BE. CS FINAL YEAR AND IT THIRD YEAR, ANNA UNIVERSITY, CHENNAI

1. Dr.K.Baranidharan
Present by…

2. Engineering
Economics &
Financial
Accountingment
Ee&fa
213 July 2013

3. ELASTICITY OF
DEMAND

4. ELASTICITY
•“the rate of responsiveness
in the demand of a
commodity for a given
change in price or any other
determinants of demand”

5. •The extent of change in
quantity demanded
because of a given change
in the order determining
factors, may be price or
any other factor(s).

6. Elasticity – the concept
• The responsiveness of one variable to changes
in another
• When price rises, what happens
to demand?
• Demand falls
• BUT!
• How much does demand fall?

7. Elasticity – the concept
• If price rises by 10% - what happens to
demand?
• We know demand will fall
• By more than 10%?
• By less than 10%?
• Elasticity measures the extent to which
demand will change

8. Measurement of ELASTICITY
• 1. Perfectly elasticity of demand
• 2. Perfectly inelasticity of demand
• 3. Relatively elasticity demand
• 4. Relatively inelasticity demand
• 5. Unity elasticity

9. 1. Perfectly elasticity of demand
•when any quantity can be
sold at a given price, and
when there no need to
reduce the price, the
demand is said to be
perfectly elastic

10. 1.Perfectly Elastic:(the quantity
demanded increases from OQ to Q1,
from OQ1 to OQ2 eventhough there
is . Price is fixed at
OP.)
Q
O
X
Y
p
Q1 Q2

11. 2. Perfectly inelasticity of demand
•the degree of change in
price leads to little change
in the quantity demanded,
then the elasticity is said to
be perfectly inelastic

12. 2. Perfectly Inelastic:
increase the price from OP1 to OP2, the
quantity demanded has not fallen. And there
is fall in the price from OP3 to OP2, the
quantity demanded remains unchanged)
p2
O
X
Y
p1
Q
p3

13. 3. Relatively elasticity demand
•The demand said to be
relatively elastic when the
change in demand is more
then the change in the
price.

14. 3. Relatively Elastic:
the quantity demand increase from OQ1 to OQ2
Because Of A Decrease in Price from OP1 to OP2.
The extent of increase in the quantity demanded
is grater than the extent of fall in the price
p1
O
X
Y
p2
Q2Q1
D
D

15. 4. Relatively inelasticity demand
•The demand said to be
relatively inelastic when
the change in demand is
less than the change in the
price.

16. 4. Relatively lnelastic
the quantity demanded increase from OQ1 to OQ2
because of a decrease in the price from OP1 to
OP2. the extend of increase in the quantity
demanded is less than the extent of fall in the
price.
p1
O
X
Y
p2
Q2Q1
D
D1

17. 5. Unity elasticity
•The elasticity in demand
is said to be unity when
the change in demand is
equal to the change in
price.

18. 5. Unitary Elastic
the quantity demanded increase from OQ1 to OQ2
because of a decrease in the price from OP1 to OP2.
the extent of increase in the quantity demanded is
equal to the extent of fall in the price.
p1
O
X
Y
p2
Q2Q1
D
D1

19. © Pilot Publishing Company
Ltd. 2005
Type of elasticity of demand
Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Advertising elasticity of demand
TYPES OF ELASTICITY

20. PRICE ELASTICITY DEMAND
• Elasticity of demand, in general refers to price
elasticity of demand.
• The quantity demanded of a commodity in
response to a given change in price.
• Price elasticity is always Negative, which
indicates that the customer tends to buy
more with every fall in the price.
• The relationship between the price and the
demand is inverse.

21. Q1 = quantity before change Q2 = quantity after change
P1 = price before change P2 = price after change
Model problems Refer the Book page Number 39 to 44

22. INCOME ELASTICITY OF DEMAND
• The quantity of a commodity in
response to a given change in
income of the customer.
• Income elasticity is normally
positive, which indicates that
the consumer tends to buy
more and more which every
increase in income

23. Q1 = quantity before change Q2 = quantity after change
I1 = daily income before change I2 = daily income after change
Model problems Refer the Book page Number 39 to 44

24. CROSS ELASTICITY OF DEMAND
• The quantity demanded of
a commodity in respect to
a change in the price of a
related goods, which may
be substitute or
complementary.

25. Q1 = quantity before change Q2 = quantity after change
P1y = price before change P2y = price after change
Model problems Refer the Book page Number 39 to 44

26. ADVERTISING ELASTICITY
• It refers to an increase in the sales
revenue because of change in advertising
expenditure.
• In other words, there is a direct
relationship between the amount of
money spent on advertising and its
impact on sales.
• Advertising elasticity always positive

27. Q1 = quantity before change Q2 = quantity after change
A1 = advertising budget before change A2 = advertising budget after change
Model problems Refer the Book page Number 39 to 44

28. Price elasticity of demand
• Price Elasticity of Demand
–The responsiveness of demand
to changes in price
–Where % change in demand
is greater than % change in price –
elastic
–Where % change in demand is less
than % change in price - inelastic

29. 29
Elasticity Coefficients
• Elastic Demand (Ed > 1): the percentage
change in quantity demanded > the percentage
change in price.
• Inelastic Demand (Ed < 1): the percentage
change in quantity demanded < the percentage
change in price.
• Unit Elastic Demand (Ed = 1): the percentage
change in quantity demanded = the percentage
change in price.

30. 30
Elasticity Coefficients
• Perfectly Elastic Demand (Ed=∞):
quantity demanded is infinitely responsive
to a change in price.
• Perfectly Inelastic Demand (Ed=0):
quantity demanded is completely
unresponsive to changes in price.

31. 31
Exhibit 3: Price Elasticity of Demand

32. FACTORS GOVERNING ELASTICITY OF
DEMAND
• A) nature of product (necessaries, comforts, luxuries)
• B) time frame (particular period, buy near-price high
shop/veg.market-price loe allot free time)
• C) degree of postponement
• D) number of alternative use(highly E, power or electy)
• E) tastes and preferences of the consumer
• F) availability of close substitutes
• G) in case of complements or joint goods
• H) level of prices
• i) availability of subsidies(govt paid, lpg)
• J)expectation price(inecity, gold rate)
• K) durability of a product(tv ecity, periciable milk inecity)
• L) government policy(monitor the price)

33. SIGNIFICANCE OF ELASTICITY OF
DEMAND
• A) price of factors of production
(land,labour.capital,organisation & technology-
rent in industrial areas/village-inecity)
• B) price fixation
• C) Government policies (tax policies, raising bank
deposit, public utilities(water,ticket),
revaluation or derevaluation(importer/xporter)
• D) forecasting demand (particular product &
services)
• E) planning levels of output and price(price
elasticity very useful to producer..adequate

34. Dr.K.Baranidharan
thank you
K YOU