Importance of concept of Elasticity Of Demand.pptx

This ppt is based on the importance of elasticity of demand in various fields.

1. IMPORTANCE OF CONCEPT OF ELASTICITY OF DEMAND

2. LIST OF CONTENTS:

3. What Elasticity of Demand is? Elasticity of demand is a measure of responsiveness of one variable, i.e., quantity demanded of commodity ( with respect to another variable, like price of commodity X ( ), Income of the consumer or other factors. A higher elasticity indicates that demand is more responsive to changes, while a lower elasticity suggests that demand remains relatively stable despite fluctuations in influencing factors. This concept is crucial for businesses in setting prices, forecasting revenue, and making production decisions, as well as for policymakers in understanding market behavior and taxation impacts.  

4. TYPES OF ELASTICITY OF DEMAND Price Elasticity Income Elasticity Cross Elasticity of Demand

5. PRICE ELASTICITY The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price that brought it about. This elasticity is usually symbolized by η: η =  

6. INCOME ELASTICITY Income elasticity of demand measures the responsiveness of demand for a product with respect to changes in income. It is defined as: = =  

7. CROSS – ELASTICITY OF DEMAND It measure the responsiveness of quantity demanded of one product to change in the prices of other products. For example, number of cars and petrol prices. Producers of large cars find their sales falling when the price of petrol rises dramatically after large oil price increases. It can be represented as follows: = =  

8. IMPORTANCE OF ELASTICITY OF DEMAND

9. IMPORTANCE OF ELASTICITY OF DEMAND: For Businesses Businesses use elasticity of demand in pricing decisions , competitor analysis & in product line decisions. Price Elasticity: It measures how demand changes with price fluctuations Low elasticity (necessities): Demand remains stable despite price changes, allowing firms to set higher prices . High elasticity (luxury goods): A small price increase leads to a significant drop in demand. Businesses must carefully price these goods.

10. IMPORTANCE OF ELASTICITY OF DEMAND: For Businesses Helps businesses maximize revenue by determining whether to increase or decrease prices.

11. IMPORTANCE OF ELASTICITY OF DEMAND: For Businesses Income Elasticity of Demand (YED): Shows how demand changes as consumer income changes. Normal goods (positive YED): Demand increases with rising income (e.g., electronics, dining out). Inferior goods (negative YED): Demand falls as income rises (e.g., cheap substitutes). Helps businesses predict demand shifts during economic growth or recessions .

12. IMPORTANCE OF ELASTICITY OF DEMAND: For Businesses Cross-Price Elasticity of Demand (XED) Measures how the demand for one good changes when the price of a related good changes. Substitutes (positive XED): If the price of coffee rises, demand for tea may increase. Complements (negative XED): If fuel prices increase, demand for cars may fall. Helps businesses assess market competition and bundling strategies .

13. IMPORTANCE OF ELASTICITY OF DEMAND: For Consumer Price Elasticity of Demand Measures how demand changes with price fluctuations. High elasticity (luxury goods): If the price of a non-essential item (e.g., branded sneakers) increases, consumers are likely to buy less or switch to alternatives. Low elasticity (necessities): If the price of essentials (e.g., salt, medicine) rises, consumers still buy them, even at higher costs. Helps consumers plan their budgets , especially when prices of goods fluctuate frequently.

14. IMPORTANCE OF ELASTICITY OF DEMAND: For Consumer Income Elasticity of Demand: Shows how demand changes as consumer income changes. Normal goods (positive YED): When income rises, consumers buy more of quality goods (e.g., organic food, travel). Inferior goods (negative YED): As income rises, demand for low-cost substitutes (e.g., instant noodles) decreases. Helps consumers adjust spending habits based on their income level and future expectations .

15. IMPORTANCE OF ELASTICITY OF DEMAND: For Consumer Cross-Price Elasticity of Demand Measures how demand for one product changes when the price of a related product changes. Substitutes (positive XED): If the price of coffee increases, consumers may buy more tea instead. Complements (negative XED): If fuel prices rise, consumers may drive less or buy fewer cars. Helps consumers find cost-effective alternatives and make better purchasing decisions.

16. IMPORTANCE OF ELASTICITY OF DEMAND: For Government Governments use elasticity of demand to design policies, regulate markets, and manage economic stability Price Elasticity of Demand : High elasticity (luxury goods): If the government increases taxes on luxury items (e.g., sports cars, jewelry), demand drops significantly, reducing tax revenue. Low elasticity (necessities): Essential goods (e.g., petrol, medicines) remain in demand even with higher prices, allowing the government to impose taxes without reducing consumption. Thus, it helps the government decide on taxation policies , ensuring both revenue generation and affordability for citizens.

17. IMPORTANCE OF ELASTICITY OF DEMAND: For Government Income Elasticity of Demand: Normal goods (positive YED): As the economy grows and incomes rise, demand for better healthcare, education, and quality goods increases, influencing public investment. Inferior goods (negative YED): During economic downturns, demand for low-cost substitutes increases, signaling the need for social welfare programs. It helps the government in planning economic policies , focusing on social security, public spending, and subsidies.

18. IMPORTANCE OF ELASTICITY OF DEMAND: For Government Cross-Price Elasticity of Demand: Substitutes (positive XED): If fossil fuel prices rise, demand for renewable energy increases, encouraging the government to invest in green energy policies. Complements (negative XED): If public transport fares rise, fewer people might use the metro or buses, leading to increased traffic congestion. Helps the government regulate markets by balancing taxes, subsidies, and policies to ensure market stability .

19. IMPORTANCE OF ELASTICITY OF DEMAND: In International Trade Elasticity of demand plays a crucial role in shaping export and import policies, exchange rates, trade balances, and global competitiveness . Countries use price, income, and cross-price elasticity of demand to optimize their trade strategies. Price Elasticity of Demand : High elasticity (luxury goods, electronics): If the price of a country’s exports rises, demand drops significantly, affecting trade revenue. Low elasticity (essential commodities, oil, medicine): Even with price increases, global demand remains stable, making them strong export commodities. Helps countries set export pricing strategies and impose tariffs on imported goods without drastically reducing demand.

20. IMPORTANCE OF ELASTICITY OF DEMAND: In International Trade Income Elasticity of Demand : Normal goods (positive YED): As incomes rise globally, demand for high-quality products (e.g., branded apparel, organic food) increases, benefiting exporters. Inferior goods (negative YED): In economic downturns, demand for cheaper substitutes (e.g., second-hand goods, low-cost alternatives) rises. Helps nations predict trade demand trends and adjust production based on economic cycles .

21. IMPORTANCE OF ELASTICITY OF DEMAND: In International Trade Cross-Price Elasticity of Demand: Measures how demand for one country’s exports changes when the price of a competitor’s product changes. Substitutes (positive XED): If Country A exports wheat and Country B lowers its wheat prices, demand for Country A’s wheat will fall. Complements (negative XED): If crude oil prices rise, demand for imported cars may decline, impacting countries that export automobiles. Helps governments form trade agreements, reduce dependency on a single market, and diversify exports .

22. MAJOR BREAKTHROUGH in Elasticity of Demand !!

23. Groundbreaking Research: Quantum Mechanics Meets Elasticity of Demand! Elasticity of Demand follows Schrödinger’s Consumer Paradox. Now what is Schrödinger’s Consumer Paradox : Until consumers check their bank balance, they are both willing and unwilling to make a purchase. The price elasticity is simultaneously elastic and inelastic in the consumer’s mind. Consumers exist in a superposition of states : undecided whether to buy or not, depending on their mood, budget, and the weather!

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25. CONCLUSION: Elasticity of demand is a vital concept in economics, influencing business strategies, government policies, and market dynamics. It determines optimal pricing, taxation, production levels, and international trade decisions. Understanding demand elasticity enables businesses and policymakers to make informed choices that balance profitability, economic stability, and consumer welfare.

26. REFERENCES: ePg Pathshala : Paper no 2(Managerial Economics) –Module 5 (Elasticity). YouTube : Dr. Sahil Roy YouTube: CA Pratik Thakkar Investopedia : Price Elasticity of Demand.

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