ELASTICITY OF DEMAND

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ELASTICITY OF DEMAND : 

ELASTICITY OF DEMAND

What is Elasticity of demand? : 

The concept of “elasticity of demand” refers to the responsiveness of demand for a commodity to changes in its determinants. This concept was given by the famous Economist Prof. Alfred Marshall. What is Elasticity of demand?

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DEFINITION PROF. ALFRED MARSHALL: “ The elasticity of demand in a market is great or small , depending on whether the amount demanded increases much or little for a given fall in the price and diminishes much or little for a given rise in price.”

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FORMULA Proportionate change in the quantity demanded Proportionate change in the determinants of demand Elasticity of demand =

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TYPES OF ELASTICITY OF DEMAND

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TYPES OF ELASTICITY OF DEMAND PRICE ELASTICITY OF DEMAND INCOME ELASTICITY OF DEMAND CROSS-ELASTICITY OF DEMAND PROMOTIONAL ELASTICITY OF DEMAND

PRICE ELASTICITY OF DEMAND : 

The extent of response of demand for a commodity to a given change in price, other demand determinants remaining constant, is termed as the price elasticity of demand. Its co-efficient can be measured as: Proportionate change in quantity demanded Proportionate change in price PRICE ELASTICITY OF DEMAND = Ed

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The formula for calculating price elasticity can be stated as: Ed = Q/Q P/P Alternatively Ed = Q Q X P P Where, Q = the original demand P = the original price Q = the change in demand P = the change in price

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Depending on the magnitude and proportional change involved in the data on demand and prices, various numerical values of co-efficient of price elasticity can be obtained.

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TYPES OF PRICE ELASTICITY OF DEMAND

Unitary Elastic Demand : 

The demand is said to be unitary elastic when the proportionate change in the quantity demanded is the same as the proportionate change in price. Here, Example: If the price rises by 10% and demand fallss by 10%, the elasticity is unitary (Ed =1) Unitary Elastic Demand Q = Q P P

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QUANTITY DEMANDED Q1 Q D D P1 P O X Y (Ed=1) PRICE The demand curve in this case is a rectangular hyperbola curve. In the above figure, when the price rises from PP1 , the demand falls to QQ1. Therefore, Ed =1.

Relatively Elastic Demand : 

The demand is said to be relatively elastic when the proportionate change in the quantity demanded is the greater than the proportionate change in price. Here, Example: If the price rises by 10% and demand falls by 30%, the elasticity is relatively elastic, i.e., (Ed >1) Relatively Elastic Demand Q > Q P P

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QUANTITY DEMANDED Q1 Q D D P1 P O X Y (Ed >1) PRICE The demand curve in this case has a gradually declining slope (flat curve). In the above figure, when the price rises from PP1 , the demand falls to QQ1. Therefore, Ed >1.

Relatively Inelastic Demand : 

The demand is said to be relatively inelastic when the proportionate change in the quantity demanded is the less than the proportionate change in price. Here, Example: If the price rises by 30% and demand falls by 10%, then the elasticity is relatively inelastic, i.e., (Ed <1). Relatively Inelastic Demand Q < Q P P

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QUANTITY DEMANDED Q1 Q D D P1 P O X Y (Ed <1) PRICE The demand curve in this case has a sharply declining slope (steep curve). In the above figure, when the price rises from PP1 , the demand falls to QQ1. Therefore, Ed<1.

Perfectly Elastic Demand : 

The demand is said to be perfectly elastic when at a given price or with a slightest fall in the price, there is an infinite extension of demand. Here, Q is any number and P is zero, and therefore, Ed = Perfectly Elastic Demand any number 0 = ∞

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QUANTITY DEMANDED D D P O X Y (Ed = ∞) PRICE The demand curve in this case is horizontal to X-axis. It suggest that the demand is ever-rising at the given price.

Perfectly Inelastic Demand : 

Whatever be the change in the price, if the demand does not respond at all (the quantity demanded remains unchanged), the demand is said to be perfectly inelastic . Here, Q is zero and P is any number, and therefore, Ed = Perfectly Inelastic Demand any number 0 = 0

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QUANTITY DEMANDED D D Q O X Y (Ed =0) PRICE The demand curve in this case is vertical to Y-axis. It suggest that the demand remains unchanged at any price.

INCOME ELASTICITY OF DEMAND : 

The extent of response of demand for a commodity to a given change in income, other demand determinants remaining constant, is termed as the income elasticity of demand. Its co-efficient can be measured as: Proportionate change in quantity demanded Proportionate change in income INCOME ELASTICITY OF DEMAND Em =

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The formula for calculating income elasticity can be stated as: Em Q/Q M/M = Alternatively Em = Q Q X M M Where, Q = the original demand P = the original price Q = the change in demand P = the change in price

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The income elasticity helps us in classifying the commodities. The following points are noted in this regard: When income elasticity is positive (Em), the commodity is of a normal type. When income elasticity is negative (Em), the commodity is inferior. Example: Cereals like jowar, bajra, etc. When income elasticity is positive and greater than one (Em>1), the commodity is a luxury. Example: T.V. sets, cars, etc. When income elasticity is positive but less than one (Em<1), the commodity is an essential one. Example: Foodgrains, medicines, etc.

CROSS-ELASTICITY OF DEMAND : 

The extent of response of demand for a commodity to a given change in the price of some other related commodity, other demand determinants remaining constant, is termed as the cross-elasticity of demand. Its co-efficient can be measured as: CROSS-ELASTICITY OF DEMAND Exy = Proportionate change in demand for X commodity Proportionate change in the price of Y commodity

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The formula for calculating price elasticity can be stated as: = Qx Qx Py Py Alternatively Exy Exy = Qx Qx X Py Py Where, Q = the original demand P = the original price Q = the change in demand P = the change in price

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The demand for two complementary goods is negative. Example: The demand for car and petrol. When the price of petrol increases, the demand for cars will decline. The demand for substitute goods is positive. Example: The demand for tea and coffee. When the price of tea increases, the demand for coffee will increase.

PROMOTIONAL ELASTICITY OF DEMAND : 

The extent of response of demand for a commodity to a given change in advertisement expenditure, other demand determinants remaining constant, is termed as the promotional elasticity of demand. Its co-efficient can be measured as: PROMOTIONAL ELASTICITY OF DEMAND Ex = Proportionate change in demand for X commodity Proportionate change in the advertisement expenditure

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The formula for calculating price elasticity can be stated as: = Qx Qx A A Alternatively Ex Ex = Qx Qx X A A Where, Q = the original demand A = the original advertisement expenditure Q = the change in demand A = the change in advertisement expenditure

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This elasticity of demand is very useful to business firms to find out the impact of their advertisement expenditure on the demand for their commodity. Future expansions, innovations and modifications are planned by business firms with the help of promotional elasticity of demand.