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Presentation On

ELASTICITY

OF

DEMAND


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(1) Definition Of Price Elasticity OfDemand

The change in the quantity demanded of aproduct due to a change in its price is knownas Price elasticity of demand.


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Kinds Of Price Elasticity Of Demand

1) Perfectly elastic demand2) Relatively elastic demand3) Elasticity of demand equal to utility4) Relatively inelastic demand5) Perfectly inelastic demand

Let Us See Some Views On Them


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Perfectly elastic demand

P

R

I

C

E

y

0 x

Perfectly elasticdemand curve

D D


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Relatively elastic demand

Relatively elasticdemand curve

P

R

IC

E

demand0 x

y

D

D


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Elasticity of demand equal to utility

Elasticity ofdemand equalto utility curve

y

x0 demand

P

R

I

C

E

D

D


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Relatively inelastic demand

Relatively inelasticdemand curve

XO

Y

demand

D

D

P

R

I

C

E


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Perfectly inelastic demand

demand

D

D

Perfectly inelasticdemand curve

0

Y

X

P

R

I

C

E


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ALL KINDS OF DEMAND CAN BE SHOWNIN ONE DIAGRAM AS FOLLOW

DD1

D2D3

D4

D5

Y

X0

DEMAND

P

R

I

C

E

WHERED1) Perfectly elastic

demandD2)Relatively elastic

demandD3)Elasticity of demand

equal to utilityD4)Relatively inelasticdemand

D5)Perfectly inelasticdemand


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Factors Affecting Price Elasticity OfDemand


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Factors Affecting Price Elasticity OfDemand

Nature of the Commodity Availability of Substitutes

Variety of uses of commodity Postponement Influence of habits Proportion of Income spent on a commodity Range of prices


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Practical Importance of the

Concept of Price Elasticity OfDemand


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Practical Importance of the Concept ofPrice Elasticity Of Demand

The concept is helpful in taking BusinessDecisions

Importance of the concept in formatting TaxPolicy of the government

For determining the rewards of the Factors ofProduction

To determine the Terms of Trades Betweenthe Two Countries


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(2) Income Elasticity Of Demand


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Positive Income elasticity of demand Y

P

A

D

D

B SO XQuantity Demanded

I n c o m e


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Positive Income elasticity of demand

Income Elasticity Equal to Unity or One Income Elasticity Greater Than Unity Or

One Income Elasticity Less Than Unity or One


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Negative Income elasticity of demand

P r

i c e

P

B

A

S

Total Revenue

Quantity Demanded (000s)


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Zero Income elasticity of demandY

XO D

D

Quantity Demanded

I n c o m e


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Measurement Of Income Elasticity OfDemand

ThusIncome Elasticity of Demand

=

= (5/45) (500/5500)= 1.22therefore here the IED is 1.22 which is more

than one.

Q 2 Q 1

Q 2 + Q 1 P2 + P1

P2 P1


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Cross Elasticity of Demand

Cross elasticity of demand express arelationship between the change in the

demand for a given product in response to achange in the price of some other product


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Types of Cross Elasticity of Demand

Cross Elasticity of Demand Equal to Unity orOne

Cross Elasticity of Demand Greater than Unityor one Cross Elasticity of demand less than unity or

one


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Measurement Cross Elasticity ofDemand

Proportionate change in Demandfor product X

Proportionate change in Price ofproduct Yi.e.

QX2 QX1

Cross Elasticity of Demand =

Cross Elasticity of Demand = QX2 + QX1PY2 PY1 PY2 + PY1

2 2


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Cross Elasticity of Demand ForSubstitutes

P r i c e o f Y

Demand for YO

Y

X

D

D


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Cross Elasticity of Demand ForComplementary Products

P r i c e o f Y

O

Y

XD

D

Demand for Y


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Cross Elasticity of Demand For NeutralProducts

P r i c e o f Y

O

Y

X

D

Demand for Y


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Importance of Cross Elasticity OfDemand

The concept is of very great importance inchanging the price of the products havingsubstitutes and complementary goods .

In demand forecasting Helps in measuring interdependence of price

of commodity . Multiproduct firms use these concept to

measure the effect of change in price of oneroduct on the demand of their other roduct


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