demand elasticity

1. -CHAITRA.G.R

2.  Demand is an economic principle that
describes a consumer's desire and willingness
to pay a price for a specific good or service.
 Holding all other factors constant, an
increase in the price of a good or service will
decrease demand, and vice versa.

3. ELASTICITY
ability to
change
and adapt

4.  PRICE ELASTICITY OF DEMAND
 INCOME ELASTICITY OF DEMAND
 CROSS ELASTICITY OF DEMAND
 PROMOTIONAL ELASTICITY OF DEMAND

5. Part 1

6.  P.E MAY BE DEFINED ASTHE RATIO OFTHE
PERCENTAGE CHANGE INTHE DEMANDTO
THE PERCENTAGE CHANGE IN PRICE.
 P.E= %change in quantity demanded/
%change in price

8.  Perfectly elastic demand(E=infinity)
 Perfectly inelastic demand(E=0)
 Unitary elastic demand (E=1)
 Elastic demand (E is greater than 1)
 Inelastic demand (E is less than 1)

9. Perfectly elastic demand is said to happen
when a little change in price leads to an
infinite change in quantity demanded. A
small rise in price on the part of the seller
reduces the demand to zero. In such a case the
shape of the demand curve will be horizontal
straight line as shown in figure 1.

10.  The figure 1 shows that at
the ruling price OP, the
demand is infinite. A slight
rise in price will contract
the demand to zero. A
slight fall in price will
attract more consumers
but the elasticity of
demand will remain
infinite (ed=∞). But in real
world, the cases of
perfectly elastic demand
are exceedingly rare and
are not of any practical
interest.

11.  Perfectly inelastic demand is opposite to
perfectly elastic demand. Under the perfectly
inelastic demand, irrespective of any rise or
fall in price of a commodity, the quantity
demanded remains the same.The elasticity
of demand in this case will be equal to zero.
 Here (ed = 0).

12.  In diagram 2 DD shows the
perfectly inelastic demand. At
price OP, the quantity demanded is
OQ. Now, the price falls to OP1,
from OP, the demand remains the
same. Similarly, if the price rises to
OP2 the demand still remains the
same. But just as we do not see the
example of perfectly elastic
demand in the real world, in the
same fashion, it is difficult to come
across the cases of perfectly
inelastic demand because even the
demand for, bare essentials of life
does show some degree of
responsiveness to change in price.

13.  The demand is said to be unitary elastic when
a given proportionate change in the price
level brings about an equal proportionate
change in quantity demanded.The numerical
value of unitary elastic demand is exactly one
i.e. Marshall calls it unit elastic.

14.  in figure 3, DD demand
curve represents unitary
elastic demand.This
demand curve is called
rectangular hyperbola.
When price is OP, the
quantity demanded is OQ.
Now price falls to OP1 the
quantity demanded
increases to OQ2.The area
OQRP = area OPSQ2 in
the fig. denotes that in all
cases price elasticity of
demand is equal to one

15.  Relatively elastic demand refers to a situation
in which a small change in price leads to a big
change in quantity demanded. In such a case
elasticity of demand is said to be more than
one (ed > 1).This has been shown in figure 4.

16.  In fig. 4, DD is the
demand curve which
indicates that when price
is OP the quantity
demanded is OQ1. Now
the price falls from OP to
OP1, the quantity
demanded increases
from OQ1 to OQ2 i.e.
quantity demanded
changes more than
change in price.’

17.  Under the relatively inelastic demand, a given
percentage change in price produces a
relatively less percentage change in quantity
demanded. In such a case elasticity of
demand is said to be less than one (ed < 1). It
has been shown in figure 5.

18.  All the five degrees of
elasticity of demand have
been shown in figure 6. On
OX axis, quantity
demanded and on OY axis
price is given.
 It shows:
 1. AB — Perfectly Inelastic
Demand
 2. CD — Perfectly Elastic
Demand
 3. EG — Less than Unitary
Elastic Demand
 4. EF — GreaterThan
Unitary Elastic Demand
 5. MN — Unitary Elastic
Demand.

19.  Availability of substitutes
 Joint demand
 Consumer habits
 Brand
 Distribution of income
 Price range
 Number of uses of the commodity etc…

20.  Total Expenditure Method.
 Proportionate Method.
 Point Elasticity of Demand.
 Arc Elasticity of Demand.
 Revenue Method.

21. Dr. Marshall has evolved the total expenditure
method to measure the price elasticity of
demand.According to this method, elasticity
of demand can be measured by considering
the change in price and the subsequent
change in the total quantity of goods
purchased and the total amount of money
spent on it.
Total Outlay = Price X Quantity Demanded

22.  This method is also
associated with the name
of Dr. Marshall. According
to this method, “price
elasticity of demand is the
ratio of percentage change
in the amount demanded
to the percentage change
in price of the commodity.”
 It is also known as the
Percentage Method, Flux
Method, Ratio Method,
and Arithmetic Method.
Its formula is as under:

23.  This method was also suggested by Marshall
and it takes into consideration a straight line
demand curve and measures elasticity at
different points on the curve.This method
has now become very popular method of
measuring elasticity.

25.  “When elasticity is computed between two
separate points on a demand curve, the
concept is calledArc elasticity”

27.  Mrs. Joan Robinson has given this method.
She says that elasticity of demand can be
measured with the help of average revenue
and marginal revenue.Therefore, sale
proceeds that a firm obtains by selling its
products are called its revenue. However,
when total revenue is divided by the number
of units sold, we get average revenue.

28.  On the contrary, when addition is made to
the total revenue by the sale of one more unit
of the commodity is called marginal revenue.
Therefore, the formula to measure elasticity
of demand can be written as,
 EA = A/ A-M
Where Ed represents elasticity of demand,
A = average revenue and M = marginal revenue