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ELASTICITY OF DEMAND

The change in the quantity demanded of a product due to a change in its price is known as Price elasticity of demand. Thus, the sensitiveness or responsiveness of demand to change in price is as called 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

y P R I D Perfectly elastic demand curve

C

E

When the demand for a product changes increases or decreases even when there is no change in price, it is known as perfect elastic x demand.

y P R I C E D D Relatively elastic demand curve

demand

When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.

When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand

D

0 x

demand

Y

D

P R

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

Y D

P R

I

C E

When a change in price, howsover Perfectly inelastic large, change no demand curve changes in quality demand, it is known as perfectly inelastic demand

D demand

There are main methods like 1. Percentage method or proportionate method 2. Total outlay method or total revenue method 3. Geometric method or point method 4. Arc elasticity of demand

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

Income Groups Elements of time Pattern of income distribution

Positive Income elasticity of demand Negative Income elasticity of demand Zero Income elasticity of demand

D

P A Income D

B S Quantity Demanded

Income Elasticity Equal to Unity or One Income Elasticity Greater Than Unity Or One Income Elasticity Less Than Unity or One

Price P

Total Revenue

B S

Y D

Income

O

D Quantity Demanded

Proportionate change in Demand Income Elasticity Of Demand = Proportionate change in Income

y Y

Here , q = Change in the quantity demanded. Q = Original quantity demanded. y = Change in income. Y = Original income. For e.g. ,when Income of the consumer = 2,500/- , he purchases 20 units of X, when income = 3,000/- he purchases 25 units of X

Thus Income Elasticity of Demand q y + = Y

Q

= (5/20) + (500/2500) = 1.5 therefore here the IED is 1.5 which is more than one.

Income Itself Only. Price Of the Commodity

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

The selection between two product or thing is called substitution So Elasticity of Substitution measures the rate at which the particular product is substituted . Thus EOS is the degree to which one product could be substituted in context of price and proportion

Elasticity Of Substitution

Elasticity of Substitution = Proportionate change in the quantity ratios of goods x & y DIVIDED BY Proportionate change in the price ratios of goods x & y.

Zero Elasticity of Substitution. Infinite Elasticity Of Substitution Elasticity of Substitution greater than unityor1 Elasticity of Substitution is equal to one Elasticity of Substitution is less than one

Proportion of income spent on particular good say X. Income elasticity of demand. Elasticity of substitution. Proportion of income spent on product other than X.

Cross elasticity of demand express a relationship between the change in the demand for a given product in response to a change in the price of some other product E.g. if the X tea demand reduces tremendously than it effect could be seen in demand of sugar and milk.

Cross Elasticity of Demand Equal to Unity or One Cross Elasticity of Demand Greater than Unity or one Cross Elasticity of demand less than unity or one

Proportionate change in Demand for product X

Cross Elasticity of Demand = Proportionate change in Price of product Y p y

i.e.

Py

D

Price of Y

D O X

Demand for Y

D

Price of Y

D O Demand for Y X

D Price of Y O

Demand for Y

The concept is of very great importance in changing the price of the products having substitutes and complementary goods . In demand forecasting Helps in measuring interdependence of price of commodity . Multiproduct firms use these concept to measure the effect of change in price of one product on the demand of their other product

******THE END******

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