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VIT-BS
      BATCH 1


ELASTICITY OF DEMAND

                       BY:
            SANGAM KUMAR
            B.AMRICK SINGH
             PUNEET KUMAR
The Concept of Elasticity
   Elasticity is a measure of the
    responsiveness of one variable to another.
   The greater the elasticity, the greater the
    responsiveness.
LAW OF DEMAND
   Law of demand states that if price of commodity
    increases quantity demanded will falls and vice
    versa.
   Law of demand indicates only direction of
    change in quantity demanded in response to
    change in price but ELASTICITY OF DEMAND
    states with how much or to what extent the
    quantity demanded will change in response to
    change in price
ELASTICITY OF DEMAND:
           MEANING
 - Percentage change in quantity demanded
    divided by percentage change in price.
                -BY MARSHALL

  -Measures the responsiveness of quantity
  demanded of a good to the change in its
                    price.
                –BY BOULDING
Ed = % change in quantity demanded divided
             by %change in price
Price Elasticity of Demand
   A measure of how much the quantity demanded
    of good responds to a change in the price of that
    good
   Computed as the percentage change in quantity
    demanded divided by the percentage change in
    price.
   We know if we raise a price, the Qd will decline,
    but we don’t know how much.
   Elasticity answers the “how much” question.
   In Business, we want to know the relationship
    between Qd and Price
   Ep = % Change in Quantity Demanded
               % Change in Price
Calculating Percentage Change
   Percentage Change measures how much a
    value has changed from one time period to
    another
   There are two methods of calculating the
    percentage change
    •   Simple Method
    •   Midpoint Method
Calculating Percentage Change
   For Example, if a firm’s sales for the current month
    amounted to $100 million and the previous month,
    the same firm’s sales were $90 million. What was
    the percentage change?

 Simple Method
Percentage Change = Current Value-Previous Value
                       Previous Value
 or,      = $100m - $90 m = $10m = 11.1%
                $90m        $90m
 Very Common Usage, especially in the business
  world
Calculating Percentage Change
   Midpoint Method
    Percentage Change = Current Value – Previous Value
                           (Current Value + Previous Value)/ 2

   Or, = $100m -$90m     = $10m = 10.5%
         ($100m + $90m)/2   $95m

   The midpoint method is the better method
    because it gives similar results whether we are
    measuring forward or backward
Determinants Of Elasticity of
                Demand
   From Formula Ep = % Change in Qd
                     % Change in Price

   If Price Elasticity of Demand > 1, demand is
    elastic
   If Price Elasticity of Demand = 1, demand is unit
    elastic
   If Price Elasticity of Demand < 1, demand is
    inelastic
Demand Elasticity
   Elastic Demand – When % Change in Quantity
    Demanded > % Change in Price
   Unit Elastic Demand – When % Change in
    Quantity Demanded = % Change in Price
   Inelastic Demand – When % Change in Quantity
    Demanded < % Change in Price
   Perfectly Elastic Demand – When Quantity
    Demanded Changes by a very large percentage
    in response to an almost zero Change in Price
   Perfectly Inelastic Demand – When the Quantity
    Demanded remains constant as Price changes
Perfectly Elastic Demand Curve

                 14

                 12

                 10

                  8                                 D

                  6

                  4

                  2


                      5   10   15    20 25     30
                                    Quantity




The elasticity of a perfectly elastic demand curve is infinity
Perfectly Inelastic Demand Curve

                             D



             30

             25

             20

             15

             10

              5


                   5   10   15   20    25
                            Quantity




The elasticity of a perfectly inelastic demand curve is 0
Relativity Elasticity of Demand Curves




                                 D1


                            D2

                 Quantity
Elasticity of Straight Line Demand Curve
     11
                  Very elastic
     10
                  e = 6.33

      9

      8
                                     Slightly elastic
      7
                                           Unit elastic
      6                                    e = 1.0
                                                 Slightly inelastic
      5

      4

      3                                                      e = .29
                                                                       Very
                                                                       inelastic
      2

      1
                                                                              D
      0
          0   1    2     3       4    5      6      7    8      9        10    11
                                      Quantity
Significance of Price Elasticity of
                Demand
   Profit maximization requires that business set a
    price that will maximize the firm’s profit
   Elasticity tells the firm how much control it has
    over using price to raise profit
   If Ep > 1, then the % Change in Qd > %
    Change is Price and demand is said to be elastic
     • An increase in price will reduce total revenue

     • A decrease in price will increase total revenue
Significance of Price Elasticity of
                Demand
   If Ep < 1, then the % change in Qd < % change
    in price, and demand is said to be inelastic
     • An increase in price will increase total revenue
     • A decrease in price will decrease total revenue


   If Ep = 1, then the % change in Qd = % change
    in Price, and demand is said to be unit elastic
     • An increase in price will have no impact on
       total revenue
     • A decrease in price will have no impact on
       total revenue
Price Elasticity of Demand Influences
   Substitute Product Availability (key determinant)
     -- Luxury or Necessity (Ep for luxury items is >)
    -- How narrowly it is defined (coffee is inelastic
    but tea may have more substitutes and therefore
    is more elastic)
    -- Time elapsed since price change (>time,
    >elasticity; more time to find substitutes or
    manage consumption)
   Income Effects
    -- The greater the proportion of income spent
        on the good, greater a price change impacts
         Quantity Demanded
Advertising
   Purpose – Product Differentiation (Branding)
     To make the demand for a product greater
     To make the demand for a product more
      inelastic




                          D    D
Elasticity Thoughts
   Demand Curve Slope and Elasticity (Steeper the slope,
    lower the elasticity)
   A Units-Free Measure (% Change – Absolute Value)

   Elasticity Along a Linear Demand Curve
    -- Slope is constant but elasticity varies

   Elasticity and Total Revenue
    -- Price and Total Revenue change in opposite
    directions, demand is elastic
    -- Price Change leaves Total Revenue unchanged,
    demand is unit elastic
    -- Price and Total Revenue change in same direction,
    demand is inelastic
Price Elasticity of Supply


   A measure of the extent to which the
    quantity supplied of a good changes when
    the price of the good changes, and all
    other influences on seller’s plans remain
    the same (cateris paribus)
Price Elasticity of Supply

   Perfectly Elastic Supply – When the quantity supplied
    changes by a very large percentage in response to an
    almost zero increase in price
   Elastic Supply – When the % change in the quantity
    supplied > the % change in the price
   Unit Elastic Supply – When the % change in the quantity
    supplied = the % change in price
   Inelastic Supply – When the % change in the quantity
    demanded is < the % change in price
   Perfectly Inelastic Supply – When the quantity supplied
    remains the same as the price changes
Influences on Price Elasticity of Supply

   Production Possibilities
    -- Opportunity Costs
        constant or gently rising opportunity costs
        = elastic price elasticity
    -- Fixed Production = inelastic price elasticity
    -- Time Elapse – longer time, > price elasticity
Influences of Price Elasticity of Supply

   Storage Possibilities

    The better the storability, the more elastic is the
    price elasticity of supply
Computing Price Elasticity of Supply


   Percentage change in quantity supplied
          Percentage change in price

•   If Price Elasticity of Supply > 1, Supply is elastic
•   If Price Elasticity of Supply = 1, Supply is unit elastic
•   If price elasticity of supply< 1, Supply is inelastic
Cross Elasticity of Demand

   A measure of the extent to which the demand
    for a good changes when the price of a
    substitute or complement changes, ceteris
    paribus
    % Change in Quantity Demanded
    % Change in Price of one of its Substitutes or complements
Income Elasticity of Demand

   A measure of the extent to which the
    demand for a good changes when income
    changes, ceteris paribus

   % Change in Quantity Demanded
          % Change in Income
Income Elasticity of Demand

   If income elasticity of demand > 1 the demand
    for the good is income elastic
   If income elasticity of demand is between
    0 and 1, the demand is income inelastic
   * If income elasticity of demand < 0 the
    demand is negative income elastic

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Elasticity Of Demand Sangam Kumar

  • 1. VIT-BS BATCH 1 ELASTICITY OF DEMAND BY: SANGAM KUMAR B.AMRICK SINGH PUNEET KUMAR
  • 2. The Concept of Elasticity  Elasticity is a measure of the responsiveness of one variable to another.  The greater the elasticity, the greater the responsiveness.
  • 3. LAW OF DEMAND  Law of demand states that if price of commodity increases quantity demanded will falls and vice versa.  Law of demand indicates only direction of change in quantity demanded in response to change in price but ELASTICITY OF DEMAND states with how much or to what extent the quantity demanded will change in response to change in price
  • 4. ELASTICITY OF DEMAND: MEANING - Percentage change in quantity demanded divided by percentage change in price. -BY MARSHALL -Measures the responsiveness of quantity demanded of a good to the change in its price. –BY BOULDING Ed = % change in quantity demanded divided by %change in price
  • 5. Price Elasticity of Demand  A measure of how much the quantity demanded of good responds to a change in the price of that good  Computed as the percentage change in quantity demanded divided by the percentage change in price.  We know if we raise a price, the Qd will decline, but we don’t know how much.  Elasticity answers the “how much” question.  In Business, we want to know the relationship between Qd and Price  Ep = % Change in Quantity Demanded % Change in Price
  • 6. Calculating Percentage Change  Percentage Change measures how much a value has changed from one time period to another  There are two methods of calculating the percentage change • Simple Method • Midpoint Method
  • 7. Calculating Percentage Change  For Example, if a firm’s sales for the current month amounted to $100 million and the previous month, the same firm’s sales were $90 million. What was the percentage change?  Simple Method Percentage Change = Current Value-Previous Value Previous Value  or, = $100m - $90 m = $10m = 11.1% $90m $90m  Very Common Usage, especially in the business world
  • 8. Calculating Percentage Change  Midpoint Method Percentage Change = Current Value – Previous Value (Current Value + Previous Value)/ 2  Or, = $100m -$90m = $10m = 10.5% ($100m + $90m)/2 $95m  The midpoint method is the better method because it gives similar results whether we are measuring forward or backward
  • 9. Determinants Of Elasticity of Demand  From Formula Ep = % Change in Qd % Change in Price  If Price Elasticity of Demand > 1, demand is elastic  If Price Elasticity of Demand = 1, demand is unit elastic  If Price Elasticity of Demand < 1, demand is inelastic
  • 10. Demand Elasticity  Elastic Demand – When % Change in Quantity Demanded > % Change in Price  Unit Elastic Demand – When % Change in Quantity Demanded = % Change in Price  Inelastic Demand – When % Change in Quantity Demanded < % Change in Price  Perfectly Elastic Demand – When Quantity Demanded Changes by a very large percentage in response to an almost zero Change in Price  Perfectly Inelastic Demand – When the Quantity Demanded remains constant as Price changes
  • 11. Perfectly Elastic Demand Curve 14 12 10 8 D 6 4 2 5 10 15 20 25 30 Quantity The elasticity of a perfectly elastic demand curve is infinity
  • 12. Perfectly Inelastic Demand Curve D 30 25 20 15 10 5 5 10 15 20 25 Quantity The elasticity of a perfectly inelastic demand curve is 0
  • 13. Relativity Elasticity of Demand Curves D1 D2 Quantity
  • 14. Elasticity of Straight Line Demand Curve 11 Very elastic 10 e = 6.33 9 8 Slightly elastic 7 Unit elastic 6 e = 1.0 Slightly inelastic 5 4 3 e = .29 Very inelastic 2 1 D 0 0 1 2 3 4 5 6 7 8 9 10 11 Quantity
  • 15. Significance of Price Elasticity of Demand  Profit maximization requires that business set a price that will maximize the firm’s profit  Elasticity tells the firm how much control it has over using price to raise profit  If Ep > 1, then the % Change in Qd > % Change is Price and demand is said to be elastic • An increase in price will reduce total revenue • A decrease in price will increase total revenue
  • 16. Significance of Price Elasticity of Demand  If Ep < 1, then the % change in Qd < % change in price, and demand is said to be inelastic • An increase in price will increase total revenue • A decrease in price will decrease total revenue  If Ep = 1, then the % change in Qd = % change in Price, and demand is said to be unit elastic • An increase in price will have no impact on total revenue • A decrease in price will have no impact on total revenue
  • 17. Price Elasticity of Demand Influences  Substitute Product Availability (key determinant) -- Luxury or Necessity (Ep for luxury items is >) -- How narrowly it is defined (coffee is inelastic but tea may have more substitutes and therefore is more elastic) -- Time elapsed since price change (>time, >elasticity; more time to find substitutes or manage consumption)  Income Effects -- The greater the proportion of income spent on the good, greater a price change impacts Quantity Demanded
  • 18. Advertising  Purpose – Product Differentiation (Branding)  To make the demand for a product greater  To make the demand for a product more inelastic D D
  • 19. Elasticity Thoughts  Demand Curve Slope and Elasticity (Steeper the slope, lower the elasticity)  A Units-Free Measure (% Change – Absolute Value)  Elasticity Along a Linear Demand Curve -- Slope is constant but elasticity varies  Elasticity and Total Revenue -- Price and Total Revenue change in opposite directions, demand is elastic -- Price Change leaves Total Revenue unchanged, demand is unit elastic -- Price and Total Revenue change in same direction, demand is inelastic
  • 20. Price Elasticity of Supply  A measure of the extent to which the quantity supplied of a good changes when the price of the good changes, and all other influences on seller’s plans remain the same (cateris paribus)
  • 21. Price Elasticity of Supply  Perfectly Elastic Supply – When the quantity supplied changes by a very large percentage in response to an almost zero increase in price  Elastic Supply – When the % change in the quantity supplied > the % change in the price  Unit Elastic Supply – When the % change in the quantity supplied = the % change in price  Inelastic Supply – When the % change in the quantity demanded is < the % change in price  Perfectly Inelastic Supply – When the quantity supplied remains the same as the price changes
  • 22. Influences on Price Elasticity of Supply  Production Possibilities -- Opportunity Costs constant or gently rising opportunity costs = elastic price elasticity -- Fixed Production = inelastic price elasticity -- Time Elapse – longer time, > price elasticity
  • 23. Influences of Price Elasticity of Supply  Storage Possibilities The better the storability, the more elastic is the price elasticity of supply
  • 24. Computing Price Elasticity of Supply  Percentage change in quantity supplied Percentage change in price • If Price Elasticity of Supply > 1, Supply is elastic • If Price Elasticity of Supply = 1, Supply is unit elastic • If price elasticity of supply< 1, Supply is inelastic
  • 25. Cross Elasticity of Demand  A measure of the extent to which the demand for a good changes when the price of a substitute or complement changes, ceteris paribus % Change in Quantity Demanded % Change in Price of one of its Substitutes or complements
  • 26. Income Elasticity of Demand  A measure of the extent to which the demand for a good changes when income changes, ceteris paribus  % Change in Quantity Demanded % Change in Income
  • 27. Income Elasticity of Demand  If income elasticity of demand > 1 the demand for the good is income elastic  If income elasticity of demand is between 0 and 1, the demand is income inelastic  * If income elasticity of demand < 0 the demand is negative income elastic