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ELASTICITY OF DEMAND�MEANING � DEGREES OF PRICE ELASTICITY�METHOD OF PRICE ELASTICITY

Navodaya Vidyalaya Samiit, Chandigarh

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MEANING OF ELASTICITY OF DEMAND

  • ELASTICITY OF DEMAND MEASURES THE CHANGES IN DEMAND OF A COMMODITY IN RESPONSE TO A CHANGE IN THE PRICE OF THE COMMODITY ,OR CHANGE IN THE INCOME OF THE CONSUMER OR CHANGE IN THE PRICE OF RELATED GOODS.
  • DOOLEY,THE ELASTICITY OF DEMAND MEASURES THE RESPOSNIVENESS OF THE QUANITY DEMANDED OF A GOOD TO CHANGE IN PRICE,PRICE OF OTHER GOODS AND CHANGES IN CONSUMER’S INCOME.
  • DR. MARSHALL,” ELASTICITY OF DEMAND MAY BE DEFINED AS THE PERCENTAGE CHANGE IN THE QUANTITY DEMANDED DIVIDED BY THE PERCENTAGE CHANGE IN THE PRICE.

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PRICE ELASITICTY OF DEMAND

  • PRICE ELASTICITY OF DEMAND:PRICE ELASTICITY OF DEMAND IS THE RATIO OF PERCENTAGE CHANGE IN THE QUANITY DEMANDED OF A COMMODITY TO PERCENTAGE CHANGE IN ITS PRICE.
  • E=(-) (PERCENTAGE CHANGE IN QUANTITY DEMANDED)(PERCENTAGE CHANGE IN PRICE)

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  • EY = PROPORTIONATE CHANGE IN QUANTITY DEMANDED/PROPORTIONATE CHANGE IN PRICE

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Navodaya Vidyalaya Samiit, Chandigarh

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PRICE ELASTICITY OF DEMAND

  • PRICE ELASTICITY OF DEMAND IS THE RATIO OF THE PERCENTAGE CHANGE IN THE QUANTITY DEMANDED OF A COMMODITY TO PERCENTAGE CHANGE IN ITS PRICE
  • PRICE ELASTICITY OF DEMAND DENOTES THE RATIO AT WHICH THE DEMAND CONTRACTS WITH RISE IN PRICE AND EXTENDS WITH FALL IN PRICE
  • DR. MARSHALL,” ELASTICITY OF DEMAND MAY BE DEFINED AS THE PRICE CHANGE IN THE QUANTITY DEMANDED DIVIDED BY THE PERCENTAGE CHANGE IN THE PRICE

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Navodaya Vidyalaya Samiit, Chandigarh

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PRICE ELASTICITY OF DEMAND

  • THERE IS INVERSE RELATIONSHIP BETWEEN PRICE AND QUANITY DEMANDED OF A GOOD.
  • PRICE ELASTICITY OF DEMAND IS EXPRESSED BY MINUS (-SIGN)
  • E= (-) PERCENTAGE CHANGE IN QUANITY DEMANDED/PERCENTAGE CHANGE IN PRICE
  • SUPPOSE THERE IS FALL IN PRICE BY 5% IS FOLLOWED BY EXTENSION IN DEMAND BY 15%. . FALL IN DEMAND IS INDICATED BY MINUS SIGN. ON MULTIPLICATION THESE MINUS SIGN TURN TO PLUS
  • E= -(15%)/-5%=3

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Navodaya Vidyalaya Samiit, Chandigarh

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DEGREES OF PRICE ELASTICITY OF DEMAND

  • PRICE ELASTICITY OF DEMAND OF ALL GOODS OR OF ONE GOOD AT DIFFERENT PRICES IS NOT ALWAYS MAY BE MORE OR IT MAY BE LESS
  • ACCRDING TO MARSHALL,” THE ELASTICTY OF ( OR RESPONSIVENESS OF DEMAND IS GREAT OR SMALL ACCORDING TO THE AMOUNT DEMANDED INCREASES MUCH OR LITTLE FOR GIVEN FALL IN PRICE AND DIMINISHES MUCH OR LITTLE FOR A GIVEN RISE IN PRICE.
  • PERFECTLY ELASTIC
  • PERFECTLY INELASTIC
  • UNIT ELASTIC
  • MORE THAN UNIT ELASTIC
  • LESS THAN UNIT ELASTIC

Navodaya Vidyalaya Samiit, Chandigarh

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PERFECTLY ELASTIC DEMAND

  • A PERFECTLY ELASTIC DEMAND IS ONE IN WHICH LITTLE CHANGE IN PRICE WILL CAUSE AN INFINITE CHANGE IN DEMAND. IN THIS CASE,A VERY LITTLE RISE IN PRICE CAUSES THE DEMAND FOR FALL TO ZERO AND A VERY LITTLE FALL IN PRICES CAUSES THE DEMAND TO EXTEND TO INFINITY.

PRICE

DEMAND

E=∞

o

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PERFECTLY INELASTIC DEMAND

  • A PERFECTLY INELASTIC IS ONE IN WHICH A CHANGE IN PRICE PRODUCES NO CHANGE IN THE QUANTITY DEMANDED

PRICE

QUANTITY

P

P1

E=0

o

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UNIT ELASTIC DEMAND

  • UNITARY ELASTIC DEMAND:- UNITARY ELASTICITY OF DEMAND IS ONE IN WHICH A PERCENTAGE CHANGE IN PRICE PRODUCE EQUAL PERCENTAGE CHANGES IN DEMAND
  • SHAPE IS RECTANGULAR
  • HYPERBOLA

Price

QUANTITY

E=1

o

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GREATER THAN UNITARY ELASTIC OR ELASTIC DEMAND

  • GREATER THAN UNITARY ELASTIC DEMAND IS ONE IN WHICH A GIVEN PERCENTAGE CHANGE IN PRICE PRODUCES RELATIVELY MORE PERCENTAGE CHANGE IN DEMAND. IF 5 % FALL IN PRICE CAUSE 20% EXTENSION IN DEMAND.
  • (-20%)/5%=4

P

QUANTITY

E >1

P1

Q1

Q

o

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LESS THAN UNITARY ELASTIC

  • LESS THAN UNITARY ELASTIC DEMAND IS ONE IN WHICH A GIVEN PERCENTAGE CHANGE IN PRICE PRODUCES RELATIVELY LESS PERCENTAGE CHANGE IN DEMAND.

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PRICE

QUANTITY

E <1

o

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DEGREES OF ELASTICITY

VALUE OF ELASTICITY

DEGREE OF ELASTICITY

ED =0

ED <1

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ED =1

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ED >1

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ED =∞

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PERFECTLY INELASTIC

LESS THAN UNITARY ELASTIC DEMAND

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UNITARY ELASTIC

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GREATER THAN UNITARY ELASTIC

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PERFECTLY ELASTIC DEMAND

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PRICE ELASTICITY

  • DENOTES RATIO AT WHICH THE DEMAND CONTRACTS WITH A RISE IN PRICE AND EXTENDS WITH A FALL IN PRICE. THERE IS AN INVERSE RELATIONSHIP BETWEEN PRICE AND THE QUANITY DEMANDED OF A GOOD
  • PRICE ELASTICITY IS EXPRESSED AS MINUS SIGN
  • E=(-) PERCENTAGE CHANGE IN QUANITY DEMANDED/PERCENTAGE CHANGE IN PRICE

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METHODS OF MEASUREMENT OF PRICE ELASTICITY OF DEMAND

  1. TOTAL EXPENDITURE METHOD
  2. PROPORTIONATE METHOD
  3. POINT ELASTICITY METHOD
  4. ARC ELASTICITY METHOD
  5. REVENUE METHOD

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PROPORTIONATE METHOD/PERCENTAGE �METHOD/OR FLUX METHOD

  • IT WAS GIVEN BY DR. FLUX. ALSO KNOWN AS FLUX’S METHOD. ALSO KNOWN AS MATHEMATICS METHOD.
  • PE = (-) (% CHANGE IN QUANTITY DEMANDED)/% CHANGE IN PRICE OR
  • PE =(-)( ΔQ/ΔP) X P/Q
  • PROPORTIONATE METHOD IS USED WHEN CHANGE IN PRICES AND CONSEQUENT CHANGES IN DEMAND ARE VERY SMALL

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EXAMPLE

  • PRICE OF ICE CREAM = RS 2
  • DEMAND IS FOUR
  • WHEN PRICE OF ICE CREAM RISE TO 4 THEN DEMAND FALLS TO 1
  • P=2, Q=4 P1=4 Q1 = 1
  • ∆P= P1-P=4-2=-2
  • ∆Q= Q1-Q=1-4=-3
  • ED= -(P/Q X∆Q/∆P)
  • = -(2/4) X-3/2)=3/4 WHICH IS LESS THAN ONE 

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EXAMPLE

  • PRICE OF ICE CREAM = RS 4
  • DEMAND IS ONE UNIT
  • WHEN PRICE OF ICE CREAM FALLS TO 2 DEMAND EXTENDS TO 4
  • P=4
  • Q=1
  • P1=2
  • Q1 = 4
  • ∆P= P1-P=2-4=-2
  • ∆Q= Q1-Q=4-1=3
  • ED= -(P/Q X∆Q/∆P)
  • = -(4/1X3/-2) =6 WHEN E >1
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  • FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

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Nature of a Commodity

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  • Necessities---Inelastic
  • Luxuries----Elastic

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Availability of Substitutes

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  • Those goods whose substitutes are available have more elastic.

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  • Those goods whose substitutes are not available have less elastic or inelastic demand curve.

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Multiple Uses

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  • Those things which have many or multiple uses, have more elastic demand curve.

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Postponement of use

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  • The consumption of those goods which can be postponed ,have more elastic demand.
  • The goods whose consumption cannot be postponed ,have inelastic demand.

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Habit of the consumer

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  • When a consumer is in habit of consuming a particular product then its demand will be inelastic.

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Income Level of the Consumers

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  • If the Level of Income is high then the demand for the product is less elastic.
  • If the level of income is Less then the demand for the product is high elastic.

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Proportion of income spent on a product

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  • If the small proportion of income is spent then the demand will be less elastic or inelastic.
  • If the large proportion of income is spent then the demand will be more elastic.

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Time Period

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  • If the time period is short then the demand will be inelastic.
  • If the time period is long then the demand will be more elastic.

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Price Level

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  • When the price level is high,the demand will be more elastic.
  • When the price level is less,the demand of the product will be less elastic.

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  • Thank you

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