Elasticity of demand

1. Submitted to Dr Hiramon Roy
Submitted by – Ravneet Kaur
Sap Id - 500109849
ELASTICITYOF
DEMAND

2. CONTENTSOF Presentation
1 WHAT IS DEMAND?
2 WHAT IS ELASTICITY?
3 WHAT IS ELASTICITY OF DEMAND?
4 TYPES OF ELASTICITY OF DEMAND
5 USEFULNESS OF ELASTICITY OF DEMAND FOR MANAGERS

3. The willingness and ability to buy a range of
quantities of a good at a range of prices, during a
given time period. Demand is one half of the market
exchange process; the other is supply. This demand
side of the market draws inspiration from the
unlimited wants and needs dimension of the scarcity
problem. People desire the goods and services that
satisfy our wants and needs. This is the ultimate
source of demand.
Whatisdemand

4. Elasticity is the relative response of one
variable, such as quantity, to changes in
another variable, such as price.
WhatisElasticity

5.  The elasticity of demand is an economic
term. It refers to demand sensitivity.
These economic variables include
factors such as prices and consumer
income.
 Demand elasticity is calculated as the
percent change in the quantity
demanded divided by a percent change
in another economic variable. A higher
value for the demand elasticity with
respect to an economic variable means
that consumers are more sensitive to
changes in this variable.
 The elasticity of demand = (% Change
in demanded quantity)/(% Change in
another economic variable)
Elasticityof demand

6. 02
Income
elasticityof
demand
01
Price elasticity
ofdemand
03Cross
elasticityof
demand
Typesof
elasticity
ofdemand

7. Price elasticityofdemand
 Any change in the price of a commodity, whether it’s a decrease
or increase, affects the quantity demanded for a product. For
example, when there is a rise in the prices of ceiling fans, the
quantity demanded goes down.
 This measure of responsiveness of quantity demanded when
there is a change in price is termed as the Price Elasticity of
Demand (PED).
 The mathematical formula given to calculate the Price Elasticity
of Demand is:
PED = % Change in Quantity Demanded % / Change in Price
 The result obtained from this formula determines the intensity of
the effect of price change on the quantity demanded for a
commodity.

8. TYPES OFPRICEELASTICITYOFDEMAND
 In particular, the demand curve can be divided into the
five elasticity alternatives:
 Perfectly elastic: At the point of intersection between
the demand curve and the vertical price axis,
demand is perfectly elastic.
 Relatively elastic: Over the "upper" half of the
demand curve between midpoint and the vertical
price axis, demand is relatively elastic.
 Unit elastic: At the exact midpoint that divides the
demand curve into two equal segments, demand is
unit elastic.
 Relatively elastic: Over the "lower" half of the
demand curve between midpoint and the horizontal
quantity axis, demand is relatively inelastic.
 Perfectly inelastic: At the point of intersection
between the demand curve and the horizontal
quantity axis, demand is perfectly inelastic.

9. TypesofPriceelasticityofdemand

10. Incomeelasticityofdemand
 How responsive is my demand to this change in my
income? To answer these questions, we need the income
elasticity of demand.
 Income elasticity of demand is the relative response of
demand to changes in income.
 Or stated in percentage terms: the income elasticity of
demand is the percentage change in demand resulting
from a percentage change in buyers' income.
 For a normal good, income elasticity is positive,
meaning that an increase in income leads to an
increase in demand.
 For an inferior good, income elasticity is negative,
meaning that an increase in income leads to a
decrease in demand.
 The formula given to calculate the Income Elasticity of
Demand is given as:
YED = % Change in Quantity Demanded% / Change in
Income

11. CROSS- PRICE elasticityofdemand
 How responsive is my demand to this change in my other prices? To
answer these questions, we need the cross elasticity of demand.
 Cross elasticity of demand is the relative response of the demand for one
good to changes in the price of another good.
 The cross elasticity of demand is a handy numerical measure commonly
used by economists to identify complement and substitute goods:
• For a substitute good, cross elasticity is positive, meaning that an
increase in the price of one good leads to an increase in demand
for the other good.
• For an complement good, cross elasticity is negative, meaning
that an increase in the price of one good leads to a decrease in
demand for the other good.
 The formula given to calculate the Cross Elasticity of Demand is given
as:
 XED = (% Change in Quantity Demanded for one good (X)%) /
(Change in Price of another Good (Y))
 The result obtained for a substitute good would always come out to be
positive as whenever there is a rise in the price of a good, the demand
for its substitute rises. Whereas, the result will be negative for a
complementary good.

12. USEFULNESSOF ELASTICITYOF DEMANDFOR
MANAGERS
For managers, a key point in the discussions of demand is what happens when
they raise prices for their products and services. It is important to know the extent
to which a percentage increase in unit price will affect the demand for a product.
With elastic demand, total revenue will decrease if the price is raised. With inelastic
demand, however, total revenue will increase if the price is raised.
Demand elasticity is affected by the availability of substitutes, the urgency of need,
and the importance of the item in the customer's budget. Substitutes are products
that offer the buyer a choice.
For example, many consumers see corn chips as a good or homogeneous
substitute for potato chips, or see sliced ham as a substitute for sliced turkey. The
more substitutes available, the greater will be the elasticity of demand. If
consumers see products as extremely different or heterogeneous, however, then a
particular need cannot easily be satisfied by substitutes.
In contrast to a product with many substitutes, a product with few or no
substitutes—like gasoline—will have an inelastic demand curve. Similarly, demand
for products that are urgently needed or are very important to a person's budget
will tend to be inelastic. It is important for managers to understand the price
elasticity of their products and services in order to set prices appropriately to
maximize firm profits and revenues.

13. THANKYOU!