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ELASTICITY OF DEMAND

ELASTICITY OF DEMAND. INTRODUCED BY ALFRED MARSHALL 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.

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ELASTICITY OF DEMAND

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  1. ELASTICITY OF DEMAND • INTRODUCED BY ALFRED MARSHALL • 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.

  2. TYPES OF ELASTICITY OF DEMAND • PRICE ELASTICITY OF DEMAND • INCOME ELASTICITY OF DEMAND • CROSS-ELASTICITY OF DEMAND

  3. PRICE ELASTICITY OF DEMAND • DEGREE OF RESPONSIVENESS OF QUANTITY DEMANDED TO A CHANGE IN PRICE IS CALLED PRICE ELASTICITY OF DEMAND. PERCENTAGE CHANGE IN QUANTITY DEMANDED PERCENTAGE CHANGE IN PRICE = SYMBOLICALLY CHANGE PRICE QUANTITY Q/Q P/P eP P Q =

  4. MEASUREMENT OF PRICE ELASTICITY OF DEMAND • PERCENTAGE METHOD • POINT METHOD OR SLOPE METHOD • TOTAL OUTLAY METHOD • ARC METHOD

  5. PERCENTAGE METHOD • RELATIVE CHANGE IN DEMAND DIVIDED BY RELATIVE CHANGE IN PRICE OR PERCENTAGE CHANGE IN DEMAND DIVIDED BY PERCENTAGE CHANGE IN PRICE. % % Q P eP = FOR EXAMPLE IF PRICE OF RICE INCREASES BY 10% AND DEMAND FOR RICE FALLS BY 10% eP = 15/10 = 0.5 THIS MEANS THAT DEMAND FOR RICE IS INELASTIC

  6. MEASURES OF ELASTICITY • REALTIVELY ELASTIC IF e>1 • REALTIVELY INELASTIC IF e<1 • UNITARY ELASTIC DEMAND IF e=1 • PERFECTLY INELASTIC DEMAND IF e=0 • PERFECTLY ELASTIC DEMAND IF e=INFINITY

  7. RELATIVELY ELASTIC P P1 D PRICE O Q1 Q QUANTITY DEMANDED

  8. RELATIVELY INELASTIC D P P1 PRICE D O Q Q1 QUANTITY DEMANDED

  9. UNITARY ELASTIC DEMAND P PRICE D P1 O Q Q1 QUANTITY DEMANDED

  10. PERFECTLY INELASTIC DEMAND D P P1 PRICE O Q QUANTITY DEMANDED

  11. PERFECTLY ELASTIC DEMAND D P PRICE O Q1 Q QUANTITY DEMANDED

  12. POINT METHOD • WE CAN CALCULATE PRICE ELASTICITY OF DEMAND AT A POINT ON THE LINEAR DEMAND CURVE. LOWER SEGMENT OF DEMAND CURVE UPPER SEGMENT OF DEMAND CURVE eP =

  13. POINT METHOD A AE – UPPER SEGMENT EB – LOWER SEGMENT C . E . D PRICE B O QUANTITY DEMANDED

  14. For example in fig. the length of the demand curve AB is 4cm. • Ep at point E ,ep = EB/EA = 2/2 = 1 • Ep at point D = (middle point of EB portion of demand curve) DB/DA = 1/3 = 0.3 ep<1 • Ep at point c(middle point of EA portion of demand curve) = CB/CA = 3/1 = 3 ep >1 • Ep at point B = 0/AB = 0/4 = 0 • Ep at point A = AB/0 = 4/0 = infinity

  15. TOTAL OUTLAY METHODWe can measure elasticity through a change in expenditure on commodities due to a change in price • Demand is elastic if total outlay or expenditure increases for a fall in price(ep>1) • Demand is inelastic if total outlay or expenditure falls for a fall in price(ep<1) • Demand is unitary if total expenditure does not change for fall in price(ep=1)

  16. TYPES OF ELASTICITY OF DEMAND

  17. ARC METHOD • SEGMENT OF DEMAND CURVE BETWEEN TWO POINTS IS CALLED AN ARC. Q = change in qty demanded P = change in price of the commodity P1 = original price P2 = New price Q1 = original qty Q2 = new qty Ep = q1 – q2 / P1-P2 Q1+q2 P1+P2 = q Q1+q2 / P P1+P2

  18. ARC ELASTICITY P A P1 PRICE B P1 Q O Q1 Q2 QUANTITY DEMANDED

  19. INCOME ELASTICITY OF DEMAND • DEGREE OF RESPONSIVENESS OF DEMAND TO CHANGE IN INCOME. Ey = Percentage change in qty demanded Percentage change in income Q- quantity demanded Y - income Ey = q/q x y/ y

  20. Cross elasticity of demand • Responsiveness of demand to change in price of realted goods. Ec = Percentage change in qty demanded of commodity X Percentage change in price of commodity Y Ec= qx/ py x py/qx

  21. Thank you

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