This action might not be possible to undo. Are you sure you want to continue?
DR. PRERNA JAIN
but not the magnitude of such a change. .Introduction Law of demand gives only the direction of change of quantity demanded in response to a given change in the price of a commodity. A firm needs to know about the responsiveness or sensitivity of demand for the commodity it produces to changes in all the independent variables.
. A firm would be particularly interested to know the impact on the quantity demanded of a commodity either when the price of the commodity is changed. Answers to all these questions can be found with the help of the concept of elasticity. or when it increases its advertising expenditure etc. Responsiveness of a commodity is the amount by which its quantity demanded changes in response to a given change in any of the determinants of demand.
Elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a given change in any of the independent variables that influence demand for that commodity .
Methods of Measuring Elasticity Ratio or Percentage Method Arc Elasticity Method Total Outlay Method .
Price Elasticity of Demand Point Definition Q / Q Q P EP P / P P Q P EP a1 Q Linear Function .
Price Elasticity of Demand Arc Definition Q2 Q1 P2 P 1 EP P2 P Q2 Q1 1 .
Total Outlay Method Measuring Elasticity by Outlay Method Degree of Elasticity Highly Elastic (ep > 1) Price (Rs.) Decreased Increased Unit Elastic (ep =1) Highly Inelastic (ep < 1) Increased Decreased Increased Decreased Decreased Increased Decreased Increased No change No change Increased Decreased .) Increased Decreased Quantity Demanded (Units) Decreased Increased Total Outlay (Rs.
Ex: Apparels .Determinants of Price Elasticity of Demand Nature of Commodity: This implies whether the commodity is a necessity or luxury. Availability and Proximity of Substitutes – In case a commodity has close substitutes price elasticity would be quite high. Necessities are relatively price inelastic. while luxuries are relatively price elastic.
the more sensitive would the commodity be to price. Ex: Electricity Proportion of income spent on the commodity: The greater the proportion of income a consumer spends on purchasing a commodity. The reverse also holds good. Alternative uses of the commodity: If a commodity can be put to more than one use. . it would be relatively price elastic. due to the income effect.
A shift from petrol driven automobiles to CNG driven is a typical example. consumers take time to adjust their consumption pattern to accommodate substitutes in their consumption bundles. but they would gradually shift to CNG in the long run. It may not be feasible for consumers to switch from petrol driven cars in the short run. Time: Demand for any commodity is usually more price elastic in the long run. The reason is simple. .
. cars etc. Durability of the commodity: Perishable commodities like eatables are relatively price inelastic in comparison to durable items like consumer electronic appliances. Items of addiction: These are relatively price inelastic.
Income Elasticity of Demand Point Definition Q / Q Q I EI I / I I Q I EI a3 Q Linear Function .
Income Elasticity of Demand Arc Definition Normal Good EI 0 Q2 Q1 I 2 I1 EI I 2 I1 Q2 Q1 Inferior Good EI 0 .
Cross-Price Elasticity of Demand Point Definition E XY QX / QX QX PY PY / PY PY QX PY a4 QX Linear Function E XY .
Arc Definition Substitutes E XY 0 E XY QX 2 QX 1 PY 2 PY 1 PY 2 PY 1 QX 2 QX 1 Complements E XY 0 .
.Promotional Elasticity of Demand It measures the degree of responsiveness of demand to a given change in advertising expenditure. a firm should go for heavy expenditures on advertisement. Ea < 1. Ea > 1. a firm should not spend too much on advertisement.
policies of taxation . while those having inelastic demand should be sold at higher price. Basis of Price Discrimination Determination of Rewards of Factors of Production Govt.Importance of Elasticity of Demand Determination of Price: Products having elastic demand should be sold at lower price.