1st assignment deepa & group(economics)
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ASSIGNMENT ON ELASTICITY OF DEMAND
Submitted as per requirement of college assignment for BBS 1st year
ASSIGNMENT
(MICRO ECONOMICS)
SUBMITTED BY SUBMITTED TO
DEEPA THAPA TAK BADHADUR THAPA
DIPA K.CLETURER, ECONOMICS
KABITA RANA
DATE: 15TH Jan 201
TABLE OF CONTENTS Page
Introduction…………………………………………………… 1
Types of Elasticity of demand……………………………………. 1
Price elasticity of demand ....................................................………………1
Types of Elasticity of demand……………………………………………...3
Perfectly Elasticity of demand……………………………………………...4
Perfectly in Elasticity of demand…………………………………………...4
Relatively Elastic demand………………………………………………….5
Relatively inelastic demand………………………………………………...5
Unitary Elastic demand……………………………………………………..6
Income elasticity of demand………………………………………………...6
Types of Income elasticity of demand………………………………………7
Positive income elasticity of demand………………………………………..7
Negative income elasticity of demand………………………………………7
Zero elasticity of demand…………………………………………………...8
Cross elasticity of demand…………………………………………………..9
Positive cross elasticity of demand………………………………………….10
Negative cross elasticity of demand…………………………………………10
Conclusion……………………………………………………………………11
References…………………………………………………………………….11
Table
Price elasticity of demand…………………………………………………….2
Negative income elasticity of demand………………………………………..7
Zero income elasticity of demand………………………………………….…8
Positive cross elasticity of demand………………………………………..….9
Negative cross elasticity of demand………………………………………….10
Figure
Price elasticity of demand…………………………………………………….2
Negative income elasticity of demand………………………………………..7
Zero income elasticity of demand…………………………………………….8
Positive cross elasticity of demand…………………………………………...9
Negative cross elasticity of demand………………………………………….10
INTRODUCTION Demand is a desire for a goods which consumers want to pay or ability to pay a price for a specific
quantity of a goods or service. If refers to quantity of product or services. It refers quantity of a product
or service desired by buyers of various price law of demand state that the inverse relationship between
price and quantity demand of a product or goods.
The elasticity of demand is the measure of responsiveness of demand for a commodity due to change in
any of its determinants. The price of the same commodity, price of the related commodity, consumer
expectations regarding future price etc are the determinants of elasticity of demand.
The concept of elasticity of demand is used to identify the actual measure of the change in quantity
demanded due to the change in price of the commodity. In other word, it is the ratio percentage change
in quantity demanded with the percentage change in any one determinant of demand.
Types of Elasticity of Demand
A Price Elasticity of Demand
B Income Elasticity of Demand
C Cross Elasticity of Demand
A. Price Elasticity of Demand
Price elasticity of demand is defined as the responsiveness of change in quantity demand due to change
in its price. It is the ratio of percentage change in quantity demand for a commodity to the percentage
change in its price, other things remains the same price and quantity demand are inversely related, so the
coefficient of price elasticity of demand is negative.
Mathematically,
Ep= - Percentage change in quantity Demand / Percentage change in price
Ep = -(∆Q/QX100)/(∆P/P X 100)
Ep = - ∆Q/∆P X P/Q
Table 1:- Price elasticity of demand
Table 1 shows that, when the price is Rs 20, the quantity demand is 30kg. Similarly, when price
is Rs 10 the quantity demand is 40kg. When price decrease with Rs10,the quantity demand
increases with 10 kg.
Fig 1: Price Elasticity of Demand
Price in(Rs) quantity demand(kg)
20 30
10 40
In figure1: DD is the demand curve. Initial price of a commodity is p and initial quantity demand is Q
price falls to P(1,2,3) and quantity demand increase to Q(1,2,3).
Types of price Elasticity of demand
1. Perfectly Elasticity Demand
2. Perfectly inelasticity demand
3. Relatively elastic demand
4. Relatively Inelastic Demand
5. Unitary Elastic Demand
1. Perfectly Elastic demand (Ep= ∞)
Demand is said to be perfectly elastic if negligible change in price leads to infinite change in quantity
demand. Quantity demanded for commodity increases infinitely or demand tends to zero, When there is
no change in the price of commodity. It is real practice. In this case, demand curve is a horizontal
straight line.
Mathematically
Ep= - Percentage change in quantity demand / Percentage change in price
Ep = -(∆Q/QX100)/(∆P/P X 100)
Ep = - ∆Q/∆P X P/Q
Ep= 0/∞
Ep=0
𝟐. 𝐏𝐞𝐫𝐟𝐞𝐜𝐭𝐥𝐲 𝐈𝐧𝐞𝐥𝐚𝐬𝐭𝐢𝐜 𝐝𝐞𝐦𝐚𝐧𝐝 (𝐄𝐩 = 𝐨)
Demand is said to be perfectly inelastic, when the demand for a commodity does not with the change in
its price. In this case demand curve is a vertical straight line.
Mathematically,
Ep=- Percentage change in quantity demand / Percentage change in price
Ep= 0/Price
Ep= 0
2. Relatively Elastic Demand (Ep>1)
If the percentage change in quantity demanded for a commodity is more than percentage change in its
price, it is called relatively elastic demand for e.g if the price of commodity decrease by 20% quantity
demanded for the commodity increases by 40%.In this kind of elasticity of demand is found in case of
luxury goods. In such case demand curve is flatter.
Mathematically
Ep= % change in Quantity demand/ % change in price
Ep= 40% / 20%
Ep= 2>1
4. Relatively Inelastic Demand (Ep<1)
If the percentage change in the quantity demanded for a commodity is less than the percentage change in
its price it said be relatively inelastic demand for e.g .If the price of the commodity decreases by 40%
quantity demanded for the commodity increases by 20%. In such case demand curve is steeper.
Mathematically.
Ep= % change in Quantity demand/ % change in price
Ep= 20% / 40%
Ep= 0.5<1
5. Unitary Elastic Demand
When percentage change in the quantity demanded is equal to the percentagechange in price, it is said to
be a unitary elastic demand for e.g 20% change in price causes 20% change in demand.
Mathematically,
Ep= % change in Quantity demand/ % change in price
Ep= 20% / 20%
Ep= 1
6. Income Elasticity of demand (Ey)
It is demand as the responsiveness of demand for a commodity to the change in the income of the
consumer. In other words, in come elasticity of demand is the ratio of the percentage change in demand
for a commodity to the percentage change in income.
Mathematically,
Ep= % change in Quantity demand/ % change in price
Ep=(∆𝑄
𝑄𝑋100)/ (∆𝑌/𝑦𝑋100)
Ep=∆𝑄
∆𝑦𝑋 𝑌/𝑄
Types of Income Elasticity of demand
A. Positive Income Elasticity of demand
B. Negative Income Elasticity of demand
C. Zero Income Elasticity of demand
A. Positive Income Elasticity of demand (Ey=>o)
If quantity demanded varies positively with income elasticity will be positive. The commodity which has
positive income elasticity, is called normal goods. The positive income elasticity is further classified:-
1. Income elasticity of demand greater than unity.
2. Income elasticity of demand less than unity.
3. Income elasticity of demand equal to unity.
B.Negative Income Elasticity of demand (Ey<o)
If demand for a commodity decreases with an increase in income of the consumer is called negative
income elasticity of demand. This is found in case of inferior goods which are consumed by low income
people. Income demand curve is downward sloping as shown in the table and figure below.
Table 2: Negative income elasticity of demand
Price (in RS.) Quantity demand
5 10
10 5
Fig 2. Negative income Elasticity of Demand
C. Zero Income Elasticity of demand
If demand for a commodity does not with change in income of the consumer the income elasticity as
zero. In this case, income demand curve becomes vertical straight line as shown in the table and figure
below.
Table 3: zero income elasticity of demand
Price (in Rs) Quantity demand(in kg)
5 10
10 5
Fig. 3 Zero Income Elasticity of Demand
C. Cross elasticity of demand
Cross elasticity of demand measure the responsiveness of demand for one commodity to change in price
of another commodity. It is defined as the percentage change in the quantity demanded of good-X
resulting from a percentage change in the price of good Y.
Mathematically,
Exy= % change in Quantity demand of good X / % change in price of good Y
Exy=(∆𝑄𝑥
𝑄𝑥𝑋100)/ (
∆𝑃𝑌
𝑃𝑦𝑋100)
Exy=∆𝑄𝑥
∆𝑃𝑦𝑋 𝑃𝑌/𝑄𝑥
Types of cross elasticity of demand
1. Positive cross elasticity of demand
2. Negative cross elasticity of demand
1. Positive cross elasticity of demand
If quantity demanded for one commodity X varies positively with the price of another commodity Y.
The cross elasticity of demand will be positive. It is concerned with substitutes goods. This situation is
shown in the following table and figure.
Table 4: Positive cross elasticity of demand
Price of Y (In RS) Quantity demand for X (in kg)
5
100
10
150
Figure 4: positive cross elasticity of demand
2. Negative cross elasticity of demand
If quantity demand for one commodity X varies inversely with the price of another commodity Y. Cross
elasticity will be negative. When price of Y increases quantity demand for X also decreases and vice-
versa. This situation is shown in the following table and figure.
Table 5: Negative cross elasticity of demand
Price of Y (In RS)
Quantity demand for X
5 100
10 150
Figure 5: Negative cross elasticity of demand
Conclusion
Demand is effect by different determinant of its. So we have to take other factors constant. The elasticity
of demand is important in pricing decision or price determination. It is of great importance in business
decision making for several reasons
Reference
Business Economics-I,KEC publication
Business Economics,Asmita publication
www.2knomics.com
www.wikipedia.com