Dr.K.Baranidharan
Present by…
Engineering
Economics &
Financial
Accountingment
Ee&fa
213 July 2013
ELASTICITY OF
DEMAND
ELASTICITY
•“the rate of responsiveness
in the demand of a
commodity for a given
change in price or any other
determinants...
•The extent of change in
quantity demanded
because of a given change
in the order determining
factors, may be price or
any...
Elasticity – the concept
• The responsiveness of one variable to changes
in another
• When price rises, what happens
to de...
Elasticity – the concept
• If price rises by 10% - what happens to
demand?
• We know demand will fall
• By more than 10%?
...
Measurement of ELASTICITY
• 1. Perfectly elasticity of demand
• 2. Perfectly inelasticity of demand
• 3. Relatively elasti...
1. Perfectly elasticity of demand
•when any quantity can be
sold at a given price, and
when there no need to
reduce the pr...
1.Perfectly Elastic:(the quantity
demanded increases from OQ to Q1,
from OQ1 to OQ2 eventhough there
is . Price is fixed a...
2. Perfectly inelasticity of demand
•the degree of change in
price leads to little change
in the quantity demanded,
then t...
2. Perfectly Inelastic:
increase the price from OP1 to OP2, the
quantity demanded has not fallen. And there
is fall in the...
3. Relatively elasticity demand
•The demand said to be
relatively elastic when the
change in demand is more
then the chang...
3. Relatively Elastic:
the quantity demand increase from OQ1 to OQ2
Because Of A Decrease in Price from OP1 to OP2.
The ex...
4. Relatively inelasticity demand
•The demand said to be
relatively inelastic when
the change in demand is
less than the c...
4. Relatively lnelastic
the quantity demanded increase from OQ1 to OQ2
because of a decrease in the price from OP1 to
OP2....
5. Unity elasticity
•The elasticity in demand
is said to be unity when
the change in demand is
equal to the change in
pric...
5. Unitary Elastic
the quantity demanded increase from OQ1 to OQ2
because of a decrease in the price from OP1 to OP2.
the ...
© Pilot Publishing Company
Ltd. 2005
Type of elasticity of demand
Price elasticity of demand
Income elasticity of demand
C...
PRICE ELASTICITY DEMAND
• Elasticity of demand, in general refers to price
elasticity of demand.
• The quantity demanded o...
Q1 = quantity before change Q2 = quantity after change
P1 = price before change P2 = price after change
Model problems Ref...
INCOME ELASTICITY OF DEMAND
• The quantity of a commodity in
response to a given change in
income of the customer.
• Incom...
Q1 = quantity before change Q2 = quantity after change
I1 = daily income before change I2 = daily income after change
Mode...
CROSS ELASTICITY OF DEMAND
• The quantity demanded of
a commodity in respect to
a change in the price of a
related goods, ...
Q1 = quantity before change Q2 = quantity after change
P1y = price before change P2y = price after change
Model problems R...
ADVERTISING ELASTICITY
• It refers to an increase in the sales
revenue because of change in advertising
expenditure.
• In ...
Q1 = quantity before change Q2 = quantity after change
A1 = advertising budget before change A2 = advertising budget after...
Price elasticity of demand
• Price Elasticity of Demand
–The responsiveness of demand
to changes in price
–Where % change ...
29
Elasticity Coefficients
• Elastic Demand (Ed > 1): the percentage
change in quantity demanded > the percentage
change i...
30
Elasticity Coefficients
• Perfectly Elastic Demand (Ed=∞):
quantity demanded is infinitely responsive
to a change in pr...
31
Exhibit 3: Price Elasticity of Demand
FACTORS GOVERNING ELASTICITY OF
DEMAND
• A) nature of product (necessaries, comforts, luxuries)
• B) time frame (particula...
SIGNIFICANCE OF ELASTICITY OF
DEMAND
• A) price of factors of production
(land,labour.capital,organisation & technology-
r...
Dr.K.Baranidharan
thank you
K YOU
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ELEASTICITY OF DEMAND - ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING

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ELEASTICITY OF DEMAND - ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING

  1. 1. Dr.K.Baranidharan Present by…
  2. 2. Engineering Economics & Financial Accountingment Ee&fa 213 July 2013
  3. 3. ELASTICITY OF DEMAND
  4. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 31 Exhibit 3: Price Elasticity of Demand
  32. 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. 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. 34. Dr.K.Baranidharan thank you K YOU
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