Download Meaning of elasticity of demand


MEANING OF PRICE ELASTICITY……………………………

DEGREES AND MEASUREMENT OF PRICE ELASTICITY OF
DEMAND…………………................................................
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FACTORS DETERMINING PRICE ELASTICITY OF DEMAND
& INCOME ELASTICITY OF DEMAND….......................

CROSS ELASTICITY OF DEMAND & IMPORTANCE OF
PRICE ELASTICITY OF DEMAND………………….............
By: ARSHDEEP KAUR
Class: BCOM II
Roll no.:4034
The concept that explains the proportional
change in the amount demanded of a good as
a result of change in its price , is called the
concept of elasticity of demand .
Thus , elasticity of demand refers to the
percentage change in its price .
Elasticity of demand is a quantitative
statement .
3.mohan’s demand for apples
contracts by 10%
1.Price of apples rises by 20%
2.ram’s demand for
apples contracts by 50%
Ram’s demand for apples is more elastic and mohan’s demand for apples is less elastic .

ELASTICITY OF DEMAND
IS OF 3 TYPES:
(1) PRICE ELASTICITY OF DEMAND
(2) INCOME ELASTICITY OF DEMAND
(3) CROSS ELASTICITY OF DEMAND
Price elasticity of demand is the ratio of the
percentage change in the quantity
demanded of a commodity to a percentage
change in its price.
E=(-)
Percentage change in quantity demanded
Percentage change in price
: priyanka parmar
roll no. 4056
THE STUDY OF THE CONCEPT OF ELASTICITY OF
DEMAND IS DIVIDED INTO 5 CATEGORIES :
Perfectly
elastic
demand
Perfectly
inelastic
demand
Unitary
elastic
demand
Elastic
demand
Inelastic
demand
PERFECTLY ELASTIC
DEMAND
A perfectly elastic demand
is one in which a little
change in price will cause
an infinite change in
demand.
A very little rise in price
causes the demand to fall to
zero and a very little fall in
price causes the demand to
extend to infinity.
Under perfect competition ,
demand curve of firm is
perfectly elastic.
PERFECTLY INELASTIC
DEMAND:
A perfectly inelastic
demand is one in which
a change in price
produces no change in
quantity demanded.
Change in prices
causes no change in
demand.
In this case , elasticity
of demand is zero or E
= 0.
UNITARY ELASTIC DEMAND
Unitary elasticity of
demand is one in which
a percentage change in
price produces an equal
percentage in demand.
In this case the demand
curve is Rectangular
Hyperbola.
In this case elasticity of
demand is unitary or
E = 1.
ELASTIC DEMAND :
Greater than unitary elastic
demand is one in which a
given percentage change in
price produces relatively
more percentage change in
demand.
Demand curve D represents
greater than unitary elastic
demand.
In this case elasticity is
greater than unitary i.e.
E>1.
INELASTIC
DEMAND
Less than unitary elastic
demand is one in which a
given percentage change in
price produces relatively
less percentage change in
demand.
Demand curve D represents
less than unitary elastic
demand.
In this case elasticity of
demand is less than
MEASUREMENT OF
PRICE ELASTICITY OF
DEMAND
Total
expenditure
method
:Proportionate
method
Arc elasticity
method
Point
elasticity
method
Revenue
method
TOTAL EXPENDITURE OF
DEMAND
According to this method , in order
to measure Ed it is essential to
know how much and in what
direction the total exp changes as
a result of change in price .
1) Ed is unity when due to rise or
fall in price of a good total exp
remains unchanged. E=1
2) Ed is greater than unity when
due to fall in price total exp goes
up and viceversa. E>1
3) Ed is less than unity when due
to fall in price total exp goes
down and due to rise in price
total exp goes up . E<1
PROPORTIONATE
METHOD
According to this method proportionate change in
demand is divided by proportionate change in
price.
Ed = prop change in demand for good X
prop change in price of good X
OR
Ed = change in quantity demanded
initial demand
change in price
initial price
POINT ELASTICITY OF DEMAND
(i) Linear demand curve
(II) NON LINEAR
DEMAND CURVE
When demand curve is
non linear , then to know
the elasticity of demand
at any point located on it
a tangent is so drawn as
to touch this point .
The point will divide the
tangent into two parts .
Lower segment of the
tangent is then divided
by the upper segment .
The resultant dividend
will indicate price
elasticity of demand.
ARC ELASTICITY
When elasticity is computed
between two separate points
on a demand curve the
concept is called arc
elasticity. It is calculated
with the help of following
formula :
E=
Q divided by
P
½( Q1 + Q)
½(P1 + P)
Here ,
Q= initial demand Q1=new
demand P=initial price P1=
new price.
REVENUE METHOD
Sale proceeds that a firm earns by selling
its products is called its revenue.
When total revenue is divided by the
number of units sold we get average
revenue.
Additions made to the total revenue by
the sale of one more unit of the
commodity is called marginal revenue.
Average revenue curve of a firm is called
demand curve.
Price elasticity of demand is measured by
the following formula :E=A
A–M
Here,
E= price elasticity of demand A=
average revenue M= marginal revenue
FACTORS
DETERMINING
THE PRICE
ELASTICITY OF
DEMAND
Presented by :
Pratima yadav
4054
INCOME ELASTICITY OF
DEMAND
INCOME ELASTICTY OF DEMAND
means the ratio of the
percentage change in the
quantity demanded to the
percentage change in income
MEASUREMENT OF
INCOME ELASTICITY
Income elasticity can be measured by
the following formula:
Ey= proportionate change in quantity demanded
proportionate change in income
DEGREE OF INCOME ELASTICITY
OF DEMAND
(1) POSITIVE INCOME ELASTICITY OF DEMAND :
Income elasticity of demand for a good is
positive, when with an increase in the income of
a consumer, his demand for the good increases
and with the decrease in the income of consumer
, his demand for the good decrease.
Positive income elasticity of demand can be of three types;
(1)UNITARY INCOME ELASTICITY OF DEMAND: Positive income
elasticity of demand is unitary when a given percentage change
in income is followed by equal percentage change in demand.
Ey=100% =1
100%
(2) LESS THAN UNITARY INCOME ELASTICITY OF DEMAND: Positive
income elasticity of demand is less than unitary when
percentage change in demand is less than percentage change in
income
Ey= 50% =1
100% 2
(3) MORE THAN UNITARY INCOME ELASTICITY OF DEMAND: Positive
income elasticity of demand is more than unitary when
percentage change in demand is more than percentage change
in income
Ey= 200% =2
100%
NEGATIVE INCOME ELASTICITY OF
DEMAND:
Income elasticity of demand is negative when increase
in the income of the consumer is accompanied by fall in
demand of a good and decrease in income is followed by
rise in demand. Negative income elasticity refers to
inferior goods, also known as giffen goods.
ZERO INCOME ELASTICITY OF
DEMAND:
Income elasticity of the demand is zero, when
change in income of consumer evokes no change
in his demand. Demand for necessaries like ,
kerosene oil, salt, etc. has zero income elasticity
of demand.

SUBMITTED TO –
)
SUBMITTED BY-
)
DEFINITIONS
GIVE BYFERGUSON
The cross elasticity of demand is the
proportional change in the quantity
of- x good demand resulting from a
given relative change in the price of
the related goods- y
“The cross elasticity of
demand is a measure of
the responsiveness of the
purchase of y to the
change in the price of x”.
POSITIVE
NEGATIVE
ZERO
 When
goods are substitutes of each other,
then a given percentage rise in the price of
goods will lead to a given percentage
increase in the demand for the other goods.
In other words , cross elasticity of demand is
positive in case of substitutes. For example
,rise in the price of coffee will lead to
increase in demand, because the two are
close substitutes of each other.
when price of coffee is 50 paise per cup , then
demand for tea is 50 cups. If price of coffee
to rise to 70 paise per cup , then demand for
tea goes up to 100cups.thus cross elasticity
of demand for tea can be calculated by this
formula.
Qx = 50 cups; Qx1 =100cups ; Qx= 100-50
=50cups of tea. Py1=70 paise;
Py =7050=20p here x stand for tea and Y for coffee
Thus cross elasticity of demand for is greater
than unity
 In
case of complementary goods ( jointly
demand goods) , percentage rise in the price
of one lead to percentage fall in the demand
for the other. Consequently , cross elasticity
of demand is negative and the same is
indicated by putting a minus (-) sign before
the number of cross elasticity of demand.
 Suppose
bread and butter are complementary
goods when price of bread rise to 80paise per
piece, then demand for butter is 10kg . With the
rise of price of bread to Rs 1.20 , demand for
bread falls to 5kg in this situation , cross
elasticity of demand for butter is calculatedPy – 80 paise , Py1 – 120 paise
Py= 120-80 = 40 paise
Qx = 10 kg:Qx1= 5kg
Qx= 5-10= -5kg
Ec= -1 ( here x stand for butter and y for bread)
It is When two goods are not related to each
other.
FOR EXAMPLE
Rise in the price of wheat will have no effect
on demand for shoes. Their cross elasticity of
demand will be called zero.
PRICE
DISCRIMINATION
• When a monopolist sells its product at different
price, it is called price discrimination. A
monopolist can practise price discrimination
when price elasticity of demand for his product
for different uses and for different consumers is
different. He will charge more price from those
consumer whose demand is inelastic and less
price from those whose demand is elastic .
Determination
Of price
Under monopoly
• A monopolistic always takes into consideration
the price elasticity of demand of his product
while determing its price (1) if it is elastic , he
will fix low price per unit. Lower price means
large sales and hence sales and hence, large
total revenue (2) if demand is inelastic , he will
fix higher price per unit. Higher price with
demand reaming more or less constant.
PRICE
DETERMINATION
OF JOINT
SUPPLY
• Goods which are produced
simultaneously in the same act
of production are called joint –
supply goods for e.g. cotton
and cotton seeds : oil and oil
cakes etc elasticity of demand
of such goods is taken into
consideration while fixing their
price. If demand for cotton is
inelastic and that of cotton –
seeds elastic , then price for
cotton will be fixed more and
that of cottonseeds will be
less.
ADVANTAGE
TO FINANCE
MINISTER
• While planning new
taxes, a finance
minister takes into
consideration
elasticity of demand.
(!) taxes on goods
having elastic
demand will yield
less revenue. It is so
because taxes will
raise their price and
thus bring down their
demand . Less
demand means less