# 8-1

ELASTICITY OF DEMAND
Orange City Institute of Higher Education, Nagpur

8-2

The Economic Concept of Elasticity Elasticity: The sensitivity of one variable to another or, more precisely, the percentage change in one variable relative to a percentage change in another.
percent change in A Coefficien t of Elasticity  percent change in B
Orange City Institute of Higher Education, Nagpur

Thus.Definition Of Price Elasticity Of Demand 8-3 • The change in the quantity demanded of a product due to a change in its price is known as Price elasticity of demand. the sensitiveness or responsiveness of demand to change in price is as called elasticity of demand Orange City Institute of Higher Education. Nagpur .

Nagpur .8-4 Kinds Of Price Elasticity Of Demand 1) 2) 3) 4) 5) Perfectly elastic demand Relatively elastic demand Elasticity of demand equal to utility Relatively inelastic demand Perfectly inelastic demand Let Us See Some Views On Them Orange City Institute of Higher Education.

Orange City Institute of Higher Education. it is known as perfect elastic x demand. Nagpur .8-5 Perfectly elastic demand y P R I D C E 0 When the Perfectly elastic demand for a demand curve product changes –increases or D decreases even when there is no change in price.

Nagpur When the proportionate change in demand is more than the proportionate changes in price.8-6 Relatively elastic demand y P R I C E D D Relatively elastic demand curve 0 demand x Orange City Institute of Higher Education. it is known as relatively elastic demand. .

8-7 Elasticity of demand equal to utility When the proportionate change in demand is equal to proportionate changes in price. Nagpur . it is known as unitary elastic demand y P R I C E Elasticity of demand equal to utility curve D D 0 x demand Orange City Institute of Higher Education.

Nagpur .8-8 Relatively inelastic demand Y D P R Relatively inelastic demand curve I C E When the proportionate change in demand is less than the proportionate changes in price. it is known as relatively inelastic demand D O X demand Orange City Institute of Higher Education.

it is known as perfectly inelastic demand 0 D demand X Orange City Institute of Higher Education. howsover Perfectly inelastic large. change no demand curve changes in quality demand.8-9 Perfectly inelastic demand Y D P R I C E When a change in price. Nagpur .

Nagpur demand .ALL KINDS OF DEMAND CAN BE SHOWN IN ONE DIAGRAM AS FOLLOW Y 8-10 P R D I C E 0 WHERE D1) Perfectly elastic demand D1 D2)Relatively elastic demand D2 D3)Elasticity of demand D3 equal to utility D4 D4)Relatively inelastic demand D5 X D5)Perfectly inelastic DEMAND Orange City Institute of Higher Education.

Nagpur .8-11 Measurement Of Price Elasticity Of Demand There are main methods like 1. Arc elasticity of demand Orange City Institute of Higher Education. Total outlay method or total revenue method 3. Geometric method or point method 4. Percentage method or proportionate method 2.

Nagpur .Factors Affecting Price Elasticity Of Demand • • • • • • • 8-12 Nature of the Commodity Availability of Substitutes Variety of uses of commodity Postponement Influence of habits Proportion of Income spent on a commodity Range of prices Orange City Institute of Higher Education.

Factors Affecting Price Elasticity Of Demand • Income Groups • Elements of time • Pattern of income distribution 8-13 Orange City Institute of Higher Education. Nagpur .

Nagpur .8-14 Practical Importance of the Concept of Price Elasticity Of Demand • The concept is helpful in taking Business Decisions • Importance of the concept in formatting Tax Policy of the government • For determining the rewards of the Factors of Production • To determine the Terms of Trades Between the Two Countries Orange City Institute of Higher Education.

Orange City Institute of Higher Education. Nagpur .the concept of price elasticity of demand helps in explaining the irony of poverty in the midst of plenty.8-15 Practical Importance of the Concept of Price Elasticity Of Demand • Determination of Rates of Foreign Exchange • For Nationalization of Certain Industries • In economic Analysis .

8-16 Income Elasticity Of Demand Orange City Institute of Higher Education. Nagpur .

Nagpur .8-17 Types Of Income Elasticity Of Demand • Positive Income elasticity of demand • Negative Income elasticity of demand • Zero Income elasticity of demand Orange City Institute of Higher Education.

Nagpur X .Y Positive Income elasticity of demand D 8-18 P A Income D O B S Quantity Demanded Orange City Institute of Higher Education.

8-19 Positive Income elasticity of demand • Income Elasticity Equal to Unity or One • Income Elasticity Greater Than Unity Or One • Income Elasticity Less Than Unity or One Orange City Institute of Higher Education. Nagpur .

Negative Income elasticity of demand Price 8-20 P A Total Revenue B S Quantity Demanded (000s) Orange City Institute of Higher Education. Nagpur .

Nagpur X Quantity Demanded .8-21 Zero Income elasticity of demand Y D Income O D Orange City Institute of Higher Education.

Nagpur Quantity Demanded X .8-22 All Income Graphs Representation Y F E Income C B A D O Orange City Institute of Higher Education.

Nagpur .Measurement Of Income Elasticity Of Demand Proportionate change in Demand Income Elasticity Of Demand = Proportionate change in Income 8-23 i.e. ∆q Income Elasticity Of Demand = Q + ∆y Y Orange City Institute of Higher Education.

g.Measurement Of Income Elasticity Of Demand 8-24 • Here . ∆q = Change in the quantity demanded.500/.. ∆y = Change in income. Q = Original quantity demanded.when Income of the consumer = 2.000/. . Nagpur . he purchases 20 units of X. • For e. when income = 3. Y = Original income.he purchases 25 units of X Orange City Institute of Higher Education.

5 which is more than one.5 therefore here the IED is 1. Nagpur .Measurement Of Income Elasticity Of Demand • Thus Income Elasticity of Demand ∆q ∆y + = Y Q 8-25 = (5/20) + (500/2500) = 1. Orange City Institute of Higher Education.

Nagpur .8-26 Factors Affecting Income Of Demand • Income Itself Only. • Price Of the Commodity Orange City Institute of Higher Education.

Nagpur .Importance Of the Concept of Income Elasticity Of Demand 8-27 • In production planning and management • In forecasting demand when change in consumers income is expected • In classifying goods as normal and inferior • In expansion and contraction of the firm by the figure of income elasticity of demand • Markets situations could be studied with the help of IED Orange City Institute of Higher Education.

Nagpur .8-28 Thank You Orange City Institute of Higher Education.