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    Elasticity of Demand

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    Humayun
    1. Elasticity measures the responsiveness of quantity to price changes and includes price elasticity of demand, income elasticity of demand, and cross elasticity of demand. 2. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Demand can be elastic, inelastic, or unitary based on the elasticity value. 3. There are different methods to measure price elasticity including the total revenue method, percentage method, and geometric method. Elasticity is applied in areas like taxation, monopoly pricing, and international trade.

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    Elasticity of Demand

    Uploaded by

    Humayun
    18K views16 pages
    1. Elasticity measures the responsiveness of quantity to price changes and includes price elasticity of demand, income elasticity of demand, and cross elasticity of demand. 2. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Demand can be elastic, inelastic, or unitary based on the elasticity value. 3. There are different methods to measure price elasticity including the total revenue method, percentage method, and geometric method. Elasticity is applied in areas like taxation, monopoly pricing, and international trade.

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    Elasticity of Demand and supply

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    1. Elasticity measures the responsiveness of quantity to price changes and includes price elasticity of demand, income elasticity of demand, and cross elasticity of demand. 2. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Demand can be elastic, inelastic, or unitary based on the elasticity value. 3. There are different methods to measure price elasticity including the total revenue method, percentage method, and geometric method. Elasticity is applied in areas like taxation, monopoly pricing, and international trade.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    18K views16 pages

    Elasticity of Demand

    Uploaded by

    Humayun
    1. Elasticity measures the responsiveness of quantity to price changes and includes price elasticity of demand, income elasticity of demand, and cross elasticity of demand. 2. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Demand can be elastic, inelastic, or unitary based on the elasticity value. 3. There are different methods to measure price elasticity including the total revenue method, percentage method, and geometric method. Elasticity is applied in areas like taxation, monopoly pricing, and international trade.

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    ELASTICITY OF DEMAND

     The Responsiveness of buyers to a change in the price


    of a commodity is called as Elasticity of Demand.

     It is the rate at which the quantity demanded of a


    commodity varies with a change in price.

     Demand is also effected by the Income of the customers


    and prices of related goods. So therefore, we have
    Income Elasticity of Demand (Ey) and Cross Elasticity
    of Demand (Exy)
    TYPES OF ELASTICITY OF
    DEMAND
    1. Price Elasticity of Demand (Ed):
    It is the ratio of the percentage change in quantity
    demanded of a product to the percentage change in
    its price.

    Ed = % change in Qd = q/q
    % change in Price p/p
    TYPES OF ELASTICITY OF DEMAND

    2. Income Elasticity of Demand (Ey):


    It is the degree of change or responsiveness of
    quantity demanded of a good to a change in the income
    of the consumer.

    Ey = % change in Qd = q/q
    % change in Income y/y
    TYPES OF ELASTICITY OF DEMAND

    3. Cross Elasticity of Demand (Exy):


    It is the percentage change in the quantity demanded
    of one commodity say X due to the percentage
    change in the price of related commodity Y.

    Exy = % change in Qd of X = qx/qx


    % change in Price of Y Py/Py

     Cross Elasticity is concerned with two types of goods


    1). Substitutes, it has positive Exy
    2). Complementary, it has negative Exy
    DEGREES OF PRICE ELASTICITY OF
    DEMAND

    Type of Elasticity Curve Tendency Elasticity Value


    Perfectly Inelastic Vertical ε=0
    Perfectly Elastic Horizontal ε=
    DEGREES OF PRICE ELASTICITY OF
    DEMAND
    Type of Demand Curve Tendency Elasticity Values Elasticity For
    Elastic Relatively Flat E>1 Luxuries
    Inelastic Relatively Steep E<1 Necessities
    DEGREES OF PRICE ELASTICITY OF
    DEMAND

    • Unitary Elasticity = 1

    D
    Price
    P1
    10%
    Po

    10%
    D

    0 Q1 Qo
    Quantity
    DETERMINANTS OF PRICE
    ELASTICITY OF DEMAND
     Necessities vs. Luxuries

     Availability of Substitutes

     Proportion of Income

     Time
    MEASUREMENT OF PRICE
    ELASTICITY OF DEMAND
    1. Total Outlay or Revenue Method:
     We measure “Ed” with change in Total
    Revenue of a firm due to change in a it’s
    price level.

     Elasticity is expressed in Three ways;


     Unitary Elasticity (Total Revenue remains the
    same)
     Elastic Demand (TR increases with decrease in
    the prices)
     Inelastic Demand (TR decreases with decrease
    in the prices)
    MEASUREMENT OF PRICE
    ELASTICITY OF DEMAND
    Total Outlay or Revenue Method:

    Price of Quantity Total Coefficient of


    Pencil per Demanded Revenue Elasticity of
    Dozen (Rs.) in Dozen Demand
    8 3 24
    7 4 28 Elastic
    6 5 30 Elastic
    5 6 30 Unity
    4 7 28 Inelastic
    3 8 24 Inelastic
    MEASUREMENT OF PRICE
    ELASTICITY OF DEMAND
    2. The Proportional or Percentage
    Method:
     Under this method we calculate Ed by the
    formula as

    Ed = % change in Qd = q/q
    % change in Price p/p

    = Q2 – Q1 X P1
    P2 – P1 Q1
    MEASUREMENT OF PRICE
    ELASTICITY OF DEMAND
    3. Geometrical or Point Method
     Under this method we measure elasticity
    of demand at any point on a demand
    curve.

    Ed = Lower Amount of Qd from the


    midpoint Upper Amount of Qd
    from the midpoint

    At midpoint Ed = 1
    Above midpoint Ed < 1
    APPLICATIONS OF ELASTICITY
    OF DEMAND

     Taxation
     Monopolist Price
     Wages
     Economic Policies
     International Trade
     Rate of Foreign Exchange
    ELASTICITY OF SUPPLY
     The percentage increase in the amount of Quantity
    Supplied in response to a given percentage increase in
    price.

     It represents the extend of change in supply in response


    to a change in price.

     The rate at which quantity supplied varies with a change


    in the price of that commodity.

    Es = % change in Qs = q/q
    % change in Price p/p
    DEGREES OF ELASTICITY OF
    SUPPLY
     Perfectly Elastic Supply (Horizontal &
    Infinite)

     Perfectly Inelastic Supply (Vertical &


    Zero)

     Elastic Supply

     Inelastic Supply
    ELASTICITY OF SUPPLY

     The Short Run:


     Es is more Inelastic or even Perfectly
    Inelastic because a firm cannot change its
    machinery in short run.

     The Long Run:


     Es is more elastic in this case because it
    can change all it factors of production to
    supply more goods.

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