ELASTICITY OF DeeeeeeeeeeeeeeeeeEMAND.pptx

ELASTICITY OF DEMAND.pptx

1. ELASTICITY OF DEMAND

2. MEANING Elasticity of Demand measures the extent to which quantity demanded of a commodity increases or decreases in response to increase or decrease in any of its quantitative determinants. So, we have several types of elasticity of demand according to the source of the change in the demand. For example, if the price is the source of the change, we have the “price elasticity of demand”.

3. DEFINITION “The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price”. – Dr. Marshall.

4. TYPES OF ELASTICITY TYPES CROSS ELASTICITY OF DEMAND INCOME ELASTICITY OF DEMAND PRICE ELASTICITY OF DEMAND

5. PRICE ELASTICITY OF DEMAND Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to a change in its price. It is also defined as: "The ratio of proportionate change in quantity demanded caused by a given proportionate change in price".

6. PRICE ELASTICITY OF DEMAND E d = Percentage Change in Quantity Demanded Percentage Change in Price E d = Δq X P Δp Q Here: E d stands for price elasticity of demand. Q stands for original quantity. P stands for original price. ∆ stands for a small change

7. INCOME ELASTICITY OF DEMAND The degree of change or responsiveness of quantity demanded of a good to a change in the income of a consumer is called income elasticity of demand. Income elasticity of demand can be defined as , "The ratio of percentage change in the quantity of a good purchased, per unit of time to a percentage change in the income of a consumer".

8. INCOME ELASTICITY OF DEMAND E y = Percentage Change in Demand Percentage Change in Income E y = Δq X Y Δy Q

9. CROSS ELASTICITY OF DEMAND The concept of cross elasticity of demand is used for measuring the responsiveness of quantity demanded of a good to changes in the price of related goods. C ross elasticity of demand is defined as, "The percentage change in the demand of one good as a result of the percentage change in the price of another good".

10. CROSS ELASTICITY OF DEMAND E xy = % Change in Quantity Demanded of Good X % Change in Price of Good Y

11. Factors affecting price elasticity of demand Proportion of income spent Availability of substitutes Nature of commodity Number of uses Addiction Time

12. DEGREES OF PRICE ELASTICITY OF DEMAND DEGREES Perfectly Elastic Demand Perfectly Inelastic Demand Elastic Demand Inelastic Demand Unitary Elasticity of Demand

13. PERFECTLY ELASTIC DEMAND

14. PERFECTLY INELASTIC DEMAND

15. UNITARY ELASTIC

16. RELATIVELY ELASTIC

17. RELATIVELY INELASTIC

18. Measurement of elasticity Percentage method Total expenditure method Point or geometric method Arc method

19. FIND ELASTICITY USING PERCENTAGE METHOD PRICE QUANTITY 75 2 50 4 25 7

20. Total expenditure method The price elasticity can be measured by noting the changes in total expenditure brought about by changes in price and quantity demanded.

21. USE tem TO TELL ELASTICITY PRICE QUANTITY TOTAL EXPENDITURE 6 4 24 4 6 24 8 3 24 6 7 42 4 8 32 3 2 6 6 4 24 5 6 30 7 5 35

22. Point method E d = Length of lower Segment of demand curve Length of upper segment of demand curve

23. FIND THE POINT ELASTICITY AT POINT A, B, C, D AND E, WHERE LENGTH OF THE DEMAND CURVE IS 4 CM

24. In case of non linear demand curve

25. Arc method The elasticity varies along the length of the demand curve. If we are to measure elasticity between any two points on the demand curve, then the Arc Elasticity Method, is used. Arc elasticity is a measure of average elasticity between any two points on the demand curve. It is defined as, "The average elasticity of a range of points on a demand curve". Formula: E d = ∆q X P 1 + P 2 ∆p q 1 + q 2

26. Find arc elasticity PRICE QUANTITY 6 2 2 4

27. APPLICATION OF ELASTICITY OF DEMAND price and output determination monopolist finance minister shifting burden of tax factor pricing foreign exchange poverty in the midst of plenty