
      • e A = Proportionate change in sales
      • Proportionate change in advertisement expenditure
      • = ΔQ / Q
      • ΔA / A
      • = ΔQ x A
      • ΔA Q
      • EXPECTATION ELASTICITY
      • IT IS DEFINED AS THE RATIO OF PERCENTAGE CHANGE IN THE LEVEL OF EXPECTED FUTURE PRICES (P t+1 ) TO THE PERCENTAGE CHANGE IN THE LEVEL OF CURRENT PRICES (P t ). THUS,
      • e pe = dP t+1 . P t
      • dP t P t+1
      • EXPECTATION ELASTICITY IS UNITARY, WHEN A RISE IN CURRENT PRICE IS EXPECTED TO RESULT IN AN EQUIPROPORTIONAL RISE IN FUTURE PRICE. IF RISE IN EXPECTED FUTURE PRICE IS MORE THAN / LESS THAN PROPORTIONAL TO CURRENT PRICE RISE, EXPECTATION ELASTICITY IS GREATER / LESS THAN ONE.