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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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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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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


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



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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


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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