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a) Elasticity Of Demand
Meaning Of Elasticity
The term Elasticity expresses the degree of correlation
between demand and Price.
The elasticity of demand is a measure of the relative
change in account purchased in response to a relative
change in price on a given demand curve.
- Mayer A.L.
The elasticity of demand, at any price or at any output,
is the proportional change of amount purchased in
response to a small change in price, divided by the
proportional change of price
Mrs. Joan Robinson
Classification of Elasticity of
Demand
From
the viewpoint of Elasticity
Demand May be two types: -
a. Elastic Demand
b. Inelastic Demand
Types of elasticity
•Price elasticity
•Cross elasticity
•Income elasticity
•Promotional elasticity
Price Elasticity
Ifthe change in
price of a product
does not have any
impact on the
change in demand,
then it is said zero
(0) elasticity
Elasticities Extreme
P Perfectly Inelastic
Demand (Insulin)
D
Perfectly Elastic
Demand (Clear Pepsi)
Q
Demand Curves
R = P∙QD
Raising prices has two counter-veiling effects:
1. a direct positive impact on revenues because
each good sold generates more revenue.
2. a negative indirect impact because fewer goods
will be sold.
Which is stronger?
Effect of price change on
revenues
%R = 1 +e Demand
%P
e Demand
<0
Price Elasticity & Revenues
If the price elasticity of demand is
exactly UNITY, a price rise has no effect
on total revenue
ELASTIC, a price rise will decrease
revenues.
INELASTIC elastic, a price rise will
increase revenues.
Cross Elasticity of Demand
The relationship between changes in the
price of one commodity and the resulting
changes in the quantity demand of
another commodity is described as the
cross elasticity of demand.
It has three types: -
1. Positive cross Elasticity of Demand
2. Negative cross Elasticity of Demand
3. Zero cross Elasticity of Demand
Substitutes vs.
Complements
A good is defined as a “Substitute”
when a rise in its price leads to a
shift out/up in the demand curve
for the good of interest.
A good is defined as a
“Complement” when a rise in its
price leads to a shift in/down in the
demand curve for the good of
interest.
Income Elasticity
Income elasticity is a measure of
responsiveness of potential buyers to
change in income. It represents the ratio of
change in demand of product as with the
change in income of the consumer
concerned.
It is of four types:
1. Positive Income Elasticity of Demand
2. Negative Income Elasticity of Demand
3. zero Income Elasticity of Demand
4. Other types of Income elasticity
Nature of goods and income
elasticity
0 1
E=change in sales
Change in advertisement
expenditure
Determinants of promotional
elasticity
The level of total sales
Cumulativeeffect of past
advertisements
Price Elasticity and Time
Elasticity of Demand
Short-term vs. Long-term
It takes time to find substitutes for goods
or to adjust consumption behavior in
response to a change in prices.
The long-run demand response to a price rise
is larger than the short-run. Price elasticity of
demand is more negative in the long run than
in the short run.
.
Oil Demand much more elastic
in long run than short-run
Short-term Long-term
Q
Practical Application of Elasticity
of Demand
Taxation
Monopoly Market
Appraisal
Economic policies
International Trade
Rate of Foreign Exchange
Increasing Returns
Output
Wages
Poverty in plenty
Effect on the economy
Thank You All