ELASTICITY OF DEMAND

 Types of elasticity of Demand

Price Elasticity of Demand - Proportional change in
quantity demanded / - Proportional change in price.
Income Elasticity of Demand -- % change in quantity
demanded / % change in Income.
Cross Elasticity of Demand -- % change in quantity
demanded of X / % change in price of Y.
 TYPES OF PRICE ELASTICITY OF
DEMAND


 Perfectly Elastic
 Perfectly Inelastic

Price Elasticity of

Demand Unitary Elasticity
 Relatively Elastic
 Relatively Inelastic
 MEASUREMENT OF PRICE ELASTICITY
 Percentage or ratio method
 Total outlay or Total revenue method

 Point method or Geometric Method.

 Percentage or ratio method

∆ Q/Q * P / ∆P
Total outlay or Quantity
Price Total revenue
Dd. method
Total Outlay Nature of els.
`5 100 500 Unit elastic e=1
` 4 125 500

`5 100 500 More than unit els. E

>1
`4 140 560
`5 100 500 Less than unit els.
E <1
`4 120 480
ARC METHOD
 In point elasticity of demand is relevant only if the change in
the price is very minute. But change in the price is not too
small, so that we have to measure the elasticity over a
substantial range of a demand curve.
 Elasticity measured over a range of the demand curve is ARC
Elasticity

A
B
ELASTICITY OF DEMAND IN DECISION MAKING
PROCESS.
 Business Decisions
 Economic policies of Government – Paradox of poverty
amidst plenty
 Determination of Public Utilities

 Taxation policy

 Determination of Factor pricing

 International trade