Download ELASTICITY OF DEMAND Degree of responsiveness of demand to

ELASTICITY OF DEMAND
Degree of responsiveness of
demand to change in any of its
determinants is called elasticity of
demand
We have three different concepts of
elasticity of demand
• Price elasticity of demand
• Cross elasticity of demand and
• Income elasticity of demand
Price elasticity of demand
• Price elasticity of demand or elasticity of
demand, is the degree of responsiveness
of the demand for commodity to a change
in its price.
Ed=
• Ed=Percentage change in quantity demanded
• Percentage change in price
Value of Elasticity Coefficients and
their Description
Value of
Elasticity
coefficie
nt
Type of elasticity
Ed=0
Perfectly Inelastic Quantity demanded
does not change with
price at all
Inelastic or less
% change in demand
than unit elastic
is less than % change
in price
Ed<1
Description
Ed=1
Unit
elastic
% change in demand is equal
to % change in price
Ed>1
Elastic or
more than
unit
elastic
Perfectly
elastic
% change in demand is more
than % change in price
Ed=∞
Purchasers are prepared to
buy all they can obtain at some
price and none at all at an
even slightly higher price.
Perfectly Inelastic
price
Q
Perfectly Elastic
Price
quantity
Unit Elastic
Inelastic
Price
quantity
Elastic
price
quantity
Flat and steep curve
• More generally we can say that elasticity
of demand at a common point will be more
on a flatter curve than on a steeper curve.
d
d,
price
R
A
C
B
d
quantity
D,
Methods of Measurement of Price
Elasticity of Demand
• Total Outlay Method or Total Expenditure
Method
• Point Method and
• Arc Method
Total out lay Method
Sug
ar
Clot
h
P
Q
TQ
18
10
15
12
P
Che
ese
Q
TQ
180 18
10
11
165 15
12
144 12
P
Q
TQ
180 18
10
180
12
180 15
14
210
15
180 12
20
240
Point Method
• Measurement of elasticity on demand
curve at a point is known as point elasticity
of demand.
• Ed= Lower segment of the demand curve
– Lower segment of the demand curve
Point Method
Ed=1
Ed= ∞
Ed>1
price
Ed=1
Ed<1
Ed=0
Quantity