ELEASTICITY OF DEMAND - ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING

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BE. CS FINAL YEAR AND IT THIRD YEAR, ANNA UNIVERSITY, CHENNAI

BE. CS FINAL YEAR AND IT THIRD YEAR, ANNA UNIVERSITY, CHENNAI

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  • 1. Dr.K.Baranidharan Present by…
  • 2. Engineering Economics & Financial Accountingment Ee&fa 213 July 2013
  • 3. ELASTICITY OF DEMAND
  • 4. ELASTICITY •“the rate of responsiveness in the demand of a commodity for a given change in price or any other determinants of demand”
  • 5. •The extent of change in quantity demanded because of a given change in the order determining factors, may be price or any other factor(s).
  • 6. Elasticity – the concept • The responsiveness of one variable to changes in another • When price rises, what happens to demand? • Demand falls • BUT! • How much does demand fall?
  • 7. Elasticity – the concept • If price rises by 10% - what happens to demand? • We know demand will fall • By more than 10%? • By less than 10%? • Elasticity measures the extent to which demand will change
  • 8. Measurement of ELASTICITY • 1. Perfectly elasticity of demand • 2. Perfectly inelasticity of demand • 3. Relatively elasticity demand • 4. Relatively inelasticity demand • 5. Unity elasticity
  • 9. 1. Perfectly elasticity of demand •when any quantity can be sold at a given price, and when there no need to reduce the price, the demand is said to be perfectly elastic
  • 10. 1.Perfectly Elastic:(the quantity demanded increases from OQ to Q1, from OQ1 to OQ2 eventhough there is . Price is fixed at OP.) Q O X Y p Q1 Q2
  • 11. 2. Perfectly inelasticity of demand •the degree of change in price leads to little change in the quantity demanded, then the elasticity is said to be perfectly inelastic
  • 12. 2. Perfectly Inelastic: increase the price from OP1 to OP2, the quantity demanded has not fallen. And there is fall in the price from OP3 to OP2, the quantity demanded remains unchanged) p2 O X Y p1 Q p3
  • 13. 3. Relatively elasticity demand •The demand said to be relatively elastic when the change in demand is more then the change in the price.
  • 14. 3. Relatively Elastic: the quantity demand increase from OQ1 to OQ2 Because Of A Decrease in Price from OP1 to OP2. The extent of increase in the quantity demanded is grater than the extent of fall in the price p1 O X Y p2 Q2Q1 D D
  • 15. 4. Relatively inelasticity demand •The demand said to be relatively inelastic when the change in demand is less than the change in the price.
  • 16. 4. Relatively lnelastic the quantity demanded increase from OQ1 to OQ2 because of a decrease in the price from OP1 to OP2. the extend of increase in the quantity demanded is less than the extent of fall in the price. p1 O X Y p2 Q2Q1 D D1
  • 17. 5. Unity elasticity •The elasticity in demand is said to be unity when the change in demand is equal to the change in price.
  • 18. 5. Unitary Elastic the quantity demanded increase from OQ1 to OQ2 because of a decrease in the price from OP1 to OP2. the extent of increase in the quantity demanded is equal to the extent of fall in the price. p1 O X Y p2 Q2Q1 D D1
  • 19. © Pilot Publishing Company Ltd. 2005 Type of elasticity of demand Price elasticity of demand Income elasticity of demand Cross elasticity of demand Advertising elasticity of demand TYPES OF ELASTICITY
  • 20. PRICE ELASTICITY DEMAND • Elasticity of demand, in general refers to price elasticity of demand. • The quantity demanded of a commodity in response to a given change in price. • Price elasticity is always Negative, which indicates that the customer tends to buy more with every fall in the price. • The relationship between the price and the demand is inverse.
  • 21. Q1 = quantity before change Q2 = quantity after change P1 = price before change P2 = price after change Model problems Refer the Book page Number 39 to 44
  • 22. INCOME ELASTICITY OF DEMAND • The quantity of a commodity in response to a given change in income of the customer. • Income elasticity is normally positive, which indicates that the consumer tends to buy more and more which every increase in income
  • 23. Q1 = quantity before change Q2 = quantity after change I1 = daily income before change I2 = daily income after change Model problems Refer the Book page Number 39 to 44
  • 24. CROSS ELASTICITY OF DEMAND • The quantity demanded of a commodity in respect to a change in the price of a related goods, which may be substitute or complementary.
  • 25. Q1 = quantity before change Q2 = quantity after change P1y = price before change P2y = price after change Model problems Refer the Book page Number 39 to 44
  • 26. ADVERTISING ELASTICITY • It refers to an increase in the sales revenue because of change in advertising expenditure. • In other words, there is a direct relationship between the amount of money spent on advertising and its impact on sales. • Advertising elasticity always positive
  • 27. Q1 = quantity before change Q2 = quantity after change A1 = advertising budget before change A2 = advertising budget after change Model problems Refer the Book page Number 39 to 44
  • 28. Price elasticity of demand • Price Elasticity of Demand –The responsiveness of demand to changes in price –Where % change in demand is greater than % change in price – elastic –Where % change in demand is less than % change in price - inelastic
  • 29. 29 Elasticity Coefficients • Elastic Demand (Ed > 1): the percentage change in quantity demanded > the percentage change in price. • Inelastic Demand (Ed < 1): the percentage change in quantity demanded < the percentage change in price. • Unit Elastic Demand (Ed = 1): the percentage change in quantity demanded = the percentage change in price.
  • 30. 30 Elasticity Coefficients • Perfectly Elastic Demand (Ed=∞): quantity demanded is infinitely responsive to a change in price. • Perfectly Inelastic Demand (Ed=0): quantity demanded is completely unresponsive to changes in price.
  • 31. 31 Exhibit 3: Price Elasticity of Demand
  • 32. FACTORS GOVERNING ELASTICITY OF DEMAND • A) nature of product (necessaries, comforts, luxuries) • B) time frame (particular period, buy near-price high shop/veg.market-price loe allot free time) • C) degree of postponement • D) number of alternative use(highly E, power or electy) • E) tastes and preferences of the consumer • F) availability of close substitutes • G) in case of complements or joint goods • H) level of prices • i) availability of subsidies(govt paid, lpg) • J)expectation price(inecity, gold rate) • K) durability of a product(tv ecity, periciable milk inecity) • L) government policy(monitor the price)
  • 33. SIGNIFICANCE OF ELASTICITY OF DEMAND • A) price of factors of production (land,labour.capital,organisation & technology- rent in industrial areas/village-inecity) • B) price fixation • C) Government policies (tax policies, raising bank deposit, public utilities(water,ticket), revaluation or derevaluation(importer/xporter) • D) forecasting demand (particular product & services) • E) planning levels of output and price(price elasticity very useful to producer..adequate
  • 34. Dr.K.Baranidharan thank you K YOU