2. • Degree of responsiveness of demand
to the change in its determinants
• Crucial role in business-decisions
3. Few more……
1. Price elasticity
2. Cross Elasticity
3. Income Elasticity
4. Advertisement Elasticity
5. Elasticity of price expectations
4. Price Elasticity??? What is it?
• Definition: Responsiveness or sensitiveness of
demand for a commodity to the changes in its
price
• Percentage change in demand /
Percentage change in price
5. How to do?
∆Q ∆P ∆Q P
Ep = ------- ÷ ------- = ----- x -----
Q P ∆P Q
Where Q = Original quantity demand
P = Original Price
∆ Q = New Quantity demanded – Original quantity demanded
∆ P = New Price – Original Price
6. Problem:
The price of product Bread is Rs. 20/-, quantity demanded is
1000 packets and the price increased from Rs. 20/- to Rs.
30/-, the quantity demanded is decreased from 1000 packets
to 850 packets.
∆Q P
850-1000 20
Ep = ------- x ----- = ----------- x -------
1000
∆P Q 30-20
Ep = -0.3
Ep < 0 - Relatively inelastic in nature as there is slight
variation in demand even though there is rise in price
7. Determinants of Price Elasticity
• Availability of substitutes
• Nature of commodity
• Weight age in the total consumption
• Time faction in adjustment of
consumption patterns
• Range of commodity use
• Proportion of market supplied
8. Types of Price Elasticity
There are 5 types of Price Elasticity
• Perfectly Elasticity of Demand
• Perfectly Inelasticity of Demand
• Unitary Elasticity of Demand
• Relatively Elasticity of Demand
• Relatively Inelasticity of Demand
13. Unitary Elasticity of Demand
Relatively Inelasticity of Demand
• E=1
•E < 1
•Eg: Inferior goods
14. Applications
• Relationship between price and total
revenue
• Determining what goods to tax
• Analyzing time tags in productive
• Behaviour of a firm
