Economics ppt

MEANING
States with how much or what extent the
quantity demanded will change in response to
change in price.
Price elasticity of demand is the ratio of
the percentage change in quantity demanded
of a commodity to a percentage change in its
price.
In MARSHALL words “Elasticity of demand may
be defined as the percentage changes in the
quantity demanded divided by the percentage
change in the price.

FORMULA:-
Ed=(-) percentage change in quantity
demanded
percentage change in price

DEGREES OF PRICE
ELASTICITY OF DEMAND
1.Perfectly elastic demand
2.Perfectly inelastic demand
3.Unitary elastic demand
4.Greater than unitary elastic demand
5.Less than unitary elastic demand

Perfectly Elastic Demand
It is a situation where a little change in
price cause an infinite change in
demand.
In this case a very little rise in
price causes the demand to fall to zero
and a very little fall in price causes then
demand to extent to infinity. Ed=∞

Perfectly Inelastic Demand
It is the situation in which a change in
price produces no change in quantity
demanded.
Ed=0

Unitary elastic demand
It is situation when percentage change
in price is equal to change in quantity
demanded.
Ed=1

Greater than unitary elastic
demand
It is the situation when percentage in
quantity demanded is equal to
percentage change in price.
Ed>1

Less than unitary elastic
demand
It is the situation where percentage change
in quantity demanded is less than change
in price.
Ed<1

MEASUREMENT OF PRICE
Total
expenditure
method
Proportionate
method
Point
elasticity
method
Arc elasticity
method

TOTAL EXPENDITURE METHOD
Total expenditure method was formulated by Alfred
Marshall. The elasticity of demand can be measured on
the basis of change in total expenditure in response to a
change in price.
• When, as a result of the change in price of a good, the
total expenditure on the good remains the same, the
price elasticity for the good is equal to unity.
• When, as a result of increase in price of a good, the total
expenditure made on the good falls or when as a result
of decrease in price, the total expenditure made on the
good increases, we say that price elasticity of demand is
greater than unity.
• When, as a result of increase in the price of a good, the
total expenditure made on the good increases or when as
a result of decrease in its price, the total expenditure
made on the good falls, we say that price elasticity of
demand is less than unity.

PROPORTIONATE
METHOD
According to this method, elasticity is measured as the ratio of
percentage change in the quantity demanded to percentage change
in the price .

POINT ELASTICITY
METHOD
When demand curve is linear:
It measures elasticity of demand at particular
point on the demand curve. we can calculate
elasticity of demand at a point on the linear
demand curve. This method is usually used,
when the percentage change is extremely small.
ED= LOWER SEGMENT/UPPER SEGMENT

When demand curve is tangent:
When demand curve is non- linear then to know the
elasticity of demand at any point located on it, a
tangent is so drawn as to touch this point.
Consequently this point will divided the tangent into
two parts.

ARC ELASTICITY
METHOD
In the words of leftwitch,” when elasticity
is computed between two separate points
on a demand curve.”

FACTORS DETERMINING THE PRICE
Nature of the commodity
Availability of substitutes
Goods with different uses
Postponement of the use
Income of the consumer
Habit of the consumer
Proportion of income spent on a commodity
Price level
Time
Joint demand

Income Elasticity Of Demand
Income elasticity of demand is a
measure of how much demand for a
good/service changes relative to a
change in income, with all other
factors remaining the same.
Measurement of income
elasticity=
proportionate change
in quantity demanded
proportionate
change in income

Degrees Of Income ElasticityOf
Demand
• Positive income elasticity of
demand
• Negative income elasticity of
demand
• zero income elasticity of demand

Positive Income Elasticity
Of Demand
Income elasticity of demand for a good is
positive, when with an increase in the
income of a consumer, his demand for the
good increase and with a decrease in the
income of a consumer, his demand for the
good decreases.

Positive income elasticity of demand
can be of three types:
1. More Than Unitary Income Elasticity Of
Demand
Positive income elasticity of demand is more
than unitary when percentage change in
demand is more than percentage change in
income.

2. Less than income elasticity of
demand
Positive income elasticity of demand is
less than unitary when percentage
change in demand is less than
percentage change in income.
3. Unitary income elasticity of
demand
Positive income elasticity of demand
is unitary when percentage change in
demand is followed by equal
percentage change in income.

Negative Income Elasticity
Of Demand
Income elasticity of demand is negative when
increase in the income of the consumer is
accompanied by fall in demand of a good and
decrease in income is followed by rise in demand.
For example: negative income elasticity refers to
inferior goods, also known as giffen goods.

Zero Income Elasticity Of
Demand
Income elasticity of demand is zero,
when change in the income of consumer
evokes no change in his demand.

CROSS ELASTICITY OF
DEMAND
There is a mutual relationship between
change in price and quantity demanded
of two related goods. Change in price of
one good cause change in demand of
related good.

Degrees Of Cross Elasticity Of Demand
1)POSITIVE:-
When goods are substitutes of each other, then a
given percentage rise in the price of good will lead
to a given percentage increase in the demand for the
other good. In other words cross elasticity of
demand is positive in substitute goods.

In case of complementary goods cross elasticity
of demand is negative because when the price of
one commodity i.e x increases then demand for
anothercommodity

Cross elasticity of demand is zero when two
goods are not related to each other.
For example, rise in the price of wheat will
have no effect on the demand for shoes. their
cross elasticity of demand will be called zero.

Importance of price elasticity
of demand
• Determining of price under monopoly
• Price discrimination
• Price determination of joint supply
• Advantage to finance minister
• Distribution of burden of taxation
• International trade
• Importance for the policy of nationalization
• Wage determination
• Paradox of poverty
• Effect on employment

Economics ppt

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Economics ppt