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Elasticity

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Elasticity

  1. 1. <ul><li>ELASTICITY OF DEMAND EXPLAINS THE MAGNITUDE OF THE IMPACT OF THE CHANGES IN THE FACTORS INFLUENCING DEMAND ON THE QUANTITY DEMANDED. </li></ul><ul><li>ELASTICITY IS THE REACTION OF ONE VARIABLE, WITH RESPECT TO CHANGES IN OTHER VARIABLES. </li></ul><ul><li>PRICE ELASITICITY OF DEMAND </li></ul><ul><li>INCOME ELASITICITY OF DEMAND </li></ul><ul><li>CROSS ELASITICITY OF DEMAND </li></ul><ul><li>ADVERTISING ELASITICITY OF DEMAND </li></ul><ul><li>EXPECTATION ELASITICITY OF DEMAND </li></ul>
  2. 2. <ul><li>FACTORS AFFECTING ELASTICITY OF DEMAND </li></ul><ul><ul><li>NATURE OF THE COMMODITY. </li></ul></ul><ul><ul><li>NUMBER OF SUBSTITUTES. </li></ul></ul><ul><ul><li>NUMBER OF USES OF A COMMODITY. </li></ul></ul><ul><ul><li>PRICE LEVEL OF THE COMMODITY. </li></ul></ul><ul><ul><li>POSITION OF COMMODITY IN CONSUMER’S BUDGET. </li></ul></ul><ul><ul><li>POSTPONEMENT OF DEMAND. </li></ul></ul><ul><ul><li>JOINT DEMAND. </li></ul></ul><ul><ul><li>CONSUMER’S BEHAVIOUR. </li></ul></ul>
  3. 3. <ul><li>ELASTICITY OF DEMAND IN DECISION MAKING PROCESS </li></ul><ul><li>(a) BUSINESS DECISIONS. </li></ul><ul><li>(b) ECONOMIC POLICIES OF GOVERNMENT. </li></ul><ul><li>(c) DETERMINATION OF PUBLIC UTILITIES. </li></ul><ul><li>(d) TAXATION POLICY. </li></ul><ul><li>(e) DETERMINATION OF FACTOR PRICING. </li></ul><ul><li>(f) INTERNATIONAL TRADE </li></ul>
  4. 4. <ul><li>SLOPE AND ELASTICITY </li></ul><ul><li>THE ELASTICITY OF DEMAND IS DEFINED AS </li></ul><ul><li>e p = Δq x p = 1 x p </li></ul><ul><li> Δp q Δp/Δq q </li></ul><ul><li>AS SLOPE OF THE DEMAND CURVE IS Δp/Δq (CHANGE IN ‘Y’ DIVIDED BY CHANGE IN ‘X’), THE ABOVE FORMULA CAN BE REWRITTEN AS </li></ul><ul><li>e p = 1 x p </li></ul><ul><li> Slope q </li></ul><ul><li>  e p  1 if p is constant </li></ul><ul><li> Slope q </li></ul>
  5. 5. <ul><li>INCOME ELASTICITY OF DEMAND </li></ul><ul><li>THUS, INCOME ELASTICITY OF DEMAND, e y 6 OF ANY COMMODITY IS </li></ul><ul><li>e Y = Percentage change in the quantity demanded of commodity ‘X’ </li></ul><ul><li> Percentage change in income of the consumer </li></ul><ul><li>Δq </li></ul><ul><li> q </li></ul><ul><li>e p = Δy = Δq x y = Δq x y </li></ul><ul><li> y q Δy Δy q </li></ul><ul><li>Where, </li></ul><ul><li>q stands for the quantity demanded. </li></ul><ul><li>y stands for the income of the consumer. </li></ul><ul><li>Δq stands for the change in the quantity demanded. </li></ul><ul><li>Δy stands for the change in income of the consumer. </li></ul>
  6. 6. <ul><li>CROSS ELASTICITY OF DEMAND </li></ul><ul><li>LET THE QUANTITY DEMANDED OF COMMODITY ‘X’ DEPENDS UPON THE PRICE OF COMMODITY ‘Y’. CROSS ELASTICITY OF DEMAND (e c ) BETWEEN ‘X’ AND ‘Y’ IS : </li></ul><ul><li>Percentage change in the quantity demanded of commodity ‘X’ </li></ul><ul><li> Percentage change in the price of commodity ‘Y. </li></ul><ul><li>Δq x </li></ul><ul><li> q x </li></ul><ul><li> Or, e c = Δp y = Δq x x p y = Δq x x p y </li></ul><ul><li> p y q x Δp y Δp y q x </li></ul><ul><li> </li></ul>
  7. 7. <ul><li>ADVERTISING ELASTICITY OF DEMAND </li></ul><ul><li> e A = Proportionate change in sales </li></ul><ul><li> Proportionate change in advertisement expenditure </li></ul><ul><li> = ΔQ / Q </li></ul><ul><li>ΔA / A </li></ul><ul><li> = ΔQ x A </li></ul><ul><li>ΔA Q </li></ul><ul><li> </li></ul>
  8. 8. <ul><li>EXPECTATION ELASTICITY </li></ul><ul><li>IT IS DEFINED AS THE RATIO OF PERCENTAGE CHANGE IN THE LEVEL OF EXPECTED FUTURE PRICES (P t+1 ) TO THE PERCENTAGE CHANGE IN THE LEVEL OF CURRENT PRICES (P t ). THUS, </li></ul><ul><li> e pe = dP t+1 . P t </li></ul><ul><li> dP t P t+1 </li></ul><ul><li>EXPECTATION ELASTICITY IS UNITARY, WHEN A RISE IN CURRENT PRICE IS EXPECTED TO RESULT IN AN EQUIPROPORTIONAL RISE IN FUTURE PRICE. IF RISE IN EXPECTED FUTURE PRICE IS MORE THAN / LESS THAN PROPORTIONAL TO CURRENT PRICE RISE, EXPECTATION ELASTICITY IS GREATER / LESS THAN ONE. </li></ul>

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