Class presentation:elasticity of demand

presented by:sukhan rangi

12-nYADAVINDRA PUBLIC

SCHOOL MOHALI

DEMAND – DEMAND FOR ANY COMMODITY REFERS TO THE AMOUNT WHICH CONSUMERS ARE WILING AND ABLE TO PURCHASE AT A PARTICULAR PRICE DURING A PARTICULAR PERIOD

OF TIME.

ELASTICITY OF DEMAND – IS THE DEGREE OF RESPONSIVENESS OF

QUANTITY DEMANDED OF A COMMODITY TO A CHANGE IN ANY OF

ITS DETERMINANTS.

ELASTICITY

PRICE ELASTICITY OF DEMAND

INCOME ELASTICITY OF DEMAND

CROSS ELASTICITY OF DEMAND

PRICE ELASTICITY

Price elasticity of demand is a measure of how much the quantity demanded of a commodity changes when its price changes.

PRICE ELASTICITY

PERFECTLY INELASTIC

INELASTIC

UNITARY ELASTIC ELASTIC PERFECTL

Y ELASTIC

PERFECTLY INELASTIC DEMAND

Perfectly inelastic demand-when quantity demanded of a commodity does not respond to change in its price ,then the elasticity of demanded is zero.

Cases of perfectly inelastic demand-

In case of medicines to be taken urgently no matter how expensive they are we have to buy them

Very rich people buy goods they like no matter what the price is

Very poor people have to buy basic necessities good .

EP =0

At price P1 the quantity demanded is Qe , at price Po also the quantity demanded remains Qe. Thus Ep is perfectly inelastic. i.e. quantity demanded is not at all affected by change in price.

PERFECTLY ELASTIC DEMAND

When consumers are prepared to buy all that they can get at a particular price but nothing at all at a slightly higher price elasticity of demand for a commodity is said to be infinite .In this case a very small fall in price causes the demand to increase to infinity (α )

Cases of perfectly elastic demand

When a commodity has more than 1 uses like milk people by is as much as they can at a nominal rate. If the price fall a bit the demand can rise to infinity but rise in price may lead to zero demand

EP=∞

At price P the demand is infinity represented by a horizontal line running parallel to the X axis.P

UNITARY ELASTIC DEMAND When a given %

change in price of commodity causes an equivalent % change in the quantity demanded , then the elasticity of demand is said to be unitary .

Cases of unitary demand-

If the price of mangoes falls from Rs. 100 to Rs.50 i.e. 50% fall . consumer A bought 1kg mangoes at Rs. 100 but now he will buy 1.5 kg mangoes at Rs.50 i.e. 50% rise in demand i.e. equal to the rise in price.

EP= 1

Demand falls from P1 to Po i.e. 10 % fall in price. The demand rises from Q1 to Qo i.e. 10% increase in demand.

Hence fall in price = rise in demand

ELASTIC DEMAND When the % change

in quantity demanded of a commodity exceeds the % change in its price, the elasticity of demand is greater than unitary and called elastic demand.

Cases of elastic demand

Commodities whose prices are expected to change in future like gold and property if their price fall a bit their demand rises.

EP > 1

Price falls from P1 to P2 i.e. 10%. The quantity demanded rises from Q1 to Q2 i.e. 15%.

Hence % change in price is < quantity demanded.

10%

15%

INELASTIC DEMAND Demand is inelastic

when the % change in quantity demanded of a commodity is less than the % change in its price. The elasticity of demand is less than unitary . It is called inelastic demand.

Cases of inelastic demand

In case of luxury goods which have a very high price, if the price falls a little. The consumers remain who could afford it earlier buy it very few more consumers are added. Hence the demand increases a bit.

EP<1

The price falls from Po to P1 i.e. 20 % . But the demand increases from Qo to Q1 i.e. only 8% which is less than the change in price.

20%

8%

Price of commodity

Income of consumer

Price of related goods

Tastes and preferences

Expectations regarding

future

Credit facilities

Size and composition of population

Distribution of income

Government policies

FACTORS AFFECTING DEMAND AND FACTORS AFFECTING PRICE OF DEMAND ARE RELATED.

FACTORS AFFECTING DEMAND

FACTORS AFFECTING ELASTICITY OF DEMAND•Availability of substitutes-commodity with more substitute tend to have an elastic demand and one with a few and weak substitutes has inelastic demand.•Nature of the commodity-the demand for necessities is inelastic and the demand for luxuries and comfort is elastic.•Proportion of the income spent-smaller is the proportion of income spent on a commodity the smaller will be the elasticity of demand and vice versa.

•The number of uses of a commodity-if a commodity is a composite good then its elasticity of demand is greater.•Time factor-price elasticity is generally low for the short period as compared to long period.•Postponement of consumption-demand for a commodity is elastic if its consumption can be postponed .•Price range-demand for a commodity tends to be inelastic at a very high and very low prices , and elastic within the moderate range of prices.•Habits of the consumer- if consumers are habitual of consuming a commodity they will continue to consume it even at a high price.

IMPORTANCE OF ELASTICITY OF DEMAND •Business decisions-whether to increase the price or not the firm should have an idea about price elasticity of demand.•Importance to monopolists- monopolists usually charge higher prices from those consumers who have inelastic demand and lower prices from those who have elastic demand for product.•Determination of factor price –if the demand of factors of production and the product is elastic then the firms will try not to spend much on factors of production .

•Importance in formulating government policies-the government can increase revenue by imposing tax of goods having inelastic demand . Imposing tax on elastic demand goods will decrease the revenue.•International trade-for determining terms of trade and determining the effect of export and import duties.•Exchange rate- deciding whether the government should devalue its currency or not ,it need to consider the elasticity of demand for its exports and imports.•Incidence of taxation -the person who pay the tax buyer or seller depends on the elasticity of demand . Higher elasticity means burden on seller and vise versa.

Methods of calculating price elasticity of demand

Percentage or proportionate method

Total expenditure method

Point or geometric method

PERCENTAGE METHOD

Price elasticity of a demand is measured by the ratio of % change in price of the commodity.

POINT METHOD

Line segment below the point on the demand curve

Line segment above the point on the demand curve

ep

=

When price elasticity of demand is measured at a point on a

demand curve , it is called point elasticity.

TOTAL EXPENDITURE METHOD

Elasticity of demand can be measured by considering the change in total expenditure as a result of change in the price of the commodity.

Ep Price (P)

Quantity (Q)

Expenditure (P*Q)

Description Graph

Ep>1

5 20 100 If the expenditure made by the consumer is increases due to the fall of price of commodity, then it is known as elasticity of demand greater than one.

4 30 120

Ep<1

5 20 100 If the total expenditure made by consumer decreases due to fall in price is known as elasticity of demand less than one.

4 22 88

Ep=1

5 20 100 If the total expenditure made by consumers remains constant due to any change in price of any commodity is called elasticity of demand equal to one.

4 25 100