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Elasticity of demand
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Elasticity Of Demand.Ppt

  1. 1. PresentationOn<br />ELASTICITY OF<br />DEMAND<br />
  2. 2. Prepared By Vyas Harshal <br />
  3. 3. Definition Of Price Elasticity Of Demand<br />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<br />
  4. 4. Kinds Of Price Elasticity Of Demand<br />Perfectly elastic demand<br />Relatively elastic demand<br />Elasticity of demand equal to utility<br />Relatively inelastic demand<br />Perfectly inelastic demand<br /> Let Us See Some Views On Them<br />
  5. 5. Perfectly elastic demand<br />y<br />When the demand for a product changes –increases or decreases even when there is no change in price, it is known as perfect elastic demand.<br />Perfectly elastic demand curve<br />P<br />R<br />I<br />C<br />E<br />D<br />D<br />0<br />x<br />
  6. 6. Relatively elastic demand<br />y<br />When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.<br />P<br />R<br />I<br />C<br />E<br />Relatively elastic demand curve<br />D<br />D<br />0<br />x<br />demand<br />
  7. 7. Elasticity of demand equal to utility<br />When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand<br />y<br />D<br />P<br />R<br />I<br />C<br />E<br />Elasticity of demand equal to utility curve<br />D<br />x<br />0<br />demand<br />
  8. 8. Relatively inelastic demand<br />Y<br />When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand<br />D<br />Relatively inelastic demand curve<br />P<br />R<br />I<br />C<br />E<br />D<br />X<br />O<br />demand<br />
  9. 9. Perfectly inelastic demand<br />Y<br />D<br />When a change in price, howsover large, change no changes in quality demand, it is known as perfectly inelastic demand<br />Perfectly inelastic demand curve<br />P<br />R<br />I<br />C<br />E<br />D<br />X<br />0<br />demand<br />
  10. 10. ALL KINDS OF DEMAND CAN BE SHOWN IN ONE DIAGRAM AS FOLLOW<br />Y<br />WHERE<br />D1) Perfectly elastic demand<br />D2)Relatively elastic demand<br />D3)Elasticity of demand equal to utility<br />D4)Relatively inelastic demand<br />D5)Perfectly inelastic demand<br />P<br />R<br />I<br />C<br />E<br />D<br />D1<br />D2<br />D3<br />D4<br />D5<br />X<br />0<br />DEMAND<br />
  11. 11. Measurement Of Price Elasticity Of Demand<br /> There are main methods like<br />Percentage method or proportionate method<br />Total outlay method or total revenue method<br />Geometric method or point method <br />Arc elasticity of demand<br />
  12. 12. 1 Percentage method or proportionate method<br />
  13. 13. (5) Factors Affecting Price Elasticity Of Demand<br />
  14. 14. Factors Affecting Price Elasticity Of Demand<br />Nature of the Commodity<br />Availability of Substitutes<br />Variety of uses of commodity<br />Postponement<br />Influence of habits <br />Proportion of Income spent on a commodity<br />Range of prices<br />
  15. 15. Factors Affecting Price Elasticity Of Demand<br />Income Groups<br />Elements of time <br />Pattern of income distribution<br />
  16. 16. (6) Practical Importance of the Concept of Price Elasticity Of Demand<br />
  17. 17. Practical Importance of the Concept of Price Elasticity Of Demand<br />The concept is helpful in taking Business Decisions<br />Importance of the concept in formatting Tax Policy of the government<br />For determining the rewards of the Factors of Production<br />To determine the Terms of Trades Between the Two Countries<br />
  18. 18. Practical Importance of the Concept of Price Elasticity Of Demand<br />Determination of Rates of Foreign Exchange<br />For Nationalization of Certain Industries <br />In economic Analysis ,the concept of price elasticity of demand helps in explaining the irony of poverty in the midst of plenty.<br />
  19. 19. (7) Income Elasticity Of Demand<br />
  20. 20. Types Of Income Elasticity Of Demand<br />Positive Income elasticity of demand<br />Negative Income elasticity of demand<br />Zero Income elasticity of demand <br />
  21. 21. Positive Income elasticity of demand<br />Y<br />D<br />P<br />A<br />D<br />Income<br />B<br />S<br />O<br />X<br />Quantity Demanded<br />
  22. 22. Positive Income elasticity of demand<br />Income Elasticity Equal to Unity or One<br />Income Elasticity Greater Than Unity Or One <br />Income Elasticity Less Than Unity or One<br />
  23. 23. Negative Income elasticity of demand<br />Price<br />P<br />A<br />TotalRevenue<br />B<br />S<br />Quantity Demanded (000s)<br />
  24. 24. Zero Income elasticity of demand<br />Y<br />D<br />Income<br />O<br />X<br />D<br />Quantity Demanded <br />
  25. 25. All Income Graphs Representation<br />Y<br />F<br />E<br />D<br />C<br />Income<br />B<br />A<br />X<br />O<br />Quantity Demanded<br />
  26. 26. Measurement Of Income Elasticity Of Demand<br />Proportionate change in Demand<br />Income Elasticity Of Demand =<br />Proportionate change in Income<br />i.e.<br />∆q<br />∆ y<br />+<br />Income Elasticity Of Demand =<br />Q<br />Y<br />
  27. 27. Measurement Of Income Elasticity Of Demand<br />Here , ∆q = Change in the quantity demanded.<br />Q = Original quantity demanded.<br />∆y = Change in income.<br />Y = Original income. <br />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 <br />
  28. 28. Measurement Of Income Elasticity Of Demand<br />Thus <br /> Income Elasticity of Demand <br /> = <br /> = (5/20) + (500/2500)<br /> = 1.5<br /> therefore here the IED is 1.5 which is more than one. <br />∆q<br />∆ y<br />+<br />Y<br />Q<br />
  29. 29. Factors Affecting Income Of Demand<br />Income Itself Only.<br />Price Of the Commodity<br />
  30. 30. Importance Of the Concept of Income Elasticity Of Demand<br />In production planning and management<br />In forecasting demand when change in consumers income is expected<br />In classifying goods as normal and inferior<br />In expansion and contraction of the firm by the figure of income elasticity of demand<br />Markets situations could be studied with the help of IED<br />
  31. 31. (8) Elasticity Of Substitution <br />The selection between two product or thing is called substitution <br />So Elasticity of Substitution measures the rate at which the particular product is substituted .<br />Thus EOS is the degree to which one product could be substituted in context of price and proportion<br />
  32. 32. Elasticity Of Substitution<br />Elasticity of Substitution<br /> = Proportionate change in the quantity ratios of goods x & y DIVIDED BY Proportionate change in the price ratios of goods x & y.<br />
  33. 33. Types of Elasticity Of Substitution<br />Zero Elasticity of Substitution.<br />Infinite Elasticity Of Substitution<br />Elasticity of Substitution greater than unityor1<br />Elasticity of Substitution is equal to one<br />Elasticity of Substitution is less than one<br />
  34. 34. Types of Elasticity Of Substitution on Graph<br />Y<br />E4<br />E3<br />Change in QUANTITIY ratio of good x & y<br />E5<br />E2<br />E1<br />X<br />O<br />Change in PRICE ratio of good x & y<br />
  35. 35. Relationship Between Price Elasticity, Income Elasticity and Substitution Elasticity <br />As Price is depended on income and substitution effect similarly Price Elasticity is depended on Income Elasticity an Substitution Elasticity .<br />These relationship can be represented by<br />Ep = Kx E1 + ( 1 – Kx ) es<br />
  36. 36. Price elasticity of demand depends on:<br />Proportion of income spent on particular good say X.<br />Income elasticity of demand.<br />Elasticity of substitution.<br />Proportion of income spent on product other than X.<br />
  37. 37. Cross Elasticity of Demand<br />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<br />E.g. if the X tea demand reduces tremendously than it effect could be seen in demand of sugar and milk.<br />
  38. 38. Types of Cross Elasticity of Demand<br />Cross Elasticity of Demand Equal to Unity or One <br />Cross Elasticity of Demand Greater than Unity or one<br />Cross Elasticity of demand less than unity or one<br />
  39. 39. Measurement Cross Elasticity of Demand<br />Proportionate change in Demand for product X<br />Cross Elasticity of Demand =<br />Proportionate change in Price of product Y<br />i.e.<br />∆qx<br />∆p y<br />+<br />Cross Elasticity of Demand =<br />Qx<br />Py<br />
  40. 40. Cross Elasticity of Demand For Substitutes <br />Y<br />D<br />Price of Y<br />D<br />O<br />X<br />Demand for Y<br />
  41. 41. Cross Elasticity of Demand For Complementary Products<br />Y<br />D<br />Price of Y<br />D<br />O<br />X<br />Demand for Y<br />
  42. 42. Cross Elasticity of Demand For Neutral Products<br />Y<br />D<br />Price of Y<br />O<br />X<br />Demand for Y<br />
  43. 43. Importance of Cross Elasticity Of Demand<br />The concept is of very great importance in changing the price of the products having substitutes and complementary goods .<br />In demand forecasting<br />Helps in measuring interdependence of price of commodity .<br />Multiproduct firms use these concept to measure the effect of change in price of one product on the demand of their other product<br />
  44. 44. Advertising Elasticity of Demand<br />Advertising elasticity of demand is the measure of the rate of change in demand due to change in advertising expenditure<br />The amount of change in demand of goods due to advertisement is known as Advertisement Elasticity of Demand .<br />
  45. 45. Advertising Elasticity of Demand<br />Proportionate change in Demand for product <br />Advertising Elasticity of Demand =<br />Proportionate change in Advertising expenditure<br />i.e.<br />∆qx<br />∆a<br />÷<br />Advertising Elasticity of Demand =<br />Q<br />A<br />
  46. 46. Relationship Between Advertising Expenditure and Sales <br />Y<br />S<br />Sales<br />S<br />X<br />O<br />Advertising Expenditure<br />
  47. 47. Factors Affecting Advertising Elasticity Of Demand<br />The stage of the Product’s Market Development .<br />Reaction of market Rival Firms.<br />Cumulative Effect of Past Advertisement.<br />Influence of Other Factors.<br />
  48. 48. Importance of the Advertising Elasticity Of Demand in Business Decisions<br />It is useful in competitive industries.<br />Though advertisement shifts the demand curve to right path but it also increases the fixed cost of the firm.<br />
  49. 49. Limitation of Advertising Elasticity of the Demand<br />The impact of advertising on sales is different under different conditions, even if other demand determinants are constant.<br />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 market . The effect on sales depend on what the rivals are doing.<br />
  50. 50. Thanking You All<br />
  51. 51. ******THE END******<br />
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