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Elasticity Of Demand

The document discusses the concept of elasticity of demand, defining it as the responsiveness of quantity demanded to changes in price, income, and related goods. It outlines different types of elasticity, including price elasticity, income elasticity, and cross elasticity, along with their implications for total revenue. Factors affecting price elasticity, such as availability of substitutes, proportion of income spent, and time period, are also examined.

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2 views

Elasticity Of Demand

The document discusses the concept of elasticity of demand, defining it as the responsiveness of quantity demanded to changes in price, income, and related goods. It outlines different types of elasticity, including price elasticity, income elasticity, and cross elasticity, along with their implications for total revenue. Factors affecting price elasticity, such as availability of substitutes, proportion of income spent, and time period, are also examined.

Uploaded by

p1876namo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Elasticity of

Demand

Presented by: Aditi Auddy


Definition ●The Degree of responsiveness to the change
in quantity demand with respect to the
of Elasticity change in any of its determinants( price,
of Demand income, price of related goods).
PRICE ELASTICITY OF DEMAND.
Types Of
Elasticity Of INCOME ELASTICITY OF DEMAND.
Demand
CROSS ELASTICITY OF DEMAND.
Definition of The degree of responsiveness of quantity
Price elasticity demanded of a commodity in response to
of Demand change in its price.
Formulas to
measure Price
Elasticity Of
Demand
Calculation
of PED
Activity-1
Elastic Demand/ Relatively Elastic Demand.
Inelastic Demand/ Relatively Inelastic
Different Demand.
Types of Price Perfectly Elastic Demand.
Elasticity Of
Perfectly Inelastic Demand.
Demand
Unitary Elastic Demand.
When the quantity demanded changes
by a greater percentage than the
Definition change in price.
Elastic demand occurs when a change
of Elastic in price results in a greater percentage
Demand change in quantity demanded, giving a
PED figure( ignoring the sign) of more
than 1 , but less than infinity.
Relatively
Elastic
Demand/Elastic
Demand
●The PED figure provides two pieces of
information. One is given by the sign.
●In the vast majority cases, it is a minus. This tell
us that there is an inverse relationship between
Interpretatio the quantity demanded and price.
n of PED ●A rise in price will cause a contraction in demand
and a fall in price will cause an extension in
demand.
●When demand is elastic , price and total revenue
move in opposite directions. For example , ten
products may initially be demanded at a price of
$ 5 each , giving a total revenue of $ 50.
●If the price falls to $4 each and demand rises to
Implication Of 20, then the total revenue would increase to $80.
Elastic ●In the case of elastic demand , a firm can raise
Demand total revenue by lowering the price, but it must
be aware that if it raises the price , its total
revenue will fall.
●Elastic demand curve is usually illustrated by a
flatter demand curve.
When the quantity demanded
Definition Of changes by a smaller percentage
Inelastic than the change in price.
Demand In case of Inelastic Demand PED is
less than 1, but greater than Zero.
Inelastic
Demand
●In case of Inelastic demand , price and total
revenue move in the same direction.
●If the price is raised , the quantity demanded
will fall , but by a smaller percentage than
Implication of the change in price and hence more revenue
Inelastic will be earned.
Demand ●If the price is lowered, more products will be
demanded, but not enough to prevent the
total revenue from falling.
●In this case , if a firm wants to raise
revenue, it should raise its price.
Perfectly
Elastic
Demand
Perfectly
Inelastic
Demand
Perfectly
Inelastic
Demand
Unit Elasticity
Of Demand
Unit Elasticity
Of Demand
● 1) Availability of Substitutes: The most important determinant of
the Price elasticity of demand is the number and kind of
substitutes available for a commodity. If a commodity has many
close substitutes , its demand is likely to be elastic. Even a small
fall in price will induce more people to buy this commodity rather
than its substitutes. For instance Coffee and tea, Coca-cola and
Factors Pepsi etc.

Affecting the ● On the other hand, if a good has no or weak substitutes, the
demand for it would be Inelastic. The consumer will have to buy it
Price Elasticity whether it’s price is high or low. This is the case with milk, sugar,
salt which do not have good substitutes. Thus when the price of
Of Demand milk increases the quantity demanded will not decrease much and
when the price falls the quantity demanded will not increase
much.
● In general, a commodity with close substitutes tends to have an
elastic demand and one with weak substitutes has an Inelastic
demand.
●Proportion of the income spent: Elasticity of
demand for a commodity depends upon the
proportion of the income which the consumer
spends on it.
Factors ●Smaller is the proportion of income spent on a
commodity, the smaller will be the elasticity of
Affecting the demand and vice- Versa. Ex: the demand for soap,
Price Elasticity salt , matches etc is highly Inelastic. Since the
consumer spends a very small proportion of his
Of Demand income on them.when the prices of such
commodities rise, it will not make much difference
consumer’s budget and, therefore, he will continue
to buy almost the same quantity of the commodity.
Hence, the demand for these goods is Inelastic.
Factors ●On the other hand , the demand for clothes , furniture
etc is likely to be elastic since the consumer spends a
Affecting the large fraction of his income on these goods. A changes
Price Elasticity in their price will have considerable effect on the
budget of the consumer and, therefore, will affect his
Of Demand demand to a great extent.
●Time factor: The elasticity of demand depends on the
time period- short period or long period.
●Price elasticity is generally low for the short period as
compared to long period. This is for two reasons:
Factors a) Firstly, it takes time for consumers to adjust their
tastes, preferences and habits. In the long period
Affecting the consumers may adjust their preferences and
consumption pattern.
Price Elasticity b)Secondly, new substitutes may be developed in the
Of Demand long run. Therefore, if the price of a commodity rises,
the demand for it will be Inelastic in the short run as the
substitutes may not be available.But in the long run
demand will be elastic as the consumer may switch
over to new substitutes, which may be available in the
long run.
Different
values of Price
Elasticity of
Demand:
Measurement
of Price
Elasticity of
demand in case
of Linear
Demand Curve/
Straight line
Demand Curve:
Measurement
of Price
Elasticity of
demand in case
of Linear
Demand Curve/
Straight line
Demand Curve:
Measurement
of Price
Elasticity of
demand in case
of Linear
Demand Curve/
Straight line
Demand Curve:
Measurement
of Price
Elasticity of
demand in case
of Linear
Demand Curve/
Straight line
Demand Curve:
Table 2.11
PRACTICAL
EXAMPLE
OF
ELASTICITY
OF DEMAND
ACTIVITIES:
●Thank You

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