ELASTICITYOF DEMANDBY : SOMYA GAUR & ATUL TRIPATHI ®

TERMS TO BE DISCUSS• Types of elasticity of

demand1.Income elasticity2.Price elasticity3.Cross Elasticity4.Adversity of elasticity• Measurement of elasticity • Degree of elasticity• Determinations of Elasticity• Factors Influencing Elasticity• Long and short run elasticity• Case Study

What is an Elasticity?

Measurement of the percentage change in one variable that results from a % change in another variable, and the other variables will remain constant .

Types Of Elasticity Of Demand

Demand

Price Elasticity

Cross Price Elasticity

Advertisement Elasticity

Income Elasticity

The price elasticity of Demand may be defined as the ratio of the relative change in demand and price variables.

ed= percentage/proportional change in quantity demanded

percentage/proportional change in price

Price Elasticity Of Demand

EXAMPLE

If is to be noted that each individual may respond differently to the change in price. If P increases by 10 per cent, and if as a result Mrs. Rashid buys, 5% less of a commodity, whereas Mrs. Abdul lah buys 20 per cent less of the commodity, we can say that Mrs. Abdullah’s demand for the commodity for the price range is more elastic than that of Mrs. Rashid. Conversely, Mrs. Rashid’s demand for the commodity with the given price range is less elastic than Mrs. Abdullah’s.

GRAPH EXPLAINATION

Relatively

Elasticity

Perfectly Elastic

Perfectly

Inelastic

Unitary

Elastic

Types Of Elasticity / Degree

Perfectly Elastic

Consumers have indefinite demand at a particular price and none at all at an even slightly higher than this given price, demand is PERFECTLY ELASTIC

e = ∞

Perfectly Inelastic

When the demand for a commodity shows no response to a change in price/ whatever change in price, the demand remains same, it is called PERFECTLY INELASTIC

e = 0

Relatively Inelastic

When the proportion of change in the quantity demanded is less than that of price the demand is considered to be RELATIVELY INELASTIC

e < 1

Unitary Elastic

When the proportion of change in demand is exactly the same as the change in price, the demand is said to be UNITARY ELASTIC

e = 1

Cross Elasticity Of Demand

The cross elasticity of demand refers to the degree of responsiveness of demand for a commodity to a given change in the price of some related commodity.

Cross Elasticity Of Demand = Proportionate/percentage change in demand for x

Proportionate/percentage change in price of y

Advertising Elasticity

Advertising elasticity is a measure of an advertising campaign's effectiveness in generating new sales. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in advertising expenditures. A positive advertising elasticity indicates that an increase in advertising leads to an increase in demand for the advertised good or service.

Income Elasticity Of Demand

The income elasticity is defined as a ratio percentage change in the quantity demanded to the percentage or proportional change in income.

Income Elasticity = percentage change in quantity demanded percentage change in income

Measurement Of Price Elasticity

Point/Geometric Method

• This method attempts to measure the price elasticity of demand at a particular point on demand curve

Point Elasticity = Lower segment of demand curve below the point Upper segment of demand curve below the point

The Percentage Method

The price elasticity of demand is measured by its coefficient Ep. This coefficient Ep measures the percentage change in the quantity of a commodity demanded resulting from a given percentage change in its price

Arc Elasticity Of Demand

Arc Elasticity of Demand measures the elasticity at the mid point between two points on a curve

Degrees Of Elasticity

•A small fall in the price of a product may lead to a considerable increase in the quantity demanded, but sometimes even a considerable fall in price may not lead to any increase in demand.

5 Types 1.Unit Elasticity:2.Relatively elastic demand (ed > 1):3.Relatively inelastic demand (ed < 1):4.Perfectly inelastic demand (ed = 0):5.Perfectly elastic demand (ed = ∞):

Unit Elasticity

Demand is unit elastic when percentage change in quantity demand and percentage in price are equal.

In case of unit elastic demand the demand curve is a Rectangular Hyperbola. In practice it is difficult to find such commodities as have a demand curve whose elasticity is unit throughout.

Relatively elastic demand (ed > 1

The demand is relative elastic or more than unity when relative change in quantity demanded is more than the relative change in price. In such cases the demand curve is of less slope.

Relatively inelastic

Demand (ed < 1)

Demand is said to be relatively inelastic or less than unity when proportionate change in demand is less than proportionate change in price. In such cases the slope of demand curve falls rapidly.

Perfectly inelastic demand (ed = 0)

When there is no change in demand as a result of increase or decrease in price then the demand is perfectly inelastic. The demand curve is vertical on OX axis

Perfectly elastic demand (ed = oc)

The demand is perfectly elastic when even a small change in price cause an infinite large change in amount demanded. A small rise in price on the part of a seller reduces the demand to zero. In such cases the demand curve is parallel to OX axis.

Factors Influencing Elasticity Of Demand

• Nature of commodity

• Availability of substitutes

• Number of uses• Consumers income• Height of price and

range of price change

• Proportion of expenditure

• Durability of the commodity

• Habit• Complementary

goods• Time• Recurrence of

demand• Possibility of

postponement

Determinants of Elasticity

• Time period the longer the time under consideration the more elastic a good is likely to be•Number and closeness of substitutes the greater the number of substitutes, the more elastic• The proportion of income taken up by the product

the smaller the proportion the more inelastic• Luxury or Necessity for example, addictive drugs

Elasticity of Demand in Short Run/ Long Run

In the short run demand is likely to be more inelastic .In the long run demand is likely to be Cross elasticity.If people are used to buying a good, then when the price goes up, they will tend to keep buying it out of habit. However, when they realise the price rise is permanent they will expend more energy and time in looking for alternatives. Therefore, over time, people are more likely to find alternatives.CASE – WindowsAlso, if a firm like Microsoft increase price of windows operating system, in the short term demand is likely to be inelastic (people are used to using windows so continue to pay higher price) However, over time, people may get fed up with paying high price for windows and consider switching systems 

CASE STUDY

The first seven rows of Table 3-3 give the estimated value of the short-run and long-run price elasticity's of demand (Ep) for selected commodities in New Delhi. These elasticity's are computed based on primary survey with a sample of 115 consumers from different regions of Delhi. The rest of the table shows elasticity's for selected commodities in the United States. The table shows that the long-run price elasticity of demand for most commodities is much larger than the corresponding short-run price elasticity. For example, the table shows that the price elasticity of demand for clothing in Delhi is 1.1 in the short run but becomes

Price elasticity of demand in real world

Commodity Short Run

Long Run Urban India"

Butter 1.478 2.78 Petrol 0.3 0.9 Tea 0.712 1.14 Coffee* 0.292 0.685 Beer 0.85 1.18 Burger 1.49 2.79 Clothing 1.1 2.88

US Clothing" 0.90 2.90 Tobacco products'' 0.46 1.89 Beer" 1.72 2.17 Electricity (household)'' 0.13 1.89 Gasoline 0.25 0.92

Elasticity chart

2.88 in the long run. This means that a 1 percent increase in price leads to a reproduction in the quantity demanded of clothing of 1.1 percent in the short run but 2.88 percent in the long run. Although the price elasticity of demand for petrol is about three times higher in the long run than in the short run, the demand for petrol remains price inelastic. It should be noted that the estimated price elasticity of demand for any commodity is likely to vary (sometimes widely) depending on the nation under consideration, the time period examined, and the estimation technique used. Thus, estimated price elasticity values should be used with caution

Thanks' For Patience