ElasticityofDemand-- Price and Income Elasticity

Orange City Institute of Higher Education, Nagpur

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ELASTICITY OFDEMAND


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The Economic Concept of Elasticity

Elasticity: The sensitivity of one variable to another or, more precisely, the percentage change in one variable relative to a percentage change in another.

Bin changepercent

Ain changepercent Elasticity oft Coefficien


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Definition Of Price Elasticity Of Demand

• 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


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Kinds Of Price Elasticity Of Demand

1) Perfectly elastic demand2) Relatively elastic demand3) Elasticity of demand equal to utility4) Relatively inelastic demand5) Perfectly inelastic demand Let Us See Some Views On Them


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Perfectly elastic demand

P

R

I

C

E

y

0 x

Perfectly elastic demand curve

D D

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.


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Relatively elastic demand

Relatively elastic demand curve

P

R

I

C

E

demand0 x

y

D

D

When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.


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Elasticity of demand equal to utility

Elasticity of demand equal to utility curve

y

x0 demand

P

R

I

C

E

D

D

When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand


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Relatively inelastic demand

Relatively inelastic demand curve

XO

Y

demand

D

D

P

R

I

C

E

When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand


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Perfectly inelastic demand

demand

D

D

Perfectly inelastic demand curve

0

Y

X

P

R

I

C

E

When a change in price, howsover large, change no changes in quality demand, it is known as perfectly inelastic demand


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ALL KINDS OF DEMAND CAN BE SHOWN IN ONE DIAGRAM AS FOLLOW

DD1

D2D3

D4

D5

Y

X0

DEMAND

P

R

I

C

E

WHERED1) Perfectly elastic

demandD2)Relatively elastic

demandD3)Elasticity of demand

equal to utilityD4)Relatively inelastic

demandD5)Perfectly inelastic

demand


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Measurement Of Price Elasticity Of Demand

There are main methods like1. Percentage method or proportionate

method2. Total outlay method or total revenue

method3. Geometric method or point method 4. Arc elasticity of demand


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Factors Affecting Price Elasticity Of Demand

• Nature of the Commodity• Availability of Substitutes• Variety of uses of commodity• Postponement• Influence of habits • Proportion of Income spent on a commodity• Range of prices


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Factors Affecting Price Elasticity Of Demand

• Income Groups• Elements of time • Pattern of income distribution


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Practical Importance of the Concept of Price Elasticity Of Demand

• The concept is helpful in taking Business Decisions

• Importance of the concept in formatting Tax Policy of the government

• For determining the rewards of the Factors of Production

• To determine the Terms of Trades Between the Two Countries


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Practical Importance of the Concept of Price Elasticity Of Demand

• Determination of Rates of Foreign Exchange• For Nationalization of Certain Industries • In economic Analysis ,the concept of price

elasticity of demand helps in explaining the irony of poverty in the midst of plenty.


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Income Elasticity Of Demand


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Types Of Income Elasticity Of Demand

• Positive Income elasticity of demand• Negative Income elasticity of demand• Zero Income elasticity of demand


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Positive Income elasticity of demandY

PA

D

D

B SO XQuantity Demanded

Inco

me


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Positive Income elasticity of demand

• Income Elasticity Equal to Unity or One• Income Elasticity Greater Than Unity Or

One • Income Elasticity Less Than Unity or One


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Negative Income elasticity of demandPri

ce

P

B

A

S

Total Revenue

Quantity Demanded (000s)


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Zero Income elasticity of demandY

XO D

D

Quantity Demanded

Inco

me


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All Income Graphs Representation

O

Y

Inco

me

AB

C D

EF

XQuantity Demanded


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Measurement Of Income Elasticity Of Demand

Income Elasticity Of Demand =Proportionate change in Demand

Proportionate change in Incomei.e.

Income Elasticity Of Demand =∆q

Q Y

∆ y+


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• Here , ∆q = Change in the quantity demanded.Q = Original quantity demanded.∆y = Change in income.Y = Original income.

• 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


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• Thus Income Elasticity of Demand =

= (5/20) + (500/2500)= 1.5therefore here the IED is 1.5 which is more than one.

∆q

Q Y

∆ y+


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Factors Affecting Income Of Demand

• Income Itself Only.• Price Of the Commodity


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Importance Of the Concept of Income Elasticity Of Demand

• In production planning and management• In forecasting demand when change in

consumers income is expected• In classifying goods as normal and inferior• In expansion and contraction of the firm by

the figure of income elasticity of demand• Markets situations could be studied with the

help of IED


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Thank You

Documents

ElasticityofDemand-- Price and Income Elasticity