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Elasticity of demand
Elasticity's of demand

• Elasticity :
• It is a general concept that can be used to quantify the
response in one variable when another variable changes.
• The degree of responsiveness of demand to the change in
its determinants is called elasticity of demand. It explains
the extent of change in quantity demanded because of a
given change in the other determining factors.
• .
Measurement of elasticity
• The elasticity is measured in the following
ways:
• A. perfectly elastic demand.
• b . Perfectly inelastic demand.
• C. relatively elastic demand
• D. relatively inelastic demand.
• f. unity elasticity.
Perfectly Elastic and
Perfectly Inelastic Demand Curves
• Relatively inelastic demand ed < 1 e.g.,
telephone services, petrol etc.
• Elastic or unitary elastic ed = 1
• Relatively elastic ed > 1 groceries, vegetables
etc.,
• Perfectly elastic demand:
• when any quantity can be sold at a given
price, and when there is no need to reduce
price, the demand is said to be perfectly
elastic.
• Examples of perfectly elastic demand:
• Items that perfect competition.
• Unbranded spices, dry fruits, coffee beans
• b . Perfectly inelastic demand:
• when a significant degree of change in price
leads to little or no change in the quantity
demanded, then the elasticity is said to be
perfectly inelastic.
• In other words the demand is said to be
perfectly inelastic when there is no change in
the quantity demanded even though there is a
big change in price.
• Unit elasticity:
• the elasticity in demand is said to be unity
when the change in demand is equal to the
change in price.
• Relatetively elastic demand:
• The demand is said to be relatively elastic
when the change in demand is more then the
change in price. In other words the extent of
increase in the quantity demanded is greater
than the extent of fall in the price.
• ep > 1
• Examples of such goods are luxuries.
• Relatively inelastic demand:
• The demand is said to be relatively inelastic
when the change in demand is less than the
change in the price
• Examples of perfectly elastic demand:
• Items that perfect competition.
• Unbranded spices, dry fruits, coffee beans
Types of elasticity
• the following are the four types of elasticity
of demand:
• 1. price elasticity of demand.
• Income elasticity of demand.
• Cross elasticity of demand.
• Advertising elasticity of demand.
Price Elasticity of Demand

• A popular measure of elasticity is price elasticity
of demand measures the responsiveness of
demand for a commodity to the changes in the
price of a product.
• It is the percentage change in demand as a result
of one percent change in the price of the
commodity
Q2 − Q1
% c h a n g e in q u a n tity d e m a n d e d =
x 100%
Q1
Price Elasticity of Demand

% c h a n g e in q u a n tity d e m a n d e d
p r ic e e la s tic ity o f d e m a n d =
% c h a n g e in p r ic e
• The value of price elasticity is always negative,
but it is stated in absolute terms
• The elasticity can be measured between any
two points on a demand curve ( called arc
elasticity) or at a point (point elasticity)
Calculating Elasticities

P2 − P1
% c h a n g e in p ric e =
x 100%
P1
Income elasticity of demand
• Income elasticity of demand refers to the
quantity demanded of a commodity in
response to a given change in income of the
consumer.
• Income elasticity is normally positive, which
indicates that the consumer tends to buy
more and more with every increase in income.
• Income elasticity of demand=
• proportionate change in quantity demanded
for product x
• proportionate change in income.
• The seme is expressed as
• Edi= Q2-Q1/Q1
i2-i1/i1
•
• Where q1 is the quantity demanded before
change, q2 is quantity demanded after change
• Where I1 is income before change and I2 is
the income after change,
cross elasticity of demand
• cross elasticity of demand refers to the
quantity demanded of a commodity in
response to a change in price of the related
good which may be substitute or
complement.
• Cross elasticity of demand= proportionate
change in quantity demanded for product
x__________________________________
• Proportionate change in price of product Y,
Advertising elasticity of demand
• Advertising elasticity of demand refers to
increase in the sales revenue because of
change in the advertising expenditure.
• In other words there is direct relationship
between the amount of money spent on
advertising and its impact on sales.
• Advertising elasticity is always positive.
Factors governing elasticity of
demand
•
•
•
•
•
•
•

Nature of product
Time frame
Degree of postponement
Number of alternative uses
Tastes and preferences of the consumer.
availability of close substitute
In case of complementary or joint foods
•
•
•
•
•

Level of prices
Availability of subsidies
Expectation of prices
Durability of the product
Government policy
Significance of elasticity of demand
• To fix the prices of factors of production
• To fix the prices of goods and services
provided rendered
• To formulate or revise government policies
• to forecast demand
• to plan the level of output and price.
Methods to measure elasticity of
demand
• 1. point elasticity
• 2. arc elasticity.
• Point elasticity: A demand curve does not
have the same elasticity throughout its entire
length. In general, elasticity differs at different
points on a given demand curve. However this
does not hold good in the following three
cases: a. perfectly elastic b. perfectly inelastic
c. unity elasticity.
• The demand curves in each of these cases
possess a single elasticity throughout its entire
length.
• Arc elasticity:
• arc elasticity measures the average
responsiveness to price change .

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Elasticity of demand

  • 2. Elasticity's of demand • Elasticity : • It is a general concept that can be used to quantify the response in one variable when another variable changes. • The degree of responsiveness of demand to the change in its determinants is called elasticity of demand. It explains the extent of change in quantity demanded because of a given change in the other determining factors. • .
  • 3. Measurement of elasticity • The elasticity is measured in the following ways: • A. perfectly elastic demand. • b . Perfectly inelastic demand. • C. relatively elastic demand • D. relatively inelastic demand. • f. unity elasticity.
  • 4. Perfectly Elastic and Perfectly Inelastic Demand Curves
  • 5. • Relatively inelastic demand ed < 1 e.g., telephone services, petrol etc. • Elastic or unitary elastic ed = 1 • Relatively elastic ed > 1 groceries, vegetables etc.,
  • 6. • Perfectly elastic demand: • when any quantity can be sold at a given price, and when there is no need to reduce price, the demand is said to be perfectly elastic. • Examples of perfectly elastic demand: • Items that perfect competition. • Unbranded spices, dry fruits, coffee beans
  • 7. • b . Perfectly inelastic demand: • when a significant degree of change in price leads to little or no change in the quantity demanded, then the elasticity is said to be perfectly inelastic.
  • 8. • In other words the demand is said to be perfectly inelastic when there is no change in the quantity demanded even though there is a big change in price. • Unit elasticity: • the elasticity in demand is said to be unity when the change in demand is equal to the change in price.
  • 9. • Relatetively elastic demand: • The demand is said to be relatively elastic when the change in demand is more then the change in price. In other words the extent of increase in the quantity demanded is greater than the extent of fall in the price. • ep > 1 • Examples of such goods are luxuries.
  • 10. • Relatively inelastic demand: • The demand is said to be relatively inelastic when the change in demand is less than the change in the price
  • 11. • Examples of perfectly elastic demand: • Items that perfect competition. • Unbranded spices, dry fruits, coffee beans
  • 12. Types of elasticity • the following are the four types of elasticity of demand: • 1. price elasticity of demand. • Income elasticity of demand. • Cross elasticity of demand. • Advertising elasticity of demand.
  • 13. Price Elasticity of Demand • A popular measure of elasticity is price elasticity of demand measures the responsiveness of demand for a commodity to the changes in the price of a product. • It is the percentage change in demand as a result of one percent change in the price of the commodity
  • 14. Q2 − Q1 % c h a n g e in q u a n tity d e m a n d e d = x 100% Q1
  • 15. Price Elasticity of Demand % c h a n g e in q u a n tity d e m a n d e d p r ic e e la s tic ity o f d e m a n d = % c h a n g e in p r ic e
  • 16. • The value of price elasticity is always negative, but it is stated in absolute terms • The elasticity can be measured between any two points on a demand curve ( called arc elasticity) or at a point (point elasticity)
  • 17. Calculating Elasticities P2 − P1 % c h a n g e in p ric e = x 100% P1
  • 18. Income elasticity of demand • Income elasticity of demand refers to the quantity demanded of a commodity in response to a given change in income of the consumer. • Income elasticity is normally positive, which indicates that the consumer tends to buy more and more with every increase in income.
  • 19. • Income elasticity of demand= • proportionate change in quantity demanded for product x • proportionate change in income. • The seme is expressed as • Edi= Q2-Q1/Q1 i2-i1/i1 •
  • 20. • Where q1 is the quantity demanded before change, q2 is quantity demanded after change • Where I1 is income before change and I2 is the income after change,
  • 21. cross elasticity of demand • cross elasticity of demand refers to the quantity demanded of a commodity in response to a change in price of the related good which may be substitute or complement.
  • 22. • Cross elasticity of demand= proportionate change in quantity demanded for product x__________________________________ • Proportionate change in price of product Y,
  • 23. Advertising elasticity of demand • Advertising elasticity of demand refers to increase in the sales revenue because of change in the advertising expenditure. • In other words there is direct relationship between the amount of money spent on advertising and its impact on sales. • Advertising elasticity is always positive.
  • 24. Factors governing elasticity of demand • • • • • • • Nature of product Time frame Degree of postponement Number of alternative uses Tastes and preferences of the consumer. availability of close substitute In case of complementary or joint foods
  • 25. • • • • • Level of prices Availability of subsidies Expectation of prices Durability of the product Government policy
  • 26. Significance of elasticity of demand • To fix the prices of factors of production • To fix the prices of goods and services provided rendered • To formulate or revise government policies • to forecast demand • to plan the level of output and price.
  • 27. Methods to measure elasticity of demand • 1. point elasticity • 2. arc elasticity. • Point elasticity: A demand curve does not have the same elasticity throughout its entire length. In general, elasticity differs at different points on a given demand curve. However this does not hold good in the following three cases: a. perfectly elastic b. perfectly inelastic c. unity elasticity.
  • 28. • The demand curves in each of these cases possess a single elasticity throughout its entire length. • Arc elasticity: • arc elasticity measures the average responsiveness to price change .