2. Content
1. Price elasticity od demand
2. Income Elasticity of demand
3. Elasticity Of Substitution
4. Cross elasticity of demand
5. Advertising Elasticity of demand
6. Uses of elasticity of demand for managerial
decision making
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3. Elasticity Of Demand
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• The elasticity of demand measures the responsiveness of
the quantity demanded of a good, to change in it’s price,
price of other goods and changes in consumer’s income.
• Various types of elasticity of demand are:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Advertising elasticity of demand
4. 1. Price Elasticity Of Demand
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• The change in the quantity demanded of a product due to a
change in its price is known as Price elasticity of demand.
Thus, the sensitiveness or responsiveness of demand to
change in price is as called elasticity of demand.
• Kinds Of Price Elasticity Of Demand
1) Perfectly elastic demand
2) Relatively elastic demand
3) Elasticity of demand equal to utility
4) Relatively inelastic demand
5) Perfectly inelastic demand
5. Perfectly elastic demand
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When the demand for a product changes –increases
or decreases even when there is no change in price,
it is known as perfect elastic demand.
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Elasticity of demand equal to utility
When the proportionate change in demand is equal to
proportionate changes in price, it is known as unitary
elastic demand
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Measurement of price elasticity of demand
Price Elasticity Of Demand =
Proportionate change in Quantity
Demanded
Proportionate change in price
i.e.
Price Elasticity Of Demand =
∆P
Q
∆Q
P
(-)
(-)
Here, Q = initial demand
P = Initial price
∆Q = Change in demand
∆P = Change in price
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EXAMPLE:
Suppose the price of ice cream is Rs 4 per cup and demand is for 1
cup. If the price of ice cream falls to Rs 2 per cup, demand increases to
4 cups. Find price elasticity of demand.
P = Rs 4
Q = Rs 1 cup
∆P = - Rs 2 (Rs 2 – Rs 4)
∆Q = 3 cups (4 – 1)
= (-)
1
4 3
-2
= 6 Or > 1
Price elasticity od demand
is greater than unity
12. Factors Affecting Price Elasticity Of Demand
• Nature of the Commodity
• Availability of Substitutes
• Variety of uses of commodity
• Postponement
• Influence of habits
• Proportion of Income spent on a commodity
• Range of prices
• Income Groups
• Elements of time
• Pattern of income distribution
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13. • Income elasticity of demand is defined as, “the percentage
change in the quantity demanded of a good divided by the
percentage change in the income of the consumer”.
• Types Of Income Elasticity Of Demand
1. Positive Income elasticity of demand
2. Negative Income elasticity of demand
3. Zero Income elasticity of demand
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2. Income Elasticity Of Demand
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Positive Income elasticity of demand
• Income Elasticity Equal to Unity or One
• Income Elasticity Greater Than Unity Or One
• Income Elasticity Less Than Unity or One
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Measurement Of Income Elasticity Of Demand
Income Elasticity Of Demand =
Proportionate change in Demand
Proportionate change in Income
i.e.
Income Elasticity Of Demand =
∆q
Q
∆ y
Y
Here , ∆q = Change in the quantity demanded.
Q = Original quantity demanded.
∆y = Change in income.
Y = Original income.
17. • =
There is Inelasticity of income
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EXAMPLE:
When the income is Rs 100, demand is 25 units;
now suppose that the income increases to Rs 150,
as a result of this demand increases to 30 units.
Calculate the elasticity of income.
5
50
100
25
=
=
2
5
= 0.4
18. 3. Elasticity Of Substitution
• The selection between two product or thing is called
substitution.
• So Elasticity of Substitution measures the rate at which the
particular product is substituted .
• Thus EOS is the degree to which one product could be
substituted in context of price and proportion
• Elasticity of Substitution
= Proportionate change in the quantity ratios of goods x & y
DIVIDED BY Proportionate change in the price ratios of goods
x & y.
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19. • Zero Elasticity of Substitution.
• Infinite Elasticity Of Substitution
• Elasticity of Substitution greater than unity or1
• Elasticity of Substitution is equal to one
• Elasticity of Substitution is less than one
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Types of Elasticity Of Substitution
21. • Cross elasticity of demand express a relationship between the
change in the demand for a given product in response to a
change in the price of some other product
• E.g. if the X tea demand reduces tremendously than it effect
could be seen in demand of sugar and milk.
• Types of Cross Elasticity of Demand
1. Cross Elasticity of Demand Equal to Unity or One
2. Cross Elasticity of Demand Greater than Unity or one
3. Cross Elasticity of demand less than unity or one
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4. Cross Elasticity of Demand
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Measurement Cross Elasticity of Demand
Cross Elasticity of Demand =
Proportionate change in Demand
for product X
Proportionate change in Price of
product Y
i.e.
Cross Elasticity of Demand =
∆qx ∆py
Qx Py
Here, ∆qx = change in quantity demanded of x
∆p y = change in price of y
Qx = original quantity demanded of x
Py = original price of good y
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5. Advertising Elasticity of Demand
Advertising Elasticity of Demand =
Proportionate change in Demand
for product
Proportionate change in Advertising
expenditure
i.e.
Advertising Elasticity of Demand =
∆Qx
Qx
∆A
A
The measurement of the degree of responsiveness of demand for
a commodity with respect to the change in the expenditure on
advertisement and other promotional activities is called the
advertising elasticity of demand.
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6. Uses of Elasticity of Demand in
Managerial decision Making
• Determination of price policy
• Incidence of taxation
• Importance in international trade
• Determination of price of public utility
• Importance in the determination of factors prices
• Output decisions
• Paradox of poverty
29. QUESTIONS
1. Carefully explain why a typical demand curve slopes
downwards.
2. Distinguish between normal and inferior goods.
3. Explain Assumptions to law of Demand
4. Explain Exceptions to the Law of demand
5. Describe Veblen effect.
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