demandelasticity97-2003-100117041418-phpapp02
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PresentationOn
ELASTICITY
OF
DEMAND
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Prepared By
Vyas Harshal
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Definition Of Price Elasticity Of Demand
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
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Kinds Of Price Elasticity Of Demand
1) Perfectly elastic demand2) Relatively elastic demand
3) Elasticity of demand equal to utility
4) Relatively inelastic demand
5) Perfectly inelastic demand
Let Us See Some Views On Them
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Perfectly elastic demand
P
R
I
C
E
y
0 x
Perfectly elastic
demand curve
D D
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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Relatively inelastic demand
Relatively inelastic
demand curve
XO
Y
demand
D
D
P
R
I
C
E
When the
proportionate
change in demand
is less than the
proportionate
changes in price, it
is known as
relatively inelastic
demand
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Perfectly inelastic demand
demand
D
D
Perfectly inelastic
demand curve
0
Y
X
P
R
I
C
E
When a change in
price, howsover
large, change no
changes in qualitydemand, it is known
as perfectly inelastic
demand
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ALL KINDS OF DEMAND CAN BE SHOWN
IN ONE DIAGRAM AS FOLLOW
DD1
D2
D3
D4
D5
Y
X0
DEMAND
P
R
I
C
E
WHERE
D1) Perfectly elastic
demandD2)Relatively elastic
demand
D3)Elasticity of demand
equal to utilityD4)Relatively inelastic
demand
D5)Perfectly inelastic
demand
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Measurement Of Price Elasticity Of
Demand
There are main methods like
1. Percentage method or proportionate
method2. Total outlay method or total revenue
method
3. Geometric method or point method4. Arc elasticity of demand
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1 Percentage method or proportionate method
Price elasticity of demand is measured by a
ratio between the proportionate change in the
quantity of a product demanded as a result of
a proportionate change in its price
Formula for calculate this is given further as
following
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Percentage method or proportionate method
Price
elasticity of
demand
= Proportionate change in demand for x
Proportionate change in Price for x
OR
_____qx
Qx/ _____
px
Px
Here,
qx = change in the quantity of x demanded
Qx = original quantity of x demanded
px = change in the price of x
Px = original price of x
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Total outlay method or total revenue method
Total outlay means total expenditure and since total expenditure
of consumers on a product implies total receipts or total revenue
of sellers, it is known as total revenue method.
It will be clear with following table
price quantity Total outlay Price elasticity
1 5 100 500 Elasticity of demandis greater than
1(e>1)
4 130 520
2 5 100 500 Elasticity of demandis less than 1(e
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Total outlay method or total revenue
method
This can be shown in graph as given
0
y
x
Total outlay
Q1 Q2 Q3
p1
p2
p3
p4P
R
I
C
eE1
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Geometric method or point
method
This method attempts to measure numerical
elasticity of demand at a particular point on
the demand curve
Price elasticity can be measure by following
method
Price
elasticity of
demand
=Lower segment of the demand curve
upper segment of the demand curve
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Geometric method or point method
It can be shown in graph as following
a
b
c
d
d
0 x
y
e=1
e= 8
e>1
e
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Arc elasticity of demand
It is the use of middle points between old and
new figures in the case of both price and
quantity. This method is known as arc
elasticity method
We can measure it with formula as given
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Arc elasticity of demand
WHERE,
Q1 = original quantity demanded
Q2 = new quantity demanded
p1 = original price
p1 = new price
Price elasticity of
demand = /Q1-Q2
Q1+Q2
P1-P2
P1+P2
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(5) Factors Affecting Price Elasticity OfDemand
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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
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Factors Affecting Price Elasticity Of
Demand
Income Groups
Elements of time
Pattern of income distribution
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(6) Practical Importance of the
Concept of Price Elasticity OfDemand
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Practical Importance of the Concept of
Price Elasticity Of Demand
The concept is helpful in taking Business
Decisions
Importance of the concept in formatting Tax
Policy of the government
For determining the rewards of the Factors of
Production
To determine the Terms of Trades Between
the Two Countries
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Practical Importance of the Concept of
Price Elasticity Of Demand
Determination of Rates of Foreign Exchange
For Nationalization of Certain Industries
In economic Analysis ,the concept of priceelasticity of demand helps in explaining the
irony of poverty in the midst of plenty.
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Positive Income elasticity of demandY
P
A
D
D
B SO XQuantity Demanded
Income
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l f d d
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Negative Income elasticity of demand
Price
P
B
A
S
TotalRevenue
Quantity Demanded (000s)
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Zero Income elasticity of demandY
XO D
D
Quantity Demanded
Income
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All Income Graphs Representation
O
Y
Income
A
B
CD
E
F
X
Quantity Demanded
M Of I El i i Of
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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+
M Of I El i i Of
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Measurement Of Income Elasticity Of
Demand
Here , q = Change in the quantity demanded.
Q = Original quantity demanded.
y = Change in income.Y = Original income.
For e.g. ,when Income of the consumer =
2,500/- , he purchases 20 units of X, when
income = 3,000/- he purchases 25 units of X
M t Of I El ti it Of
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Measurement Of Income Elasticity Of
Demand
Thus
Income Elasticity of Demand
=
= (5/20) + (500/2500)
= 1.5
therefore here the IED is 1.5 which is more
than one.
q
Q Y
y
+
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Factors Affecting Income Of Demand
Income Itself Only.
Price Of the Commodity
I t Of th C t f I
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Importance Of the Concept of Income
Elasticity Of Demand
In production planning and management
In forecasting demand when change in
consumers income is expected In classifying goods as normal and inferior
In expansion and contraction of the firm by
the figure of income elasticity of demand Markets situations could be studied with the
help of IED
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(8) Elasticity Of Substitution
The selection between two product or thing is
called substitution
So Elasticity of Substitution measures the rateat which the particular product is substituted .
Thus EOS is the degree to which one product
could be substituted in context of price andproportion
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Elasticity Of Substitution
Elasticity of Substitution
= Proportionate change in the quantity ratios
of goods x & y DIVIDED BY Proportionatechange in the price ratios of goods x & y.
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Types of Elasticity Of Substitution
Zero Elasticity of Substitution.
Infinite Elasticity Of Substitution
Elasticity of Substitution greater than unityor1 Elasticity of Substitution is equal to one
Elasticity of Substitution is less than one
Types of Elasticity Of Substitution on
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Types of Elasticity Of Substitution on
Graph
Changein
QUANTITIY
ratioofgood
x&y
Change in PRICE ratio of good x & yO
X
Y
E4
E1
E2
E3
E5
Relationship Between Price Elasticity
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Relationship Between Price Elasticity,Income Elasticity and Substitution
Elasticity
As Price is depended on income and
substitution effect similarly Price Elasticity is
depended on Income Elasticity an SubstitutionElasticity .
These relationship can be represented by
Ep = Kx E1 + ( 1Kx ) es
P i l i i f d d d d
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Price elasticity of demand depends on:
Proportion of income spent on particular good
say X.
Income elasticity of demand.
Elasticity of substitution.
Proportion of income spent on product other
than X.
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Cross Elasticity of Demand
Cross elasticity of demand express a
relationship between the change in the
demand for a given product in response to achange in the price of some other product
E.g. if the X tea demand reduces
tremendously than it effect could be seen indemand of sugar and milk.
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Types of Cross Elasticity of Demand
Cross Elasticity of Demand Equal to Unity or
One
Cross Elasticity of Demand Greater than Unityor one
Cross Elasticity of demand less than unity or
one
Measurement Cross Elasticity of
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Measurement Cross Elasticity of
Demand
Proportionate change in Demand
for product X
Proportionate change in Price ofproduct Yi.e.
qx
Qx Py
p y
+
Cross Elasticity of Demand =
Cross Elasticity of Demand =
C El ti it f D d F
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Cross Elasticity of Demand For
Substitutes
Priceof
Y
Demand for Y
O
Y
X
D
D
Cross Elasticity of Demand For
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Cross Elasticity of Demand For
Complementary Products
Priceof
Y
O
Y
X
D
D
Demand for Y
Cross Elasticity of Demand For Neutral
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Cross Elasticity of Demand For Neutral
Products
Priceof
Y
O
Y
X
D
Demand for Y
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Advertising Elasticity of Demand
Advertising elasticity of demand is the
measure of the rate of change in demand
due to change in advertising expenditure
The amount of change in demand of goods
due to advertisement is known as
Advertisement Elasticity of Demand .
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Advertising Elasticity of Demand
Proportionate change in Demand
for product
Proportionate change in Advertisingexpenditurei.e.
qx
Q A
a
Advertising Elasticity of Demand =
Advertising Elasticity of Demand =
Relationship Between Advertising
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Relationship Between Advertising
Expenditure and Sales
O X
Y
S
S
S
ales
Advertising Expenditure
Factors Affecting Advertising Elasticity
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Factors Affecting Advertising Elasticity
Of Demand
The stage of the Products Market
Development .
Reaction of market Rival Firms. Cumulative Effect of Past Advertisement.
Influence of Other Factors.
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Importance of the Advertising
Elasticity Of Demand in Business
Decisions
It is useful in competitive industries.
Though advertisement shifts the demand
curve to right path but it also increases the
fixed cost of the firm.
Limitation of Advertising Elasticity of
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Limitation of Advertising Elasticity of
the Demand
The impact of advertising on sales is different
under different conditions, even if other
demand determinants are constant. Like wise, it is difficult to establish any co-
relationship between advertising expenditure
and volume of sales when there counteradvertisements by rival firm in the market .
The effect on sales depend on what the rivals
are doing.
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Thanking You ll
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THE END
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