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ELASTICITY OF DEMAND. INTRODUCED BY ALFRED MARSHALL ELASTICITY OR RESPONSIVENESS OF DEMAND IN A MARKET IS GREAT OR SMALL ACCORDING AS THE AMOUNT DEMANDED INCREASES MUCH OR LITTLE FOR A GIVEN FALL IN PRICE AND DIMINISHES MUCH OR LITTLE FOR A GIVEN RISE IN PRICE.

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Elasticity of demand
ELASTICITY OF DEMAND

  • INTRODUCED BY ALFRED MARSHALL

  • ELASTICITY OR RESPONSIVENESS OF DEMAND IN A MARKET IS GREAT OR SMALL ACCORDING AS THE AMOUNT DEMANDED INCREASES MUCH OR LITTLE FOR A GIVEN FALL IN PRICE AND DIMINISHES MUCH OR LITTLE FOR A GIVEN RISE IN PRICE.


Types of elasticity of demand
TYPES OF ELASTICITY OF DEMAND

  • PRICE ELASTICITY OF DEMAND

  • INCOME ELASTICITY OF DEMAND

  • CROSS-ELASTICITY OF DEMAND


Price elasticity of demand
PRICE ELASTICITY OF DEMAND

  • DEGREE OF RESPONSIVENESS OF QUANTITY DEMANDED TO A CHANGE IN PRICE IS CALLED PRICE ELASTICITY OF DEMAND.

PERCENTAGE CHANGE IN QUANTITY DEMANDED

PERCENTAGE CHANGE IN PRICE

=

SYMBOLICALLY

CHANGE

PRICE

QUANTITY

Q/Q

P/P

eP

P

Q

=


Measurement of price elasticity of demand
MEASUREMENT OF PRICE ELASTICITY OF DEMAND

  • PERCENTAGE METHOD

  • POINT METHOD OR SLOPE METHOD

  • TOTAL OUTLAY METHOD

  • ARC METHOD


Percentage method
PERCENTAGE METHOD

  • RELATIVE CHANGE IN DEMAND DIVIDED BY RELATIVE CHANGE IN PRICE OR PERCENTAGE CHANGE IN DEMAND DIVIDED BY PERCENTAGE CHANGE IN PRICE.

%

%

Q

P

eP

=

FOR EXAMPLE IF PRICE OF RICE INCREASES BY 10% AND DEMAND FOR RICE FALLS BY 10%

eP

=

15/10

=

0.5

THIS MEANS THAT DEMAND FOR RICE IS INELASTIC


Measures of elasticity
MEASURES OF ELASTICITY

  • REALTIVELY ELASTIC IF e>1

  • REALTIVELY INELASTIC IF e<1

  • UNITARY ELASTIC DEMAND IF e=1

  • PERFECTLY INELASTIC DEMAND IF e=0

  • PERFECTLY ELASTIC DEMAND IF e=INFINITY


RELATIVELY ELASTIC

P

P1

D

PRICE

O

Q1

Q

QUANTITY DEMANDED


RELATIVELY INELASTIC

D

P

P1

PRICE

D

O

Q

Q1

QUANTITY DEMANDED


UNITARY ELASTIC DEMAND

P

PRICE

D

P1

O

Q

Q1

QUANTITY DEMANDED


PERFECTLY INELASTIC DEMAND

D

P

P1

PRICE

O

Q

QUANTITY DEMANDED


PERFECTLY ELASTIC DEMAND

D

P

PRICE

O

Q1

Q

QUANTITY DEMANDED


Point method
POINT METHOD

  • WE CAN CALCULATE PRICE ELASTICITY OF DEMAND AT A POINT ON THE LINEAR DEMAND CURVE.

LOWER SEGMENT OF DEMAND CURVE

UPPER SEGMENT OF DEMAND CURVE

eP

=


POINT METHOD

A

AE – UPPER SEGMENT

EB – LOWER SEGMENT

C

.

E

.

D

PRICE

B

O

QUANTITY DEMANDED


For example in fig the length of the demand curve ab is 4cm
For example in fig. the length of the demand curve AB is 4cm.

  • Ep at point E ,ep = EB/EA = 2/2 = 1

  • Ep at point D = (middle point of EB portion of demand curve) DB/DA = 1/3 = 0.3 ep<1

  • Ep at point c(middle point of EA portion of demand curve) = CB/CA = 3/1 = 3 ep >1

  • Ep at point B = 0/AB = 0/4 = 0

  • Ep at point A = AB/0 = 4/0 = infinity


TOTAL OUTLAY METHOD 4cm.We can measure elasticity through a change in expenditure on commodities due to a change in price

  • Demand is elastic if total outlay or expenditure increases for a fall in price(ep>1)

  • Demand is inelastic if total outlay or expenditure falls for a fall in price(ep<1)

  • Demand is unitary if total expenditure does not change for fall in price(ep=1)



Arc method
ARC METHOD 4cm.

  • SEGMENT OF DEMAND CURVE BETWEEN TWO POINTS IS CALLED AN ARC.

Q = change in qty demanded

P = change in price of the commodity

P1 = original price

P2 = New price

Q1 = original qty

Q2 = new qty

Ep = q1 – q2 / P1-P2

Q1+q2 P1+P2

= q

Q1+q2 /

P

P1+P2


ARC ELASTICITY 4cm.

P

A

P1

PRICE

B

P1

Q

O

Q1

Q2

QUANTITY DEMANDED


Income elasticity of demand
INCOME ELASTICITY OF DEMAND 4cm.

  • DEGREE OF RESPONSIVENESS OF DEMAND TO CHANGE IN INCOME.

Ey = Percentage change in qty demanded

Percentage change in income

Q- quantity demanded

Y - income

Ey = q/q x y/ y


Cross elasticity of demand
Cross elasticity of demand 4cm.

  • Responsiveness of demand to change in price of realted goods.

Ec = Percentage change in qty demanded of commodity X

Percentage change in price of commodity Y

Ec= qx/ py x py/qx


Thank you 4cm.


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