SUB: LAW OF BUSINESS TAXATION

1. BBAE / 2KI6
Prepared by: SALAHUDIN ANSARI
0301-3639630

2. ELASTICITY OF DEMAND AND
SUPPLY
Price elasticity of demand
Income elasticity of demand

3. Price elasticity of demand
It is a measure of responsiveness of demand to
change in price . It is calculated by dividing
percentage change in price
PED =
PriceinChangePercentage
DemandedQuantityinChangePercentage
PED =
Q2 - Q1
Q1
P2 - P1
P1
=
D Q
Q1
D P
P1

4. DEGREE OF PRICE ELASTICITY OF DEMAND
(a) Perfectly inelastic demand(E=0)
If the quantity demanded of a commodity
does not change to a change in price , its
demand will be perfectly inelastic

5. (b) Perfectly elastic demand(E=∞)
If infinite quantity of a commodity is demanded at the existing price
, the demand will be perfectly elastic. The consumer will buy an
infinite quantity at the existing price .
Any price change will reduce demand to zero. The demand for life
saving drugs is perfectly elastic.

6. (c) Inelastic demand (E<1)
If the percentage change in quantity demanded is
less than percentage change in price the will be
inelastic
The demand for basic need (e.g., food, clothing ,
housing )is inelastic

7. (d) Elastic demand (E>1)
If the percentage change in quantity demanded change in the
percentage change in price , the demand of commodity will be
elastic . The demand for luxurious , goods
e.g, Car, Ac, Mobile set is elastic

8. (e) Unit elasticity (E=1)
If the percentage change in quantity demanded is equal to the percentage
change in price , the demand of commodity will be unit elastic.
The total revenue of the producer or the outlay (expenditure) of the
consumer remain same with the change in price when the demand is unit
elastic. The unit elastic curve is a rectangular hyperbola.

9. Measurement of price elasticity of demand
(a) Proportionate / percentage / formula method:
A formula is used to calculate price elasticity of demand
mathematically . If there is a negligible change in price and
quantity demanded of a commodity , the point elasticity of
demand is calculated.
If there is change in price is significant , arc elasticity of demand
is calculate d.
PIONT ELASTICITY OF DEMAND : is measure of
responsiveness of demand to change in price at a particular point
with out averaging price and quantity.
PED =
∆𝑸
∆𝑷
×
𝑷(𝒐𝒇 𝒑𝒆𝒓𝒕𝒊𝒄𝒖𝒍𝒂𝒓 𝒑𝒐𝒊𝒏𝒕)
𝑸(𝒐𝒇 𝒑𝒂𝒓𝒕𝒊𝒄𝒖𝒍𝒂𝒓 𝒑𝒐𝒊𝒏𝒕)

10. Arc elasticity of demand
It is measure of average responsiveness of demand to
change in price between the two points on the curve .
Arc means the distance between the two points on a
curve.
=
∆𝑄
∆𝑃
×
𝑃(𝑎𝑣𝑒𝑟𝑎𝑔𝑒)
𝑄(𝑎𝑣𝑒𝑟𝑎𝑔𝑒)
This method is used when there is a significant change in
the price and quantity demanded of a commodity

11. (b) Geometrical method
If the demand line or a curve is given to
calculate price elastcity of demand
geometrically the following formula is
used
PED at a point =
𝑙𝑜𝑤𝑒𝑟 𝑝𝑎𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑖𝑛𝑒
𝑢𝑝𝑝𝑒𝑟 𝑝𝑎𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑖𝑛𝑒
PED at a point =
𝐵𝐶
𝐴𝐵
Since numerator (BC) is greater than tne
denominator , demand at this point is
elastic (E>1)

12. (C) TOTAL OUTLAY METHOD:
(A) if the total outlay (expenditure) of a consumer increase with
the fall in price or decrease with the rise in price , the demand will
be elastic.
The following table show that total outlay is Rs.1000 when the price
of pen is Rs10 per unit but fall in price of pen to a Rs.5 per unit
increase the total outlay of the consumer to Rs.1500. thus, the
demand for pen is elastic in this table.
Price of pen (Rs) Qd of pen (unit) Total outlay
10 100 1000
5 300 1500

13. (2) If the total outlay (expenditure) of a consumer decrease with fall
in price or increase with the rise in prise , the demand will be
inelastic . The following table shows that total outlay is Rs 1000
when the price of pen is Rs 10 per unit but fall in the price of pen to
rupees 5 per unit decrease the total outlay of the consumer to Rs
750. hence demand is inelastic.
Price of pen (Rs) Qd of pen (unit) Total outlay
10
5
100
150
1000
750

14. (3) If the total outlay (expenditure) of a consumer does not change
with the change in price ,the price elasticity of demand will be equal
to 1 or unitary elastic . The following table shows that total outlay is
Rs1000 when the price of pen is rupees 10per unit or Rs 5 per unit
Price of pen (Rs) Qd of pen (unit) Total outlay
10 100 1000
5 200 1000

15. IMPORTANCE OF PED :
(a)Importance of PED for a producer :
If the PED of a product is elastic , a producer will increase his
revenue by reducing the price of his product . At point Po (A)
producer total revenue is OPo AQo but by reducing the price
form Po to P1 , total revenue has increased which is now equal
to OP1 BQ1.
A producer will increase his revenue by raising the price of
his product , if the PED for a product is inelastic. At the price
Po , producers total revenue is Opo Gqo. Total revenue increase
from Opo GQo to OP1 FQ1 by increasing the price from Po to
P1.

16. (b) Importance of PED For A Monopolist:
A discriminating monopolist will maximize his revenue
by charging higher price of his product in market (1)
Where the demand for his inelastic and lower price in
market(2)
Where the demand for his product is elastic.

17. (c) Importance of PED for a government
(1)If a government taxation policy is to increase its tax renew than it
can increase its tax renew by taxing the goods having inelastic
demand like cegerate and alcohol
(2) if a government want to decrease the total demand, it leaves tax
on inelastic demand
(3) PED also helps government in balance of payment policy in
order to rectify balance of payment current account , a
government devalues its domestic currency . The devaluation
increase the prices of import s and decrease the price of export the
devolution will help improving balance of payment if the export
and imports of a country have elastic demand . This is called as
mar shall- lerner condition.

18. POSITIVE PRICE ELASTICITIES OF DEMAND; GIFFEN
GOODS:
Normally the PED s negative and the demand curve slopes
downward , but in rare case the PED is positive and the demand
curve slops upward . Such goods are called Griffin goods are
those goods for which the demand increase with a rise in price
and decrease with a fall in price . In the case of Griffin goods
income effect out weighs the substitution effect.
SUBSTITUTION EFFECT is the effect on the level of
consumption of a good of a change in its price relatives to other
goods
INCOME EFFECT is the effect on the level of consumption of a
good of a change in real income caused by the change in its price
.

19. Determine / factors influencing PED for a good:
The following 5 factors influence price elasticity of demand
.
(a)Availability of substitutes:
The availability of close substitutes effects the price elasticity
of demand . If a close substitute of a good is available in the
market , its will be elastic
A consumer will shift to the substitute of the good if the price
increase. For example if the price of Pepsi increases the
costumer will shift to coke. In this case the decrease in
quantity demanded of Pepsi. Will be greater than increase in
its price. Hence the demand for pepsi will be elastic (E>1).
(b) TIME HORIZON
The time period influence price elasticity of demand for a
commodity . During short run period of time the demand for a
commodity is inelastic because it will not be possible for a
consumer to change his purchasing pattern or to develop the

20. (c) Proportion of income spent on a good:
If a small proportion of a consumer income is being spent on the commodity
(e.g. match box)
Its demand will be in elastic . If on the other hand , significant proportion of a
consumer income is being spent o commodity ,its demand will be elastic
(d) Degree of necessity attached to a good:
The elasticity of demand also depends upon the degree of necessity attached
to good. If a good being used is basic need (e.g. food , shelter , clothing), its
demand will be inelastic . If the good being used is luxurious good (e.g. CAR,
AC) its demand will be elastic.
(e) Price policies of competitors :
In oligopoly market ,the price policy of the competitor determines the
elasticity of demand of commodity .if the producer increase the price
of the product and his rival keeps the price unchanged , the consumer
will shift to the other producer . Thus the demand will be elastic . On
the other hand , if the producer decreases the price of commodity and
his rival follow s him , the percentage increase in the quantity
demanded will be less than the decrease in price . Hence the demand
will be inelastic .

21. Income Elasticity Of Demand
Indicates proportionate change in demand
which results from change in household
income.
it is the mathematical relationship between ∆Y & ∆Qd
Income elasticity of demand =
%𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
%𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 ℎ𝑜𝑢𝑠𝑒 ℎ𝑜𝑙𝑑𝑠 𝑖𝑛𝑐𝑜𝑚𝑒

22. (a)Income elasticity of demand for normal goods is
positive . In the case of normal goods quantity
demanded increase with the increase in income and
vice versa.
(b) income elasticity of demand for interior goods is
negatives because the quantity demanded of inferior
goods decrease with the rise in consumer income and
vice versa.

23. THANK YOU