ELASTICITY OF DEMAND,DEMAND

FORECASTING AND PRODUCTION

ANALYSIS
   BY:- N.MEGHANA,
18251A0220,
EEE-A,3/4
ELASTICITY OF DEMAND:-
 It is defined as the proportionate change in demand of
product in response to the proportionate change in any of
the factors affecting demand.
It is also defined as the percentage change in quantity
demanded caused by one percent change in the demand
determinant under concentration, while other determinants
are held constant.
When the law of demand only shows the direction of change
in demand ,the elasticity of demand shows the direction as
well as the percent change in demand. So, elasticity of
demand is more useful concept than price.
TYPES OF ELASTICITY OF DEMAND:-
1.Price elasticity of demand
2.Income elasticity of demand
3.Cross elasticity of demand
4.Promotional elasticity of demand.
ELASTIC DEMAND: a small change in price may lead to a great
change in quantity demanded. In this case, demand the elastic.
IN-ELASTIC DEMAND :If a big change in price is followed by a small
change or no change in demanded then the demand in inelastic.
TYPES OF PRICE ELASTICITY OF DEMAND:
1.Perfectly elastic demand(Ed=infinite)
2.Perfectly inelastic demand(Ed=0)
3.Relatively elastic demand(Ed>1)
4.Relatively inelastic demand(Ed<1)
5.Unit elasticity of demand(Ed=1)
INCOME ELASTICITY OF DEMAND:-
The income of the costumer is an important determinant of demand.
Although income doesn't vary in the short run ,its impact on long term
demand analysis is very crucial.
TYPES OF INCOME ELASTICITY:-
1.zero income elasticity(Ey=0)-quantity demanded remains the same
even though money income increases.
2.high income elasticity(Ey>1)-an increase in income brings about a
more than proportionate increase in quantity demanded.
3.low income elasticity(Ey<1)-as income increases quantity demand also
increases but less than proportionately.
4.unit income elasticity(Ey=1)-an increase in income brings about a
proportionate increase in quantity demanded.
5.negative income elasticity(Ey<0)-when income increases, quantity
demand falls and viceversa.
CROSS ELASTICITY OF DEMAND;
It is positive if goods x and y are substitutes in the
consumption basket ,negative if they are complements and
zero if the two goods are related.
Cross elasticity is always positive for substitutes and
negative for complements.
POSITIVE CROSS ELASTICITY:
Substitute goods are those which compact with eachother.
For eg tea,coffee etc. For substitutes goods the cross
elasticity is positive.
For substitutes quantity demanded of one good moves in the
same direction as the price of the other. Like coke amd pepsi,
zen and santro, etc.
NEGATIVE CROSS ELASTICITY:
Complementary goods are those goods which have to be consumed
simultaneously it means if a consumer wants to consume one product
he has to consume other product.
For complements, quantity demanded of one good moves in the
opposite direction as the price of the other like car and petrol.
ZERO CROSS ELASTICITY:
Cross elasticity for unrelated goods is zero because one commodity
doesn't affect the other commodity if the price of one commodity
changes it will not affect demand for other cpmmodity. If the price of
tea changes by 2% it will not create any affect on the demand of
clothes.
PROMOTIONAL ELASTICITY OF DEMAND:
Advertising and promotion are the vital tools in the competitive
market to generate awareness about its products.
FACTORS AFFECTING ELASTICITY OF DEMAND:
1. nature of commodity
2.availability and non-availability of substitutes
3.variety of uses
4.degree of postponment of dema
5.amount of money spent
6.range of prices
7.time frame
8.tastes and preferences of the consumer
9.expectations of prices
10.durability of the product
11.availability of subsidies.
1.NATURE OF PRODUCT
  Necessities – less elastic like bread, rice
  Comforts – elastic like ac
  Luxuries – more elastic like gold, diamonds
2.AVAILABILITY AND NON-AVAILABILITY OF SUBSTITUTES:
   Goods having number of close substitutes will have an elastic demand
    And Goods with no close substitute will have an inelastic demand.
3.VARIETY OF USES:
  Several uses- elastic like milk and electricity
  Single use –inelastic like salt 
4.DEGREE OF POSTPONMENT OF DEMAND-
   Urgent like medicines and books
   Possibility of postponment like clothing and cycle 
5.AMOUNT OF MONEY SPENT-
   Like matchbox ,needle and clothing
6.RANGE OF PRICES-
High priced goods like jewellery
Low priced goods like salt
7.TIME FRAME-
  Calender and clock
8.TASTES AND PREFERENCES-
 Like chocolates and toothpaste
MEASUREMENT OF PRICE ELASTICITY OF DEMAND- to know the
exact rate of change in demand for a change in demand for a change
in price elasticity of demand has to be measured.
The following methods are used for the measurement of elasticity
 1. proportional method
 2.percentage method
 3.total outlay/total expenditure method
 4. point elasticity method.
PROPORTIONAL METHOD-
Also called percentage method.
The percentage change in the price and percentage change in the
demand are calculated and compared.
TOTAL EXPENDITURE/TOTAL OUTLAY METHOD-
This method was suggested by Marshall .
In the method elasticity can be measured by comparing the total
expenditure on commodity before and after the change in price.
POINT ELASTICITY METHOD-
In this method we measure elasticity of demand of different pointd
on the demand curve.
When the elasticity is measured at a particular point on a demand
curve it is called point method and this method is also known as
geometrical method.
DEMAND FORECASTING-
It refers to an estimate of future demand for the product. It is an
objective assessment of the future course of demand, in recent times,
forecasting plays an important role in business decision making.
It is also essential to distinguish between forecasting of demand and
forecast of sales , sales forecasts are important for estimating
revenue , cash requirements and expenses whereas, demand
forecasting relate to production, inventory control, timing, reliability
of forecast etc. However, there is not much difference between these
terms. Forecast can broadly be classified into two categories-
PASSIVE FORECAST-where forecasting is done under the assumption
that the firm does not change the course of its action.
ACTIVE FORECAST-where forecasting is done under the condition of
likely future changes in the actions by the firm.