elasticity of demand

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types amnd methods of price elasiticity

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Presentation Transcript

The Elasticity of Demand : 

The Elasticity of Demand

The Concept of Elasticity : 

The Concept of Elasticity Elasticity is a measure of the responsiveness of one variable to another. The greater the elasticity, the greater the responsiveness.

Elasticity – the concept : 

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

Types of Elasticity : 

Types of Elasticity Price elasticity of demand Income elasticity of demand Cross elasticity

Price Elasticity : 

Price Elasticity The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.

Degree of price elasticity of demand : 

Degree of price elasticity of demand Perfectly elastic demand Perfectly inelastic Unitary elastic More elastic demand Less elastic demand

Perfectly elastic demand : 

Perfectly elastic demand It refers to that situation in which a small change in price will cause an infinitely change in demand O Q1 Q2 Q3 D E=∞ P D PRICE QUANTITY

Perfectly Inelastic Demand : 

Perfectly Inelastic Demand It refer to that situation in which there is no change in demand as a result of change in price E=0

Unitary elastic demand : 

Unitary elastic demand It refers to a situation where demand changes in exact proportion to the changes in price . If the price becomes double ,the demand falls by the half and if price falls by half ,demand double . Price Q Q1 y x E=1 ∆Q/Q = ∆ P/P

More elasticity Demand : 

More elasticity Demand it refers to a situation in which change in demand is more than a proportionate change in price. o Q Q1 Demand Y X More elastic E >1 Price ∆Q/Q > ∆ P/P

Less elastic demand : 

Less elastic demand It refers to a situation in which the changing demand is less than proportionate change in price . The demand for articles of necessity is of this type. P P1 E< 1 ∆Q/Q < ∆ P/P

Factors determining the price elasticity of demand : 

Factors determining the price elasticity of demand Nature of commodity Substitute Varity of uses Postponement of use Range of prices Habits Proportion of the income spent on a commodity Joint demand Durability Fashion Classes of buyers

Income elasticity of demand : 

Income elasticity of demand Income elasticity of demand is the rate at which quantity bought changes, as a result of change in the income of the consumer, other things being equal . It shows how the quantity demanded will change ,when the income of the consumer changes, other things remaining constant.

Slide 14: 

EY =∆Q * Y Y Q EY= Quantity Income 0 Q Q1 D D

kinds of the income elasticity of demand : 

kinds of the income elasticity of demand Positive income elasticity of demand :when the amount demanded of a company a commodity increase with increase in income of the consumer and decrease with decrease income. Quantity income y2 y y1 O Q2 Q Q1

Negative income elasticity of demand : 

Negative income elasticity of demand When the amount demanded of commodity diminishes with an increase in the income of the consumer and increase with a fall in income. Income y2 y y1 Quantity DY DY

Zero income elasticity of demand : 

Zero income elasticity of demand When the demand for a commodity does not respond to changes in income of the consumer the income elasticity of demand is zero. y y2 y1 Income Quantity O Q

Cross elasticity of demand : 

Cross elasticity of demand When the demand for a commodity changes with a change in the price of another related commodity ,the case is of cross demand . Measurement of cross elasticity of demand

Kinds of cross elasticity of demand : 

Kinds of cross elasticity of demand Positive cross elasticity Negative cross elasticity Zero cross elasticity

Positive cross elasticity : 

Positive cross elasticity With the rise or fall in the price of commodity the quantity demanded of related commodity increases or decrease E.g. substitute Demand for tea Price of coffee P P1 O Q Q1

Negative cross elasticity : 

Negative cross elasticity With the rise in the price of commodity the quantity demanded of related commodity decrease. p Quantity Dc Dc p1

Zero cross elasticity of demand : 

Zero cross elasticity of demand When with the change in the price of a commodity there is no change in demand of other commodity ;then cross elasticity of demand is zero. p p2 p1 Price of butter Demand for petrol O Q

Measurement of price elasticity of demand : 

Measurement of price elasticity of demand Total expenditure method Percentage or proportionate Point method Arc method Revenue method

Total Expenditure method : 

Total Expenditure method This method was evolved by Dr. Marshall There are three measures of elasticity of demand Greater than unity Equal to unity Less than unity

Total expenditure method : 

Total expenditure method

Percentage or proportionate : 

Percentage or proportionate This method was propounded by Dr. Flux. According to this method the elasticity of demand can be measured with the help of the following formula: PE= % change in demand % change in price

Point method : 

Point method This method suggested by Dr. Marshall. This method is also known as point elasticity . This method is useful when there is minute changes in price and quantity demanded.

Arc method : 

Arc method When elasticity is computed between two separate points on a curve, the concept ids called arc elasticity . p p1 demand price

Revenue method : 

Revenue method E = A A-M