Elasticity of demand


Published on

1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Elasticity of demand

  1. 1. ELASTICITY OF -By Suvarna Kamble. DEMAND
  2. 2. MEANING OF ELASTICITY OF DEMAND:Term is used to denote a measure of the rate at which demand changes in response to the change in prices.It is the percentage change in quantity demanded divided by the percentage in one of the variables on which demand depends.It is Price elasticity of demand , which is usually referred to as elasticity of Demand.
  3. 3. TYPES OF ELASTICITY OF DEMAND:Price elasticityIncome elasticityCross elasticityPromotional elasticity
  4. 4. PRICE ELASTICITY OF DEMAND:Price elasticity of Demand expresses the response of quantity demanded of goods to a change in its price.Definition:“Elasticity of demand may be defined as the ratio of the percentage change in demand to the percentage change in price” -prof.Lipsey..
  5. 5. THUS, PRICE ELASTICITY OF DEMAND ISTHE RATIO OF PERCENTAGE CHANGE IN AMOUNT DEMANDED TO APERCENTAGE CHANGE IN PRICE.Price elasticity(Ep)=%change in quantity demanded % change in Price Ep= ^Q xP = ^Q x P Q ^P ^P QWhere, Ep=price elasticity P=PriceQ=Quantity ^Q=Change in quantity demanded^P=Change in Price.
  6. 6. TYPES/DEGREES OF DEMAND:Perfectly Elastic Demand(E=∞): In this case the demand for a commodity changes even though there is no change in Price.It implies that with a very small Percentage change in price , the quantity demanded would change indefinitely & so the seller would not change the Price.
  7. 7. Perfectly Inelastic Demand(E=0):If the demand for a commodity does not change in spite of an increase or decrease in its Price.
  8. 8. Unitary Elastic Demand(E=1)Price elasticity of demand is unity when the change in demand is exactly proportionate to the change in price.Eg: The Price is Rs.10 &the quantity demanded is 100 units &the total outlay is Rs.1000. and if price increases to Rs.20 & the quantity demanded declines to 50 units , the total outlay is Rs. 1000In this case demand curve is rectangular hyperbola.
  9. 9. Elastic Demand(E>1):If the Percentage change quantity demanded is greater than the percentage change in price.Price elasticity of demand is greater than one.Eg: The Price Increases from Rs.10 to Rs.20,quantity demanded declines from 100 units to 40 units.as a result , the total outlay declines from Rs. 1000 to Rs.800.
  10. 10. on the other hand, if Price declines from Rs.10 to Rs.5 and quantity demanded increases from 100to300 units as a result the total outlay has increased from Rs.1000 to Rs.1500.In this case the price and total outlay are inversely related.
  11. 11. Inelastic demand(E<1):If the Percentage change in quantity demanded is less than the percentage change in Price .Price elasticity of demand is less than one.Eg: when price increases from Rs.10 to Rs.20& the quantity declines from 100 units to 50 units , the total outlay increases from Rs.1000 to Rs.1500.
  12. 12. On the other hand if the price declines from Rs.10 to Rs.5 & quantity demanded increases from 100 units to 150 units . the total outlay declines from Rs.1000 to Rs.750This shows that the price and total outlay are directly related.Because , the quantity demanded changes relatively slower than the change in price.