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- 1. contents The concept of elasticity of demand Types of Elasticity of demand - Price Elasticity of Demand - Income Elasticity of Demand - Cross Elasticity of Demand - Promotional Elasticity of Demand Degrees of Elasticity of Demand Significance of the concept of elasticity of demand in business decision making Importance of theory of demand in relation to Electronic commerce
- 2. Elasticity of Demand Elasticity – Responsiveness
- 3. Price elasticity of demand – Consumers’ responsiveness to a change in price Income elasticity of demand – Consumers’ responsiveness to a change in income Cross elasticity of demand – Consumers’ responsiveness to a change in price of the relative commodity Promotional elasticity of demand – Consumers’ responsiveness to a change in advertisement expenditure Types Of ELASTICITY OF DEMAND
- 4. Price Elasticity of Demand= Percentage change in quantity demanded/Percentage change in Price Ep = ∆Q/Q = ∆Q * P ∆P/P ∆P Q PRICE ELASTICITY OF DEMAND
- 5. Price Elasticity of Demand p q ED ∆ ∆ = % %
- 6. Price Elasticity of Demand The percentage change in the quantity demanded given. . . . . . a percentage change in the price. 6 B A Demand P Q
- 7. Perfectly Elastic ||=∞ Perfectly Inelastic ||= 0 Relatively Elastic ||>1 Unitary or Unit ||=1 Relatively Inelastic ||<1 7 Ranges of Elasticity . . .
- 8. Ranges of price elasticity 8 ED = ∞ Demand is perfectly Elastic Demand for Ice Cream 2.00
- 9. Ranges of price elasticity 9 ED = 0 Demand is perfectly Inelastic Demand for Ice Cream 2.00 10
- 10. Ranges of price elasticity Demand is relatively Elastic Demand for Ice Cream 3.00 2.00 108 E D >1
- 11. Ranges of price elasticity… 11 Demand is Relatively Inelastic Demand for Ice Cream 4.00 2.00 98 ED <1
- 12. Ranges of price elasticity ….. Demand is unitary Elastic Demand for Ice Cream 4.00 2.00 108 E D= 1
- 13. 13 Computing Elasticity Coefficients - Example (point elasticity) Price Elasticity of Demand = Percentage Change in Quantity Demanded Percentage Change in Price
- 14. Computing Elasticity Coefficients 14 Demand for Ice Cream 2.20 2.00 108 ED ($2.20 - $2.00) / $2.00 (8 - 10) / 10 =
- 15. Computing Elasticity Coefficient….. 15 ED (10%) (-20%) = Demand for Ice Cream 2.20 2.00 108
- 16. Computing Elasticity Coefficient 16 ED = -2 Demand for Ice Cream 2.20 2.00 108 Notice the sign
- 17. Computing Elasticity Coefficient 17 ED = -2 Demand is Elastic Demand for Ice Cream 2.20 2.00 108
- 18. Constant-Elasticity Demand Curves Perfectly elastic D curve – Horizontal; ED = ∞ – Consumers don’t tolerate P increases Perfectly inelastic D curve – Vertical; ED = 0 – ‘Price is no object’ Unit-elastic D curve – %∆p causes an exact opposite %∆q
- 19. Constant-Elasticity Demand Curves 0 Quantity per period Priceperunit p ED = ∞ (a) Perfectly elastic D Priceperunit ED’’ = 0 (b) Perfectly inelastic ED ’’ = 1 (c) Unit elastic D’ 0 Quantity per period Q Priceperunit $10 6 0 Quantity per period 60 100 D’’ a Consumers demand all quantity offered for sale at p, but demand nothing at a price above p Consumers demand Q regardless of price Total revenue is the same for each p-q combination b
- 20. Summary of Price Elasticity of Demand Effects of a 10 Percent Increase in Price
- 21. Arc Price elasticity of demand Price elasticity of demand between two points on the demand curve Ep = Q2 – Q1 * P2+P1 P2 - P1 Q2 + Q1
- 22. Factors affecting the price elasticity of demand Availability of substitutes Much greater in the long run and smaller in the short run
- 23. Elasticity Estimates Short run – Consumers have little time to adjust Long run – Consumers can fully adjust to a price change Demand is more elastic in the long run
- 24. Demand Becomes More Elastic over Time Dw Priceperunit $1.25 1.00 Dm Quantity per day95 10075500 Dy e Dy is more elastic than Dm , which is more elastic than Dw Dw: one week after the price increase Dm: one month after the price increase Dy: one year after the price increase
- 25. Price Elasticity and the Linear D Curve Linear D curve – Constant slope – Different elasticity – D becomes less elastic as we move downward D upper half: elastic D lower half: inelastic D midpoint: unit elastic
- 26. Demand, Price Elasticity, and Total Revenue Where D is elastic, a lower P increases TR Where D is inelastic, a lower P decreases TR TR reaches a maximum at the rate of output where D is unit elastic D 90 60 10 70 Priceperunit $100 80 50 40 30 20 b a d e 800500200100 Quantity per period1,0000 900 Totalrevenue 25,000 500 Quantity per period1,0000 (a) Demand and price elasticity (b) Total revenue Total revenue Unit elastic, ED =1 Elastic, ED >1 Inelastic, ED <1c
- 27. Significance of the concept of elasticity of demand in business decision making – TR & MR TR raises as long as Ep is positive Price Quantity Ep = ∆Q/Q ∆P/P TR = P*Q MR = ∆TR/∆Q 6 0 0 5 100 5 500 5 4 200 2 800 3 3 300 1 900 1 2 400 0.5 800 -1 1 500 0.2 500 -3 0 600 0 0 -5
- 28. Price elasticity, total revenue and Marginal revenue
- 29. Elasticity and Total Revenue TR= p * q As p decreases If D elastic, TR increases If D inelastic, TR decreases If D unit elastic, TR unchanged
- 30. 30 Computing Income Elasticity Income Elasticity of Demand = Percentage Change in Quantity Demanded Percentage Change in Consumer Income
- 31. 31 Income Elasticity Q I I Q I I Q Q i × ∆ ∆ = ∆ ∆ =ε
- 32. How demand rises with income Engel A1 A2 X1 X2
- 33. Engel The Shape of the Engel Curve - income elasticity If the Engel Curve is a straight line, the income elasticity is 1.0 A X
- 34. Engel The Shape of the Engel Curve - income elasticity…… If the Engel Curve has increasing slope the elasticity is greater than 1.0 A X
- 35. Engel The Shape of the Engel Curve - income elasticity……… If the Engel Curve has decreasing slope the elasticity is less than 1.0 A X
- 36. Engel The Shape of the Engel Curve - income elasticity…….. This Engel Curve corresponds to a good that is both inferior and superior, depending on income A X
- 37. Selected Income Elasticities of Demand
- 38. Advertising Elasticity of Demand= Proportionate change in sales/Proportionate change in Advertisement Expenditure Promotional Elasticity of Demand
- 39. Coefficient of cross elasticity of demand of x for y = Percentage change in the quantity demanded of X/ Percentage change in the price of good y Exy= ∆Qx/Qx = ∆Qx * Py ∆Py/Py ∆Py Qx Cross-price Elasticity of Demand
- 40. • Pricing Decisions by business firms - Estimation Step 1. Identify the imp. Variables that affect the demand for the product it sells Step 2. obtain variable estimates of the marginal effect of a change in each variable on demand (Regression analysis) Step 3. The firm use this information to estimate the elasticity of demand for the product it sells with respect to each of the variables in the demand function. - Forecasting These are essential for optimal managerial decisions in the short run and in planning for growth in the long run. Using elasticities in managerial decision making
- 41. • Uses in Economic policy Regarding price regulation, especially of farm products • Use in International Trade • Importance in Fiscal Policy Using elasticities in managerial decision making…..
- 42. in relation to Electronic commerce International convergence of tastes E commerce -B to B Ex: Wal-Mart suppliers – proprietary net work -B to C – Retail - Frictionless capitalism ( squeeze profit margins from so many industries - Comparison shopping - New selling methods like auctions (buyers post a price) - Infomediaries - Computer frauds
- 43. Selected Price Elasticities of Demand (Absolute Values)
- 44. CaseStudy Deterring Young Smokers Health hazard Kills 440,000 Americans a year Lung cancer; Heart disease; Emphysema; Stroke Cost to society $7.18 per pack sold Higher health cost Lost worker productivity Total: $150 billion a year $3,400 per smoker per year
- 45. CaseStudy Deterring Young Smokers Discouraging smoking Prohibit the sale of cigarettes to minors Higher cigarette tax ED is higher for teens Big share of budget Less peer pressure Not an addiction yet Reduces teen smoking Change consumer tastes

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