Elaticity of demand
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Elasticity of demand measures the responsiveness of quantity demanded or supplied to changes in its determinants like price, income etc. There are different types of elasticity - price elasticity measures the change in quantity demanded from a change in price, income elasticity measures change in quantity demanded from a change in income, and cross elasticity measures change in demand of one good from price change of another good. Price elasticity can be perfectly elastic, perfectly inelastic, unitary or relatively elastic/inelastic. There are different methods to measure elasticity like percentage, total expenditure, geometric and arc. Income elasticity helps classify goods as necessities, normal or luxury goods. Cross elasticity indicates substitutes if positive and complements if
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Elaticity of demand
- 1. Elasticity Of Demand By Dr. Sunil Chandanshive (MA. M.Phil., Ph. D., NET) Assistant Professor, Dept. of Economics K.J. Somaiya College of Arts and Commerce Vidyavihar, Mumbai
- 2. Elasticity of Demand – A measure of the extent to which quantity demanded and quantity supplied respond to variations in price, income, and other factors. % change in quantity demanded Elasticity Of Demand= --------------------------------------------- % change in determinant of demand – Elasticity of demand measures the extent to which demand will change – Price Elasticity of is usually referred to as Elasticity of demand
- 3. Types Of Elasticity Of Demand Price Elasticity Cross Price Elasticity Income Elasticity Advertisement DemandElasticity
- 4. Types of Price Elasticity of Demand o Perfectly Elastic Demand o Perfectly inelastic Demand o Unitary Elastic demand o Relatively elastic Demand o Relatively inelastic Demand
- 5. Price elasticity of demand is the percentage change in quantity demanded due to percent change in the price, other thing remaining equal Percentage change in QD %∆Q Ep= ----------------------------------- Or ----------- Percentage change in price %∆P ∆Q ∆P Ep= ---- ÷ ------ Q P ∆Q P Ep= ---- * ---- ∆P Q Price Elasticity of Demand Price Demand 50 100 45 140 40 50 Ep= ---- * ------- = -4 -5 100
- 6. D D2 D3 D4 Y X0 D5 DEMAND P R I C E D1 -Perfectlyelastic Demand D1 D2 -Relativelyelastic demand D3 –UnitaryElasticityofdemand D5 -Perfectlyinelastic demand D4-Relatively inelastic Demand AllTypesofPriceelasticityofDemandinDiagram
- 7. Measurement of Price ElasticityOf Demand There are main methods like 1. Percentage method or proportionate method 2. Total outlay method or totalrevenue method 3. Geometric method or pointmethod 4. Arc elasticity of demand
- 8. Total outlay method method • Delveloped by Alfred marshall, It is measured, when total exp. of consumer changes due to change in price. There r three types of elasticity • Unitary Elastic Demand E=1 • More than unit Elastic Demand E>1 • Less than unit Elastic Demand E<1
- 9. Table 1 Types Price Change Total Exp. Relation E>1 or Negative Relation E=1 No change No Relation E<1 Positive Relation
- 10. Sr. No Price Q. Demand Total Outlay Elasticity I 15 200 3000 Ep>1 12 300 3600 II 15 200 3000 Ep=1 12 250 3000 III 15 200 3000 Ep<1 12 210 2520
- 11. Geometric method Or pointmethod Lower segment of D curve Ep=--------------------------------------- or Upper segment of D curve PN Ep at P= ------- = 1 PM
- 12. Ep at A= NM/MO = NA/ AM =40/20 = 2 (>1)
- 13. Arcelasticity of demand ∆Q ------------ Average Quantity Ep=----------------------- ∆P ------------- Average Price -08 04 Ep = ----- ÷ ----- 84 12 -08 12 Ep = ---- * ----- = -0.28 04 84 Price Demand 10 88 14 80
- 14. Arcelasticity of demand ∆Q ------------ Average Quantity Ep=----------------------- ∆P ------------- Average Price -100 01 Ep = -------- ÷ ------- 950 10.50 -100 10.50 Ep = ------ * ------- = -1.1053 01 950 Price Demand 10 1000 11 900
- 15. MeasurementOfIncomeElasticityOf Demand Proportionate change inDemand Income Elasticity Of Demand= Proportionate change inIncome i.e. Income Elasticity Of Demand= Q Y ∆Q ∆y ÷
- 16. percentage change in quantity demanded Income Elasticity = ------------------------------------------- percentage change in income Income elasticity of Demand ∆ Q ∆Y Ey = -------- ÷ ------- Q Y ∆ Q Y Ey = -------- * ------- ∆ Y Q 10 100 Ey = -------- * ------- = 0.8 50 25 Income Demand 100 25 150 35
- 17. Fore.g.,whenIncomeof the consumer=2,500/- , hepurchases20units of X,when income=3,000/- hepurchases25units of X ∆Q ∆Y Ep= ------- ÷ ------ Q Y ∆Q Y Ep= ---- * ------ ∆Y Q 5 2500 Ep= ----- * ------- = 1.25 Which is more than 1 500 20
- 18. Positve Ey Ey = 1 Ey > 1 Ey < 1 Negative Ey Ey < 0 Zero Ey Ey = 0 Normal / confort / luxury Goods Inferior Goods Necessaries goods Food and clothing Fine wines, high quality chocolates and luxury holidays overseas, Sports cars Consumer durable - audio visual equipment, smart-phones, cleaning and cooking services, handbags and luggage Staple food products such as bread, vegetables and frozen foods. Mass transport (bus and rail) Bajra, bred, nano car, cigarettes , urban bus services, A McDonald’s coffee may be an inferior good compared to a Starbucks coffee Salt, medicine TypesofIncomeElasticityofdemand
- 20. ImportanceofIncome ElasticityOfDemand • In classifyinggoodsasnormal and inferior and luxury goods (Ey>1) • It helps in forecastingdemandfornonessentialgoods • Taxation:luxurygrmoreincomeelastic,raisingtaxonthesecangeneratemore revenue • It help to decide price of products • Help firms in designing various marketing strategies: For instance firms producing product with high Ey goods should concentrate in marketing efforts on media that reach high income group • Marketssituations couldbestudiedwiththe helpof IED
- 21. Cross elasticity of demand express a relationship between the change in the demand for a given product in response tochange in the priceof some otherproduct Example CrossElasticityofDemand
- 22. MeasurementCrossElasticityof Demand Porpotionate change in demand for product X Cross elasticity of demand= ------------------------------------------------------ or Porpotionate change in price of product Y ∆ Qx ∆Py Ec=-------- ÷ --------- Qx Py ∆ Qx Py Ec=-------- * --------- ∆Py Qx 2000 75 Ec=-------- * ---------. = 1.5 25 4000 Here don’t ignore – or + sign Price of coffee Demand of Tea 75 4000 100 6000
- 23. Types of cross elasticity of demand Positive Ec- in case of substitute goods EExy > 0 Negative Ec- in case of complementary goods Exy < 0 Zero Ec- in case of no related goods. Exy = 0 Price of Sugar & demand for Tea shirt
- 25. Advretisement elasticity of demand is the percentage change in quantity demand due to percent change advertisement expenditure Percentage change in QD %∆Q Ep= ----------------------------------- Or ----------- Percentage change in Ad. exp %∆A. Exp ∆Q ∆A. Exp Ep= ---- ÷ ------ Q A.Exp ∆Q A. Exp Ep= ---- * ---- ∆A. Exp Q 70 50 Ep= ------ * ------ =2.33 15 100 Advretisement Elasticity of Demand A.Exp Demand 50 100 65 170
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