price,income,cross

1. A Abhishek Giri’s presentation
Lecturer in the Dept. of Aquaculture Management
Prabhat Kumar College, Contai

2.  In business and economics, elasticity refers to the degree to which individuals,
consumers or producers change their demand or the amount supplied in
response to price or income changes.

3. • 1) PRICE ELASTICITYOFDEMAND
• 2) CROSS ELASTICITY OFDEMAND
• 3) INCOME ELASTICITYOFDEMAND
• 4)ADVERTISINGORPROMOTIONAL ELASTICITY OFDEMAND

4. It is the relationship between % change in the quantity
demanded of a good to the % change in the price of a related
good.
Eba= % Change in Quantity of X
% Change in Price of Y

5.  Py
Py Qx
Where, Qx=Quantityof good X,
Py =Price of good Y
Delta =change.
The Elasiticity of Demand for good X may be positve, negative or zero
which depends on thenature of relation (may be as substitutes,
complementary or unrelated )betweenthe goods X and Y.

Qx

6. If X and Y are substitute goods, a fall in the price of good Y
will reduce the quantity demanded of good X. Similarly,
an increase in the price of good Y will raise the demand
for good X. Their cross elasticity is Positive.

7. Quantity of good X(TEA) is
takenon X-axis and the
quantityofgood
Y(COFFEE)is plotted on Y-axis
.When the priceof Y (COFFEE)
increasesfrom OYto OY1, the
quantity demandedof X (TEA)
rises from OX to OX1 . Demand
curve shows POSITIVE elasticity
of both thegoods.

8. If two goods are jointly demanded, risein the price of one leads to a fall
in the demand for theother.
Rise in he prices of cars will bring a fall in their demand together with
the demand for petrol. A fall in the prices of cars will raise the demand for
petrol . Cross elasticity of demand is NEGATIVE.

9. The rise in the price of Y (CARS)
fromOY to OY1 , the demand forX
(PETROL) falls from OX to OX1
.Demand shows NEGATIVE cross
elasticity.

10.  If the two goods are unrelated,a fall inthe price of good Y(SALT)has no
effect whatsoever on the demand for good X(CAR). In such case , the cross
elasticity of demand is ZERO.

11. A fall in the price of Y
(SALT)has no effecton the
quantitydemanded of
X(CAR).Evenan increasein the
price of good Y(SALT)from OY
to OY1, the demand for good
X(CAR) remains the same .
Crosselasticityof demandis
ZERO.

12. APPLICATIONSOF CROSSELASTICITYIN
MANAGEMENT
 1.PRODUCTION
 2.DEMAND FORECASTING ANDPRICING
 3.INTERNATIONLTRADE ANDBALANCE OF PAYMENTS

13. The concept of income elasticityof demand expresses the responsiveness of
a consumer’s demand for any good to the change in his income.
Ey= % Change in Quantity Demanded
% change in income
Where Deltais change
Q=quantity demanded
Y= isincome.

Y Q
Q Y

14. If an increase in income leads to an increased demand for a
commodity ,income elasticity is POSITIVE – also called
NORMAL goods.
More is purchased as the incomeincreases.
If an increase in income leads to a fall in the demand for a commodity ,
income elasticity is NEGATIVE – also called INFERIOR goods.
Less is purchased as the incomeincreases.

15. In case of LUXURIES, the coefficient
of income elasticity is POSITIVE but
high, Ey > 1. Assuming prices of all
other goods as constant, if the income
of the consumer increases by 5% & as
a result his purchases of the
commodity increaseby 10% .
Ey =10/5= 2(>1) INCOME
DEMAND IS

16. The coefficient of income elasticity
is positive but LOW,Ey <1.
If the proportion of income spent on
a commodity increases by 2% when
the consumer’s income goes up by
5%,Ey = 2/5=0.4(<1)
INCOME DEMAND IS
INELASTIC

17. The coefficient of income
elasticityis unity Ey= 1
A 5% increase in income leads
to5% rise in demand,Ey
=5/5=1

18. The coefficient of income elasticity of
demand in case of inferior goods is
NEGATIVE.
In this case, the consumer will reduce
his purchases of it, when his income
increases.
If a 5% increase in income leads to
2% reduction in demand, Ey = -2/5
=-0.4(<0).

19. If with an increase in income ,
the quantity demanded remains
unchanged, the coefficient of
incomeelasticity, Ey =0.
If with ,5% increase in income,
there is no change in the quantity
demanded, then Ey =0/5=0

20. 1. Nature of commodity:
Commodities are grouped in to necessities, comforts & luxuries.
2. Income level:
 Depends upon the income of the country.
3. Time period:
 Over a long run a luxury may become a necessity.
4. Demonstration effect:
 Changing tastes, preferences & choices of people.
 5.Frequency:
 Higher frequency ,income elasticity will behigh.

21. 1. Planningof the firm’s growth:
The knowledgeof income elasticity of demand is important for both the firms & govt.
2. Formulationof farm policy:
The govt. of India has considered it necessary to continue & increase various
agricultural subsidies.
3. Forecasting demands:
Used in forecastingfuture demand provided the firm knows the growth rate of income & income
elasticity of demand for the good
4. Formulating marketing strategies:
The income elasticity of demand of potential buyer class for products affects the no. ,nature &
location of sales centres ,& the policies related to other sales promotion activities.

22. Advertising elasticity of demand is the measure of the rate of change in
demand due to changes in advertising expenditure.
The amount of change in demand of goods due to advertisement is known
as advertising elasticity ofdemand

23. Q= quantity sold of good X ,
A = units of advertisingexpenses on good X,
Delta Q = change in quantitysold of good X,
Delta A= change in advertising expenses on good X
EA

Q

A
A Q

25.  1.Stage of product’sdevelopment
 2.Degree of competition
 3.Effectsof advertising in terms oftime
 4.Effect of advertising by rivalfirms