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elasticity-Micro economics


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elasticity-Micro economics

  1. 1. Elasticity Elasticity of Demand Price Elasticity of Demand •Price Elasticity •Income Elasticity •Cross Elasticity
  2. 2. Meaning of Elasticity: It is the degree of responsiveness of a variable with the occurrence of changes in the other variable. Elasticity of Demand: It is also termed as Price Elasticity of Demand. The concept of Elasticity of Demand refers to the changes in the proportion of quantity demanded of a commodity with the proportion of changes in the price.
  3. 3. It is Alfred Marshall, who introduced the concept of elasticity into economic theory. Demand is also determined by other variables too, the income of the consumer and price of the related goods etc. are the major determinants of the demand. And these factors lead to different kinds of demand Elasticities. There are three kinds of demand elasticity: 1. Price Elasticity 2. Income Elasticity 3. Cross Elasticity
  4. 4. Price Elasticity of Demand: Price Elasticity means the degree of responsiveness or sensitiveness of quantity demanded of a good to changes in its price. In other words: Price Elasticity of demand is a measure of relative change in quantity purchased of a good in response to a relative change in its price. Price Elasticity = - percentage change in quantity percentage change in price
  5. 5. Contd.….. = - change in quantity demanded ⁄ quantity demanded change in price ⁄ price = - ∆q × p q ∆p
  6. 6. The Price elasticity of Demand is negative. Since the demand curve slopes downwards the change in quantity demanded will always have the opposite sign to change in its price. The minus sign in the definition of elasticity is simply designed to ‘neutralize’ this negative relation between price and quantity changes and thus to make elasticity of demand a positive number.
  7. 7. In the above diagram depicts the Elasticity's in the following ways: a) Perfectly Inelastic Demand b) Perfectly Elastic Demand c) Unitary Elastic Demand d) Relatively Elasticity of Demand (or) Greater than Elasticity e) Relatively Inelastic Demand (or) Less than Elasticity of Demand.