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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) Perfectly elastic demand
2) Relatively elastic demand
3) Elasticity of demand equal to utility
4) Relatively inelastic demand
5) Perfectly inelastic demand
Let Us See Some Views On Them
P
R
I
C
E
y
0 x
Perfectly elastic
demand curve
D D
When the
demand for a
product
changes –
increases or
decreases
even when
there is no
change in
price, it is
known as
Relatively elastic
demand curve
P
R
I
C
E
demand0 x
y
D
D
When the
proportionate
change in
demand is
more than
the
proportionate
changes in
price, it is
known as
relatively
elastic
Elasticity of
demand equal
to utility curve
y
x0 demand
P
R
I
C
E
D
D
When the
proportionate
change in
demand is
equal to
proportionate
changes in
price, it is
known as
unitary elastic
demand
Relatively inelastic
demand curve
XO
Y
demand
D
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
demand
D
D
Perfectly inelastic
demand curve
0
Y
X
P
R
I
C
E
When a change
in price,
howsover large,
change no
changes in
quality demand,
it is known as
perfectly
inelastic demand
D
D1
D2
D3
D4
D5
Y
X0
DEMAND
P
R
I
C
E
WHERE
D1) Perfectly elastic
demand
D2)Relatively elastic
demand
D3)Elasticity of
demand equal to
utility
D4)Relatively inelastic
demand
D5)Perfectly inelastic
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
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
Elasticity of demand
 The concept is helpful in taking Business
Decisions
 Importance of the concept in formatting Tax
Policy of the government
 For determining the rewards of the Factors of
Production
 To determine the Terms of Trades Between
the Two Countries
 Determination of Rates of Foreign Exchange
 For Nationalization of Certain Industries
 In economic Analysis ,the concept of price
elasticity of demand helps in explaining the
irony of poverty in the midst of plenty.
Elasticity of demand
 Positive Income elasticity of demand
 Negative Income elasticity of demand
 Zero Income elasticity of demand
Y
P
A
D
D
B S
O XQuantity
Income
 Income Elasticity Equal to Unity or
One
 Income Elasticity Greater Than
Unity Or One
 Income Elasticity Less Than Unity
or One
Price
P
B
A
S
Total Revenue
Quantity Demanded (000s)
Y
XO
D
D
Quantity Demanded
Income
O
Y
Incom
e
A
B
C
D
E
F
X
Quantity
Income Elasticity Of
Demand =
Proportionate change in
Demand
Proportionate change in
Incomei.e.
Income Elasticity Of
Demand =
∆
q
Q 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
=
= (5/20) + (500/2500)
= 1.5
therefore here the IED is 1.5 which is
more than one.
∆
q
Q Y
∆
y+
 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
= 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
ChangeinQUANTITIYratioofgood
x&y
Change in PRICE ratio of good x & y
O
X
Y
E4
E1
E2
E3
E5
 As Price is depended on income and
substitution effect similarly Price
Elasticity is depended on Income
Elasticity an Substitution Elasticity .
 These relationship can be represented
by
 Ep = Kx E1 + ( 1 – Kx ) es
 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
Proportionate change in Price
of product Yi.e.
∆q
xQx Py
∆p
y+
Cross Elasticity of
Demand =
Cross Elasticity of
Demand =
PriceofY
Demand for
O
Y
X
D
D
PriceofY
O
Y
X
D
D
Demand for
PriceofY
O
Y
X
D
Demand for
 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
 Advertising elasticity of demand is the
measure of the rate of change in
demand due to change in advertising
expenditure
 The amount of change in demand of
goods due to advertisement is known
as Advertisement Elasticity of Demand
.
Proportionate change in
Demand for product
Proportionate change in
Advertising expenditurei.e.
∆q
xQ A
∆a
÷
Advertising Elasticity of
Demand =
Advertising Elasticity of
Demand =
O X
Y
S
S
Sales
Advertising
Expenditure
 The stage of the Product’s Market
Development .
 Reaction of market Rival Firms.
 Cumulative Effect of Past
Advertisement.
 Influence of Other Factors.
 It is useful in competitive industries.
 Though advertisement shifts the
demand curve to right path but it also
increases the fixed cost of the firm.
 The impact of advertising on sales is
different under different conditions,
even if other demand determinants
are constant.
 Like wise, it is difficult to establish
any co-relationship between
advertising expenditure and volume
of sales when there counter
advertisements by rival firm in the
Elasticity of demand

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Elasticity of demand

  • 2.  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
  • 3. 1) Perfectly elastic demand 2) Relatively elastic demand 3) Elasticity of demand equal to utility 4) Relatively inelastic demand 5) Perfectly inelastic demand Let Us See Some Views On Them
  • 4. P R I C E y 0 x Perfectly elastic demand curve D D When the demand for a product changes – increases or decreases even when there is no change in price, it is known as
  • 5. Relatively elastic demand curve P R I C E demand0 x y D D When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic
  • 6. Elasticity of demand equal to utility curve y x0 demand P R I C E D D When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand
  • 7. Relatively inelastic demand curve XO Y demand D 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
  • 8. demand D D Perfectly inelastic demand curve 0 Y X P R I C E When a change in price, howsover large, change no changes in quality demand, it is known as perfectly inelastic demand
  • 9. D D1 D2 D3 D4 D5 Y X0 DEMAND P R I C E WHERE D1) Perfectly elastic demand D2)Relatively elastic demand D3)Elasticity of demand equal to utility D4)Relatively inelastic demand D5)Perfectly inelastic demand
  • 10. 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
  • 12.  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
  • 13.  Income Groups  Elements of time  Pattern of income distribution
  • 15.  The concept is helpful in taking Business Decisions  Importance of the concept in formatting Tax Policy of the government  For determining the rewards of the Factors of Production  To determine the Terms of Trades Between the Two Countries
  • 16.  Determination of Rates of Foreign Exchange  For Nationalization of Certain Industries  In economic Analysis ,the concept of price elasticity of demand helps in explaining the irony of poverty in the midst of plenty.
  • 18.  Positive Income elasticity of demand  Negative Income elasticity of demand  Zero Income elasticity of demand
  • 20.  Income Elasticity Equal to Unity or One  Income Elasticity Greater Than Unity Or One  Income Elasticity Less Than Unity or One
  • 24. Income Elasticity Of Demand = Proportionate change in Demand Proportionate change in Incomei.e. Income Elasticity Of Demand = ∆ q Q Y ∆ y+
  • 25.  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
  • 26.  Thus Income Elasticity of Demand = = (5/20) + (500/2500) = 1.5 therefore here the IED is 1.5 which is more than one. ∆ q Q Y ∆ y+
  • 27.  Income Itself Only.  Price Of the Commodity
  • 28.  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
  • 29.  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
  • 30.  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.
  • 31.  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
  • 32. ChangeinQUANTITIYratioofgood x&y Change in PRICE ratio of good x & y O X Y E4 E1 E2 E3 E5
  • 33.  As Price is depended on income and substitution effect similarly Price Elasticity is depended on Income Elasticity an Substitution Elasticity .  These relationship can be represented by  Ep = Kx E1 + ( 1 – Kx ) es
  • 34.  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.
  • 35.  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.
  • 36.  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
  • 37. Proportionate change in Demand for product X Proportionate change in Price of product Yi.e. ∆q xQx Py ∆p y+ Cross Elasticity of Demand = Cross Elasticity of Demand =
  • 41.  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
  • 42.  Advertising elasticity of demand is the measure of the rate of change in demand due to change in advertising expenditure  The amount of change in demand of goods due to advertisement is known as Advertisement Elasticity of Demand .
  • 43. Proportionate change in Demand for product Proportionate change in Advertising expenditurei.e. ∆q xQ A ∆a ÷ Advertising Elasticity of Demand = Advertising Elasticity of Demand =
  • 45.  The stage of the Product’s Market Development .  Reaction of market Rival Firms.  Cumulative Effect of Past Advertisement.  Influence of Other Factors.
  • 46.  It is useful in competitive industries.  Though advertisement shifts the demand curve to right path but it also increases the fixed cost of the firm.
  • 47.  The impact of advertising on sales is different under different conditions, even if other demand determinants are constant.  Like wise, it is difficult to establish any co-relationship between advertising expenditure and volume of sales when there counter advertisements by rival firm in the