Elasticity of demand
- 1. ELASTICITY OF DEMAND MR. NITIN SETIA
- 2. TOPIC COVERED •MEANING OF ELASTICITY •TYPES OF ELASTICITY •PRICE ELASTICITY •INCOME ELASTICITY •CROSS ELASTICITY
- 3. MEANING OF ELASTICITY Elasticity is a measure of how much buyers and sellers respond to changes in market conditions. Elasticity allows us to analyze supply and demand with greater precision. If something is elastic it is responsive, flexible, or readily changed. A rubber band is elastic and with little force it easily stretches. A chain on the other hand is rigid and changes very little when pulled. In the context of price elasticity of demand, the price change is comparable to the force applied to a rubber band or chain and the change in quantity demanded is comparable to the stretch. When consumers are relatively responsive to a price change, we say that demand is elastic. When the change in quantity demanded by consumers is relatively small in response to a price change, we say that demand is inelastic.
- 4. TYPES OF ELASTICITY TYPES OF ELASTICITY PRICE ELASTICITY INCOME ELASTICITY CROSS ELASTICITY
- 5. PRICE ELASTICITY According to the law of demand, when price goes up, consumers demand fewer quantities of a product. If the price of a product falls, quantity demanded will rise. But when the price of a product changes, by how much more (or less) will consumers buy? To help answer this question, we will use a measurement called the Price Elasticity of Demand. Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. It is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
- 6. COMPUTING THE PRICE ELASTICITY OF DEMAND The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. PRICE ELASTICITY OF DEMAND= PERCENTAGE CHANGE IN QTY DEMANDED/PERCENTAGE CHANGE IN PRICE Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:
- 7. DEGREES OF PRICE ELASTICITY OF DEMAND 1. Perfectly Elastic Demand:-It is a situation where a little change in price will cause an infinite change in Demand. 2.Perfectly Inelastic Demand:-It is a situation in which a change in price produces no change in the quantity demanded. 3.Unitary Elastic Demand:-It is a situation when percentage change in price is same as change in quantity demanded. 4. Relatively Elastic Demand:-It is a situation when percentage change in quantity demanded is greater then percentage change in price. 5. Relatively Inelastic Demand:-It is a situation where percentage change in quantity demanded is less than price
- 8. PERFECTLY ELASTIC DEMAND Perfectly Elastic Demand:-It is a situation where a little change in price will cause an infinite change in Demand.
- 9. PERFECTLY INELASTIC DEMAND Perfectly Inelastic Demand:-It is a situation in which a change in price produces no change in the quantity demanded.
- 10. UNITARY ELASTIC DEMAND Unitary Elastic Demand:-It is a situation when percentage change in price is same as change in quantity demanded.
- 11. RELATIVELY ELASTIC DEMAND Relatively Elastic Demand:-It is a situation when percentage change in quantity demanded is greater then percentage change in price
- 12. RELATIVELY INELASTIC DEMAND Relatively Inelastic Demand:-It is a situation where percentage change in quantity demanded is less than price
- 13. INCOME ELASTICITY Income Elasticity of Demand:- Other things, such as price of the given commodity, price of the related goods, taste of consumer etc. remains constant Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income. It is computed as the percentage change in the quantity demanded divided by the percentage change in income. Goods consumers regard as necessities tend to be income inelastic. Examples include food, fuel, clothing, utilities, and medical services. Goods consumers regard as luxuries tend to be income elastic. Examples include sports cars, furs, and expensive foods.
- 14. DEGREES OF INCOME ELASTICITY OF DEMANDINCOME ELASTICITY OF DEMAND IS OF THREE TYPES 1) 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 increases and with a decrease in the income of the consumer his demand for a good decreases.
- 15. DEGREES OF INCOME ELASTICITY OF DEMAND 1) Unitary 2) Less than unitary 3) More than unitary
- 16. NEGATIVE INCOME ELASTICITY OF DEMAND 2) NEGATIVE INCOME ELASTICITY OF DEMAND: Income elasticity of demand for a good is NEGATIVE when with an increase in the income of a consumer his demand for the good DECREASES.
- 17. ZERO INCOME ELASTICITY OF DEMAND 3) ZERO INCOME ELASTICITY OF DEMAND: Income elasticity of demand for a good is ZERO when CHANGE in the income of a consumer evokes no change in his demand.
- 18. CROSS ELASTICITY There is a mutual relationship between change in price and quantity demanded of two related goods. Change in the price of one good can cause change in the demand of related goods. For example. Change in the price of tea ordinarily cause change in the demand of the coffee. Cross elasticity can be measured as follows: proportionate change in demand of product x Cross elasticity of demand= _________________________________ proportionate change in the price of product y
- 19. DEGREES OF CROSS ELASTICITY OF DEMAND 1) Positive cross elasticity: Cross elasticity of demand is positive in case of substitutes. In other words, when goods are substitutes of each other, then a given percentage rise in the price of a good will lead to a given percentage increase in the demand of the substitute good.
- 20. 1) Negative cross elasticity: Cross elasticity of demand is negative in case of complementary goods. In other words, when goods are complementary of each other, then a given percentage rise in the price of a good will lead to a given percentage decrease in the demand of the complementary good.