Dr.K.Baranidharan

Present by…

Engineering Economics &

Financial Accountingment

Ee&fa2April 11, 2023

ELASTICITY OF DEMAND

ELASTICITY• “the rate of responsiveness

in the demand of a commodity for a given change in price or any other determinants of demand”

•The extent of change in quantity demanded because of a given change in the order determining factors, may be price or any other factor(s).

Elasticity – the concept

• The responsiveness of one variable to changes in another

• When price rises, what happens to demand?

• Demand falls• BUT!• How much does demand fall?

Elasticity – the concept

• If price rises by 10% - what happens to demand?

• We know demand will fall• By more than 10%?• By less than 10%?• Elasticity measures the extent to which

demand will change

Measurement of ELASTICITY

• 1. Perfectly elasticity of demand• 2. Perfectly inelasticity of demand• 3. Relatively elasticity demand• 4. Relatively inelasticity demand• 5. Unity elasticity

1. Perfectly elasticity of demand

• when any quantity can be sold at a given price, and when there no need to reduce the price, the demand is said to be perfectly elastic

1.

1.Perfectly Elastic:(the quantity demanded increases from OQ to Q1, from OQ1 to OQ2 eventhough there is no change in price. Price is fixed at OP.)

QO

X

Y

p

Q1 Q2

2. Perfectly inelasticity of demand

• the degree of change in price leads to little change in the quantity demanded, then the elasticity is said to be perfectly inelastic

2. Perfectly Inelastic:increase the price from OP1 to OP2, the quantity demanded has not fallen. And there is fall in the price from OP3 to OP2, the quantity demanded remains unchanged)

p2

OX

Y

p1

Q

p3

3. Relatively elasticity demand

• The demand said to be relatively elastic when the change in demand is more then the change in the price.

3. Relatively Elastic:the quantity demand increase from OQ1 to OQ2 Because Of A Decrease in Price from OP1 to OP2. The extent of increase in the quantity demanded

is grater than the extent of fall in the price

p1

OX

Y

p2

Q2Q1

D

D

4. Relatively inelasticity demand

• The demand said to be relatively inelastic when the change in demand is less than the change in the price.

4. Relatively lnelasticthe quantity demanded increase from OQ1 to OQ2 because of a decrease in the price from OP1 to OP2. the extend of increase in the quantity demanded is less than the extent of fall in the price.

p1

OX

Y

p2

Q2Q1

D

D1

5. Unity elasticity

•The elasticity in demand is said to be unity when the change in demand is equal to the change in price.

5. Unitary Elasticthe quantity demanded increase from OQ1 to OQ2 because of a decrease in the price from OP1 to OP2. the extent of increase in the quantity demanded is equal to the extent of fall in the price.

p1

OX

Y

p2

Q2Q1

D

D1

© Pilot Publishing Company Ltd. 2005

Type of elasticity of demand

Price elasticity of demand

Income elasticity of demand

Cross elasticity of demand

Advertising elasticity of demand

TYPES OF ELASTICITY

PRICE ELASTICITY DEMAND

• Elasticity of demand, in general refers to price elasticity of demand.

• The quantity demanded of a commodity in response to a given change in price.

• Price elasticity is always Negative, which indicates that the customer tends to buy more with every fall in the price.

• The relationship between the price and the demand is inverse.

𝐸𝐷𝑝=(𝑄2−𝑄1) /𝑄1(𝐏𝟐−𝐏𝟏)/𝐏𝟏

𝐸𝐷𝑝=𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 h𝑐 𝑎𝑛𝑔𝑒 𝑖𝑛 h𝑡 𝑒𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑓𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋

𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 h𝑐 𝑎𝑛𝑔𝑒 𝑖𝑛 h𝑡 𝑒𝑝𝑟𝑖𝑐𝑒𝑜𝑓 𝑋

Q1 = quantity before change Q2 = quantity after changeP1 = price before change P2 = price after change

Model problems Refer the Book page Number 39 to 44

INCOME ELASTICITY OF DEMAND

• The quantity of a commodity in response to a given change in income of the customer.

• Income elasticity is normally positive, which indicates that the consumer tends to buy more and more which every increase in income

ED 1=(Q 2−Q 1)/Q 1(𝐈𝟐−𝐈𝟏)/𝐈𝟏

𝐼 𝐸𝐷=𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 h𝑐 𝑎𝑛𝑔𝑒 𝑖𝑛 h𝑡 𝑒𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑓𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋

𝑝𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 h𝑐 𝑎𝑛𝑔𝑒𝑖𝑛𝑖𝑛𝑐𝑜𝑚𝑒

Q1 = quantity before change Q2 = quantity after changeI1 = daily income before change I2 = daily income after change

Model problems Refer the Book page Number 39 to 44

CROSS ELASTICITY OF DEMAND

• The quantity demanded of a commodity in respect to a change in the price of a related goods, which may be substitute or complementary.

ED c=(Q 2 x−Q 1 x) /Q 1 x

(𝐏𝟐𝐲−𝐏𝟏𝐲 )/𝐏𝟏𝐲

C

Q1 = quantity before change Q2 = quantity after changeP1y = price before change P2y = price after change

Model problems Refer the Book page Number 39 to 44

ADVERTISING ELASTICITY

• It refers to an increase in the sales revenue because of change in advertising expenditure.

• In other words, there is a direct relationship between the amount of money spent on advertising and its impact on sales.

• Advertising elasticity always positive

ED c=(Q 2−Q 1)/Q 1

(𝐀𝟐−𝐀𝟏) /𝐀𝟏

A

Q1 = quantity before change Q2 = quantity after changeA1 = advertising budget before change A2 = advertising budget after change

Model problems Refer the Book page Number 39 to 44

Price elasticity of demand

• Price Elasticity of Demand–The responsiveness of demand

to changes in price–Where % change in demand

is greater than % change in price – elastic

–Where % change in demand is less than % change in price - inelastic

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Elasticity Coefficients

• Elastic Demand (Ed > 1): the percentage change in quantity demanded > the percentage change in price.

• Inelastic Demand (Ed < 1): the percentage change in quantity demanded < the percentage change in price.

• Unit Elastic Demand (Ed = 1): the percentage change in quantity demanded = the percentage change in price.

30

Elasticity Coefficients

• Perfectly Elastic Demand (Ed=∞): quantity demanded is infinitely responsive to a change in price.

• Perfectly Inelastic Demand (Ed=0): quantity demanded is completely unresponsive to changes in price.

31

Exhibit 3: Price Elasticity of Demand

FACTORS GOVERNING ELASTICITY OF DEMAND

• A) nature of product (necessaries, comforts, luxuries)• B) time frame (particular period, buy near-price high

shop/veg.market-price loe allot free time)• C) degree of postponement• D) number of alternative use(highly E, power or electy)• E) tastes and preferences of the consumer• F) availability of close substitutes• G) in case of complements or joint goods• H) level of prices• i) availability of subsidies(govt paid, lpg)• J)expectation price(inecity, gold rate)• K) durability of a product(tv ecity, periciable milk inecity)• L) government policy(monitor the price)

SIGNIFICANCE OF ELASTICITY OF DEMAND

• A) price of factors of production (land,labour.capital,organisation & technology- rent in industrial areas/village-inecity)

• B) price fixation• C) Government policies (tax policies, raising bank

deposit, public utilities(water,ticket), revaluation or derevaluation(importer/xporter)

• D) forecasting demand (particular product & services)

• E) planning levels of output and price(price elasticity very useful to producer..adequate revenue.

Dr.K.Baranidharanthank you

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