The document discusses various types of elasticities of demand, including price elasticity, income elasticity, cross elasticity, and promotional elasticity. It defines each type of elasticity and explains how to measure elasticity using different methods. The importance of understanding elasticities for determining pricing, taxation policies, and other business and economic decisions is also summarized.

1. ASSIGNMENT(PPT)ASSIGNMENT(PPT)
MC-203 MANAGERIAL ECONOMICSMC-203 MANAGERIAL ECONOMICS
TOPIC :- DEMAND FUNCTION AND DEMAND ELASTICITIES
NAME :- VISHAL VERMA (7071497236) M.COM 2ND
YEAR
SECTION :- B
ROLL NO :- 2157
RESPECTED TEACHER’S NAME :- PROF. DR. SUNITA SRIVASTAVA

2. ACKNOWLEDGEMENTACKNOWLEDGEMENT
In performing our assignment, we had to take the help of some respected persons, who
deserve our greatest gratitude. We would like to show our gratitude to PROF. DR.SUNITA
SRIVASTAVA for giving us a good guideline for assignment throughout numerous
consultations. We would also like to expend our deepest gratitude to all those who have directly
or indirectly guided us in accomplishing this assignment.
In addition, a thank you to MR OM PRAKSH SIR who, introduced us to the methodology of
work and guidance.
We also thank the ‘UNIVERSITY OF LUCKNOW’ for their help and support in the form of

3. OBJECTIVES OF THE PRESENTATION
 To understand the meaning of
responsiveness of demand to changes in
determinants of demand.
 To lay down the degrees of responsiveness
of demand.
 To discuss various types of elasticities of
demand.
 To learn how to measure elasticity by
various methods.
 To understand the relevance and
application of elasticities of demand

4. Demand function:
 A demand function is a statement of the relation between the
demand for a product and all variables (factors) that affect
demand.
 It is also defined as the relation between the consumers’ optimal
choice of the quantity of a goods and its price is called the
demand function.
 Its formula for
Demand Function is q= d(p)
There are two types of Demand Function:
Individual Demand Function
Market Demand Function

5. INDIVIDUAL DEMAND FUNCTION
 It shows how demand for a commodity, by an individual
consumer in the market, is related to its various
determinants.
Dx = f(Px,Px,Y,T,E)
 PRICE OF COMMODITY: Other things being equal, with the
rise in price of commodity, its demand contracts, and with
a fall in price its demand extends. This inverse relationship
between price of the commodity and its demand is called
Law of Demand.
 PRICE OF OTHER GOODS: Demand for good x is influenced
by the price of other goods(z). is called cross price
demand.

6.  TASTE AND PREFERENCES: The Demand for goods and services
depends upon the individual taste and preferences. They
include fashion, habit, custom etc. Taste and Preferences of the
consumer influenced by advertisement, change in fashion,
climate and new inventions etc.
 EXPECTATION: If the consumer expects that price in future will
rise, he will buy more quantity in present, at existing price.
Likewise if the consumer expects that price in future will fall, he
will buy less quantity in present, or may even postpone

7. MARKET DEMAND FUNCTION
 MARKET DEMAND FUNCTION shows how market
demand for a commodity is related to its various
determinants. It is expressed as under:
Mkt. Dx =f(Px,Pr,Y,T,E,N,Yd)
 Apart from the above factors, we can Say that only
two types of new factors are added in market
demand function. This are:
N = Population Size
Yd = Distribution of Income.

8. THE EXPLANATION OF THE TWO
FACTORS IS AS UNDER:
 POPULATION SIZE: Demand increase with increase in
population and decrease with decrease in population. That is
because within increase in population size, the number of
buyers of product tends to increase. Composition of
population also affects demand. If composition of population
change, e.g. female population increases, demand for goods
meant for women will go up.
 DISTRIBUTION OF INCOME: Market demand is also influenced
by change in the distribution of income in the society. If
income is equally distributed, there will be less demand. In
case of unequal distribution, most people will have enough
money to buy things.

9. ELASTICITY OF DEMAND
 “Elasticity” is a standard measure of the degree of
responsiveness (or sensitivity) of one variable to
changes in another variable.
 Elasticity of Demand measures the degree of
responsiveness of demand for a commodity to a
given change in any of the independent variables
that influence demand for that commodity, such as
price of the commodity, price of the other
commodities, income, taste, preferences of the
consumer and other factors.
 Responsiveness implies the proportion by which the
quantity demanded of a commodity changes, in
response to a given change in any of its
determinants .

10. ELASTICITY OF DEMAND
 Mathematically, it is the percentage change in
quantity demanded of a commodity to a
percentage change in any of the (independent)
variables that determine demand for the
commodity.
 Four major types of elasticity:
 Price elasticity,
 Income elasticity,
 Cross elasticity
 Advertising (or promotional) elasticity.
 In order to assess the impact of one variable on
demand, we assume other variables as constant (ceteris
paribus)

11. PRICE ELASTICITY OF DEMAND
 Price is most important among all the
independent variables that affect the demand
for any commodity.
 Hence Price elasticity of demand ( “ep” or “e”)
is considered to be the most important of all types
of elasticity of demand.
 Price elasticity of demand means the sensitivity of
quantity demanded of a commodity to a given
change in its own price.

12. DEGREES OF PRICE ELASTICITY
PERFECTLY ELASTIC DEMAND
 ep=∞ (in absolute terms).
 Unlimited quantities of the
commodity can be sold at the
prevailing price
 A negligible increase in price would
result in zero quantity demanded
 Horizontal demand curve
PERFECTLY INELASTIC DEMAND
 The other extreme of the elasticity
range
 ep=0 (in absolute terms)
 Quantity demanded of a
commodity remains the same,
irrespective of any change in the
price
 Such goods are termed neutral
 Vertical demand curve
Price
Quantity
O
P D
Q1 Q1
Price
Quantity
O
D
Q1
P2
P1

13. Degrees of Price Elasticity
HIGHLY ELASTIC DEMAND
 Proportionate change in quantity
demanded is more than a given
change in price
 ep >1 (in absolute terms)
 Such goods are called luxuries
UNITARY ELASTIC DEMAND
 Proportionate change in price brings
about an equal proportionate change
in quantity demanded
 ep =1 (in absolute terms).
 Demand curves are shaped like a
rectangular hyperbola, asymptotic to
the axes
RELATIVELY INELASTIC DEMAND
 Proportionate change in quantity
demanded is less than a proportionate
change in price
 ep <1 (in absolute terms)
 Such goods are called necessities
Price
Quantity
O
D
D
Q1 Q2
P2
P1
Price
Quantity
O
D
D
Q1 Q2
P2
P1
Price
Quantity
O
D
D
Q1 Q2
P2
P1

14. METHODS OF MEASURING PRICE ELASTICITY
 RATIO (OR PERCENTAGE) METHOD
 The most popular method used to measure elasticity
 Elasticity of demand is expressed as the ratio of
proportionate change in quantity demanded and
proportionate change in the price of the commodity
 It allows comparison of changes in two qualitatively
different variables
 It helps in deciding how big a change in price or quantity is
ep=
 where Q1= original quantity demanded, Q2= new
quantity demanded, P1= original price level, P2= new
price level
XcommodityofpriceinchangeateProportion
XcommodityofdemandedquantityinchangeateProportion
=ep
112
112
/
/
PPP
QQQ
−
−

15. METHODS OF MEASURING ELASTICITY
 POINT ELASTICITY METHOD
 Elasticity measured at a point of demand curve is
referred as point elasticity of demand.
 For nonlinear demand curve we need to apply calculus
to calculate point elasticity.
 As changes in price become smaller and approach
zero, the ratio becomes equivalent to the first order
derivative of the demand function with respect to price
 Point elasticity can be expressed as:
ep = LOWER SEGMENT DEMAND CURVE
UPPER SEGMENT OF DEMAND CURVER
Contd…
.
P
Q
∆
∆

16. METHODS OF MEASURING ELASTICITY
 ARC ELASTICITY METHOD
 Used when the available figures on price and
quantity are discrete, and it is possible to isolate
and calculate the incremental changes.
 It is used to find the elasticity at the midpoint of
an arc between any two points on a demand
curve, by taking the average of the prices and
quantities.
 This method finds wider applications, as it reflects
a movement along a portion (arc) of a demand
curve
ep = / = .
2/)( 21
12
QQ
QQ
+
−
2/)( 21
12
PP
PP
+
−
Contd…
21
12
QQ
QQ
+
−
12
21
PP
PP
−
+

17. METHODS OF MEASURING ELASTICITY
 TOTAL OUTLAY METHOD (MARSHALL)
 Elasticity is measured by comparing expenditure levels
before and after any change in price, i.e. whether the new
expenditure is more than, or less than, or equal to the initial
expenditure level.
 Helps a seller in taking a decision to raise price only if:
 Reduction in quantity demanded does not reduce total
revenue or
 Reduction in price increases the quantity demanded to
the extent that total revenue also increases.
 DEGREES
 When demand is elastic, a decrease in price will result in
an increase in the revenue (sales).
 When demand is inelastic, a decrease in price will result
in a decrease in the revenue (sales).
 When demand is unit-elastic, an increase (or a
decrease) in price will not change the revenue (sales)
Contd…

18.  NATURE OF COMMODITY
 Necessities are relatively price inelastic, while
luxuries are relatively price elastic
 AVAILABILITY AND PROXIMITY OF SUBSTITUTES
 Price elasticity of demand of a brand of a
product would be quite high, given availability of
other substitute brands
 ALTERNATIVE USES OF THE COMMODITY
 If a commodity can be put to more than one
use, it would be relatively price elastic
DETERMINANTS OF PRICE ELASTICITY
OF DEMAND

19. DETERMINANTS OF PRICE ELASTICITY
OF DEMAND
 PROPORTION OF INCOME SPENT ON THE COMMODITY
 The greater the proportion of income spent on a commodity,
the more sensitive would the commodity be to price
 Reason is income effect
 TIME
 Demand for any commodity is more price elastic in the long
run
 DURABILITY OF THE COMMODITY
 Perishable commodities like eatables are relatively price
inelastic in comparison to durable items
 ITEMS OF ADDICTION
 Items of intoxication and addiction are relatively price
inelastic

20. INCOME ELASTICITY OF DEMAND (EY)
 ey measures the degree of responsiveness of demand for
a good to a given change in income, ceteris paribus.
 DEGREES:
 Positive income elasticity
 Demand rises as income rises and vice versa
 Normal good
 Negative income elasticity
 Demand falls as income rises and vice versa
 Inferior good
consumerofincomeinchangeateProportion
XcommodityofdemandedquantityinchangeateProportion
=ey

21. CROSS ELASTICITY OF DEMAND
 ec measures the responsiveness of demand
of one good to changes in the price of a
related good
 DEGREES
 Negative Cross Elasticity
 Complementary goods
 Positive Cross Elasticity
 Substitute goods
YcommodityofpriceinchangeateProportion
XcommodityofdemandedquantityinchangeateProportion
=ec

22. PROMOTIONAL ELASTICITY OF DEMAND
 Advertising (or promotional) elasticity of demand (ea)
measures the effect of incurring an “expenditure” on
advertising, vis-à-vis an increase in demand, ceteris paribus.
 Some goods (like consumer goods) are more responsive to
advertising than others (like heavy capital equipments).
 DEGREES
 ea>1
 Firm should go for heavy expenditure on
advertisement.
 ea <1
 Firm should not spend too much on advertisement
eexpenditurgadvertisininchangeateProportion
Xcommodityofsales)(ordemandedquantityinchangeateProportion
=ea

23. IMPORTANCE OF ELASTICITY
 DETERMINATION OF PRICE
 Elasticity is the basis of determining the price of a product
keeping its possible effects on the demand of the product in
perspective
 BASIS OF PRICE DISCRIMINATION
 Products having elastic demand may be sold at lower price,
while those having inelastic demand may be sold at high
prices
 DETERMINATION OF REWARDS OF FACTORS OF PRODUCTION
 Factors having inelastic demand are rewarded more than
factors that have relatively elastic demand.
 GOVERNMENT POLICIES OF TAXATION
 Goods having relatively elastic demand are taxed less than
those having relatively inelastic demand.

24. SUMMARY AND CONCLUSION
 Elasticity of demand measures the degree of responsiveness of
the quantity demanded of a commodity to a given change in
any of the independent variables that influence demand for
that commodity.
Price elasticity of demand (ep) measures the degree of
responsiveness of the quantity demanded of a commodity to a
given change in its price, other things remaining the same.
By the percentage method ep is expressed as the ratio of
proportionate change in quantity demanded and
proportionate change in price of the commodity.
As per the total outlay method elasticity is measured by
comparing expenditure levels before and after any change in
price, i.e. whether the new expenditure is more than, or less
than, or equal to the initial expenditure level.
Arc elasticity is used to calculate price elasticity of demand at
the midpoint of an arc between any two points on the demand
curve, by taking the average of the prices and quantities; point
elasticity can be approximated by calculating the arc elasticity
for a very small arc on the demand curve.

25. SUMMARY AND CONCLUSION
 If the demand curve is a straight line, price elasticity of
demand at different points of the demand curve can be
calculated by the ratio of the lower segment and upper
segment of the demand curve.
 MR= AR[1- ep]
 Income elasticity of demand (ey) measures the degree of
responsiveness of the quantity demanded of a commodity to
a given change in consumer’s income. For normal goods ey is
positive; for neutral goods ey is zero; for inferior goods ey is
negative.
 Cross elasticity of demand (ec) shows how changes in prices of
other goods would affect the demand for a particular good.
For substitutes ec is positive; and for complements ec is
negative.
 Advertising (or promotional) elasticity of demand (ea)
measures the effect of incurring an “expenditure” on
advertising of a firm on the demand for its product at
constant price.
 Elasticity is used for determination of right price by seller and
for taxation by government.