The Elasticity of Demand - Price Elasticity - Income Elasticity - Cross Elasticity - Advertisement Elasticity

1. All About Elasticity of Demand
Price Elasticity
Income Elasticity
Cross Elasticity
Advertisements Elasticity
Prepared By:
Mohammed Jasir PV
Asst. Professor
MIIMS, Puthanangadi
Contact : 9605 69 32 66

3. due to % Change in
% Change in
Demand
Any determinants of
demand
• Elasticity of demand is defined as the ratio of % change in demand to
the % change in one of the determinants of demand.
• Demand for a commodity is elastic when a change in determinants
leads to change in demand.
Elasticity of Demand

4. due to % Change in
% Change in
Demand
Price
The % change in the quantity demanded of a commodity
due to a % change in its price
Price Elasticity of Demand

5. due to % Change in
% Change in
Demand
Income
Income Elasticity of Demand
The % change in the quantity demanded of a commodity
due to a % change in consumers real income

6. due to % Change in
% Change in
Demand
Price of Another
Product
Cross Elasticity of Demand
The % change in the quantity demanded of a product due to a
change in the price of another product

7. Types of Elasticity of Demand
Elasticity of demand classified in to Three
1) Price elasticity of demand
2) Income elasticity of demand
3) Cross elasticity of demand

8. Price Elasticity Of Demand
• Price elasticity of demand is the ratio of the percentage change in
the quantity demanded of a commodity due to a percentage
change in its price.
• In other words it measures the degree of change of demand in
response to change in price.
• Change in demand due to change in Price

9. Price Elasticity Of Demand

11. Degree or kinds of price elasticity of demand
1. Perfectly Elastic Demand
2. Perfectly Inelastic Demand
3. Elasticity Equal to Unity
4. Elastic Demand (More Elastic Demand)
5. Inelastic Demand (Less Elastic Demand)

12. • Demand for a commodity is said to be perfectly elastic when a slight
change in price leads to infinite change in quantity demanded.
• Elasticity = Infinite
Price
Quantity demanded
Y
X
Demand
0
10
Perfectly Elastic Demand

13. • Quantity demanded of a commodity remains the same irrespective
of any rise or fall in price.
• Elasticity = 0
Price
Quantity
Demanded
Y
X
Demand
0
10
05
15
Perfectly Inelastic Demand
Example: Common salt which
is used for cooking

14. Elasticity Equal to Unity
• When a given increase or decrease in price is making an equivalent
increase or decrease in quantity demanded.
• The % change in both the price and quantity demanded is the same.
• Example: A fall in price by 10% leads to an increase in demand by 10%
• Elasticity = 1
Price
Quantity Demanded
Y
X
Demand
0
10
20
10 15

15. Elastic Demand (More Elastic Demand)
• Demand for a commodity is said to more elastic when a small
change in price brings about a proportionately larger change in
quantity demanded.
• Elasticity: Greater Than One (Ep>1).
Price
Quantity Demanded
Y
X
Demand
0
08
10
10 20

16. Inelastic Demand (Less Elastic Demand)
• When A given change in price leads to A proportionately
smaller change in quantity demand.
• Elasticity: Less Than One (Ep<1)
Price
Quantity Demanded
Y
X
Demand
0
04
10
10 12

17. Price
Quantity Demanded
Y
X
Demand
0
10
Quantity
Demanded
Y
X
Demand
0
10
05
15
Price
Quantity Demanded
Y
X
Demand
0
05
10
10 20
Price
Quantity Demanded
Y
X
Demand
0
08
10
10 20
Price
Quantity Demanded
Y
X
Demand
0
04
10
10 12
Inelastic Demand (Less Elastic Demand)
Perfectly Elastic Demand Perfectly Inelastic Demand
Price
Elasticity Equal to Unity
Elastic Demand (More Elastic Demand)

18. Income Elasticity of Demand
• The rate of change in quantity demanded due to change in the
income of the consumer is known as “income elasticity”.
• “income elasticity of demand means the ratio of the percentage
change in the quantity demanded to the percentage change in
income”. by Watson

19. Income Elasticity Of Demand
• Example: If a 10% increase in income, the quantity of a good
demanded increased by 20% , the income elasticity of demand
would be 20%/10%= 2

20. Income
Quantity Demanded Quantity Demanded
10 K
15 K
Income
10 K
15 K
20 Kg 30 Kg 20 Kg 30 Kg
Income Elasticity Can Be..
Positive Income Elasticity Negative Income Elasticity
Income Demand Income Demand

21. Positive and Negative
• A negative income elasticity of demand is associated with
inferior goods that is an increase in income will lead to
changes to more luxurious substitutes resulting in fall in the
quantity demanded.
• A positive income elasticity of demand is associated with
normal goods; an increase in income will lead to a rise in
quantity demanded.

22. Cross Elasticity Of Demand
• Shows the relationship between the demand for one commodity and
price of another commodity
• The percentage change in the quantity demanded of a product in
response to a change in the price of another product
• Price of some related product also causes a variation in the demand
for a commodity
• Example: When the price of diesel car increases , the demand for
petrol car increases, this type of goods is called substitute goods.
• When the price of diesel increases, the demand for diesel car
decreases, this types of goods is called complements goods.

24. Cross Elasticity Of Demand

26. due to % Change in
% Change in
Demand
Advertisement
Advertising Elasticity of Demand
Advertising elasticity is a measure of an advertising
campaign's effectiveness in generating new sales.

28. Advertising elasticity of Demand
• Advertising elasticity of demand (AED) is a measure of a market's
sensitivity to increases or decreases in advertising saturation.
• Advertising elasticity is a measure of an advertising campaign's
effectiveness in generating new sales. It is calculated by dividing the
percentage change in the quantity demanded by the percentage
change in advertising expenditures.
• A positive advertising elasticity indicates that an increase in advertising
leads to a rise in demand for the advertised good or service.

29. Elasticity of Demand
– Price Elasticity of Demand
• Perfectly elastic
• Perfectly Inelastic
• Unitary Elastic
• More Elastic
• Less Elastic
– Income Elasticity
• Positive and Negative
– Cross Elasticity