Elasticity of demand curves

elasticity of demand curves

1. Elasticity of Demand Shakeel Ahmed Qureshi

2. Elasticity of Demand Percentage change in the Quantity demanded of a good due to percentage change in the price of the good is called elasticity of demand. Or Degree of responsiveness or sensitivity of quantity demand of a good due to change in the price of the good is called price elasticity of demand. η d  

3. Methods to Measure Elasticity of Demand

4. Total Outlay (Expenditure) Method Under this method total expenditure made on the good before change in price and after change price are compared. If Total Expenditure remain Same then Elasticity of demand is equal to one. If Total Expenditure increases, then Elasticity of demand is Greater than one . If Total Expenditure decreases, then Elasticity of demand is less than one. E d =   According to this method, by comparing the total expenditures of the consumer both before and after change in price of a product, it can be known whether demand elasticity for product is one, less than one or more than one.

5. Price Qd Total Expenditure 40 6 240 20 8 160 Price Qd Total Expenditure 40 6 240 20 18 360 1   1   1   Price Qd Total Expenditure 40 6 240 20 12 240 Total Outlay (Expenditure) Method

6. The Demand Curve having Elasticity equal to one. ( =1) D D 40 20 12 6 Qd P As the price decreases from 40 to 20 The quantity increases from 6 units to 12 units. The Change in the quantity is proportional to change in the price. Price Qd Total Expenditure 40 6 240 20 12 240 1  

7. The Demand Curve having Elasticity less than one. ( <1) D D 40 20 8 6 Qd P As the price decreases from 40 to 20, The quantity increases from 6 to 8 units. The percentage Change in the quantity is less than percentage change in the price. Price Qd Total Expenditure 40 6 240 20 8 160 1  

8. The Demand Curve having Elasticity greater than one. ( >1) D D 40 20 18 6 Qd P As the price decreases from 40 to 20, The quantity demanded increases from 6 to 18. The percentage Change in the quantity is greater than percentage change in the price. Price Qd Total Expenditure 40 6 240 20 18 360

9. 6 Qd D D 40 20 12 P 1   D D 40 20 8 6 Qd P 1   D D 40 20 18 6 Qd P 1   Total Outlay (Expenditure) Method 1 Vs 1 Vs 1  

10. Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) η d   Percentage change in the Quantity demanded of a good due to percentage change in the price of the good is called elasticity of demand.

11. Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) Percentage change in the Quantity demanded of a good due to very small change in the price of the good. Such that apparently there is only one point on the demand curve, is called point elasticity of demand. Point Elasticity of Demand D D P1 P2 Q2 Q1 Qd P

12. Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate )   Percentage change in the Quantity demanded of a good due to very small change in the price of the good. Such that apparently there is only one point on the demand curve, is called point elasticity of demand. Point Elasticity of Demand η d   D D P 1 P 2 Q 1 Qd P Q 2

13. Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate )   Percentage change in the Quantity demanded of a good due to comparatively significant large change in the price of the good. Such that there appear two distinct points on the demand curve, is called Arc elasticity of demand. Arc Elasticity of Demand η d   D D P1 P2 Q2 Q1 Qd P A B

14. Geometric Method Geometric method was suggested by Prof. Marshall and is used to measure the elasticity at a point on the demand curve. When there are infinitely small changes in price and demand, then the ‘Geometric Method’ is used. This method is also known as ‘Graphic Method’ or ‘Point Method’ or ‘Arc Method’. Elasticity of demand (E d ) is different at different points on the same straight line demand curve . In order to measure E d  at any particular point, lower portion of the curve from that point is divided by the upper portion of the curve from the same point .   P Q Quantity Demand Price N Lower Segment Upper Segment

15. η d   E D Quantity Demand Price B A C E d = 1 E d < 1 E d > 1 E d =   E d = 0 Geometric Method

16. Two Extremes of Elasticity of Demand 1 Perfectly inelastic demand: The Demand Curve having Elasticity equal to zero ( =0) 2 Perfectly Elastic Demand: The Demand Curve having Elasticity equal to infinity ( =)

17. The Demand Curve having Elasticity equal to zero ( =0) As the price decreases from P 1 to P 2 The quantity do not change. There is no Change in the quantity as price changes from P 1 to P 2. Perfectly inelastic demand D D Price P 1 Q P 2 Quantity Demand

18. The Demand Curve having Elasticity equal to infinity ( =) D D P Q 1 Q Quantity Demanded Price At a certain price the quantity increases from Q to Q 1 . There is no change in the price while there is change in the quantity from Q to Q1. Perfectly elastic demand

19. Income Elasticity of demand Percentage change in the Quantity demanded of a good due to percentage change in the income of the consumer is called Income elasticity of demand.   η Y  

20. Cross Elasticity of demand Percentage change in the Quantity demanded of a good due to percentage change in the price of its substitute or complementary good is called cross elasticity of demand. η X         =    

21. < E < ∞ (for absolute values of elasticity ) Unit Elastic Perfectly Inelastic Perfectly Elastic Elastic Inelastic E = 1 E = 0 E < 1 E >1 E = ∞ P Q d Q d Q d Q d Q d P P P P

22. Elasticity of Demand Shakeel Ahmed Qureshi