Elasticity Of Demand Sangam Kumar

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Elasticity Of Demand Sangam Kumar

  1. 1. VIT-BS BATCH 1ELASTICITY OF DEMAND BY: SANGAM KUMAR B.AMRICK SINGH PUNEET KUMAR
  2. 2. The Concept of Elasticity Elasticity is a measure of the responsiveness of one variable to another. The greater the elasticity, the greater the responsiveness.
  3. 3. LAW OF DEMAND Law of demand states that if price of commodity increases quantity demanded will falls and vice versa. Law of demand indicates only direction of change in quantity demanded in response to change in price but ELASTICITY OF DEMAND states with how much or to what extent the quantity demanded will change in response to change in price
  4. 4. ELASTICITY OF DEMAND: MEANING - Percentage change in quantity demanded divided by percentage change in price. -BY MARSHALL -Measures the responsiveness of quantity demanded of a good to the change in its price. –BY BOULDINGEd = % change in quantity demanded divided by %change in price
  5. 5. Price Elasticity of Demand A measure of how much the quantity demanded of good responds to a change in the price of that good Computed as the percentage change in quantity demanded divided by the percentage change in price. We know if we raise a price, the Qd will decline, but we don’t know how much. Elasticity answers the “how much” question. In Business, we want to know the relationship between Qd and Price Ep = % Change in Quantity Demanded % Change in Price
  6. 6. Calculating Percentage Change Percentage Change measures how much a value has changed from one time period to another There are two methods of calculating the percentage change • Simple Method • Midpoint Method
  7. 7. Calculating Percentage Change For Example, if a firm’s sales for the current month amounted to $100 million and the previous month, the same firm’s sales were $90 million. What was the percentage change? Simple MethodPercentage Change = Current Value-Previous Value Previous Value or, = $100m - $90 m = $10m = 11.1% $90m $90m Very Common Usage, especially in the business world
  8. 8. Calculating Percentage Change Midpoint Method Percentage Change = Current Value – Previous Value (Current Value + Previous Value)/ 2 Or, = $100m -$90m = $10m = 10.5% ($100m + $90m)/2 $95m The midpoint method is the better method because it gives similar results whether we are measuring forward or backward
  9. 9. Determinants Of Elasticity of Demand From Formula Ep = % Change in Qd % Change in Price If Price Elasticity of Demand > 1, demand is elastic If Price Elasticity of Demand = 1, demand is unit elastic If Price Elasticity of Demand < 1, demand is inelastic
  10. 10. Demand Elasticity Elastic Demand – When % Change in Quantity Demanded > % Change in Price Unit Elastic Demand – When % Change in Quantity Demanded = % Change in Price Inelastic Demand – When % Change in Quantity Demanded < % Change in Price Perfectly Elastic Demand – When Quantity Demanded Changes by a very large percentage in response to an almost zero Change in Price Perfectly Inelastic Demand – When the Quantity Demanded remains constant as Price changes
  11. 11. Perfectly Elastic Demand Curve 14 12 10 8 D 6 4 2 5 10 15 20 25 30 QuantityThe elasticity of a perfectly elastic demand curve is infinity
  12. 12. Perfectly Inelastic Demand Curve D 30 25 20 15 10 5 5 10 15 20 25 QuantityThe elasticity of a perfectly inelastic demand curve is 0
  13. 13. Relativity Elasticity of Demand Curves D1 D2 Quantity
  14. 14. Elasticity of Straight Line Demand Curve 11 Very elastic 10 e = 6.33 9 8 Slightly elastic 7 Unit elastic 6 e = 1.0 Slightly inelastic 5 4 3 e = .29 Very inelastic 2 1 D 0 0 1 2 3 4 5 6 7 8 9 10 11 Quantity
  15. 15. Significance of Price Elasticity of Demand Profit maximization requires that business set a price that will maximize the firm’s profit Elasticity tells the firm how much control it has over using price to raise profit If Ep > 1, then the % Change in Qd > % Change is Price and demand is said to be elastic • An increase in price will reduce total revenue • A decrease in price will increase total revenue
  16. 16. Significance of Price Elasticity of Demand If Ep < 1, then the % change in Qd < % change in price, and demand is said to be inelastic • An increase in price will increase total revenue • A decrease in price will decrease total revenue If Ep = 1, then the % change in Qd = % change in Price, and demand is said to be unit elastic • An increase in price will have no impact on total revenue • A decrease in price will have no impact on total revenue
  17. 17. Price Elasticity of Demand Influences Substitute Product Availability (key determinant) -- Luxury or Necessity (Ep for luxury items is >) -- How narrowly it is defined (coffee is inelastic but tea may have more substitutes and therefore is more elastic) -- Time elapsed since price change (>time, >elasticity; more time to find substitutes or manage consumption) Income Effects -- The greater the proportion of income spent on the good, greater a price change impacts Quantity Demanded
  18. 18. Advertising Purpose – Product Differentiation (Branding)  To make the demand for a product greater  To make the demand for a product more inelastic D D
  19. 19. Elasticity Thoughts Demand Curve Slope and Elasticity (Steeper the slope, lower the elasticity) A Units-Free Measure (% Change – Absolute Value) Elasticity Along a Linear Demand Curve -- Slope is constant but elasticity varies Elasticity and Total Revenue -- Price and Total Revenue change in opposite directions, demand is elastic -- Price Change leaves Total Revenue unchanged, demand is unit elastic -- Price and Total Revenue change in same direction, demand is inelastic
  20. 20. Price Elasticity of Supply A measure of the extent to which the quantity supplied of a good changes when the price of the good changes, and all other influences on seller’s plans remain the same (cateris paribus)
  21. 21. Price Elasticity of Supply Perfectly Elastic Supply – When the quantity supplied changes by a very large percentage in response to an almost zero increase in price Elastic Supply – When the % change in the quantity supplied > the % change in the price Unit Elastic Supply – When the % change in the quantity supplied = the % change in price Inelastic Supply – When the % change in the quantity demanded is < the % change in price Perfectly Inelastic Supply – When the quantity supplied remains the same as the price changes
  22. 22. Influences on Price Elasticity of Supply Production Possibilities -- Opportunity Costs constant or gently rising opportunity costs = elastic price elasticity -- Fixed Production = inelastic price elasticity -- Time Elapse – longer time, > price elasticity
  23. 23. Influences of Price Elasticity of Supply Storage Possibilities The better the storability, the more elastic is the price elasticity of supply
  24. 24. Computing Price Elasticity of Supply Percentage change in quantity supplied Percentage change in price• If Price Elasticity of Supply > 1, Supply is elastic• If Price Elasticity of Supply = 1, Supply is unit elastic• If price elasticity of supply< 1, Supply is inelastic
  25. 25. Cross Elasticity of Demand A measure of the extent to which the demand for a good changes when the price of a substitute or complement changes, ceteris paribus % Change in Quantity Demanded % Change in Price of one of its Substitutes or complements
  26. 26. Income Elasticity of Demand A measure of the extent to which the demand for a good changes when income changes, ceteris paribus % Change in Quantity Demanded % Change in Income
  27. 27. Income Elasticity of Demand If income elasticity of demand > 1 the demand for the good is income elastic If income elasticity of demand is between 0 and 1, the demand is income inelastic * If income elasticity of demand < 0 the demand is negative income elastic

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