INDEX MEANING OF PRICE ELASTICITY…………………………… DEGREES AND MEASUREMENT OF PRICE ELASTICITY OF DEMAND…………………................................................ FACTORS DETERMINING PRICE ELASTICITY OF DEMAND & INCOME ELASTICITY OF DEMAND…....................... CROSS ELASTICITY OF DEMAND & IMPORTANCE OF PRICE ELASTICITY OF DEMAND………………….............

Meaning of elasticity of demand By: ARSHDEEP KAUR Class: BCOM II Roll no.:4034

INTRODUCTION The concept that explains the proportional change in the amount demanded of a good as a result of change in its price , is called the concept of elasticity of demand . Thus , elasticity of demand refers to the percentage change in its price . Elasticity of demand is a quantitative statement .

EXAMPLE 3.mohan’s demand for apples contracts by 10% 1.Price of apples rises by 20% 2.ram’s demand for apples contracts by 50% Ram’s demand for apples is more elastic and mohan’s demand for apples is less elastic .

TYPES ELASTICITY OF DEMAND IS OF 3 TYPES: (1) PRICE ELASTICITY OF DEMAND (2) INCOME ELASTICITY OF DEMAND (3) CROSS ELASTICITY OF DEMAND

PRICE ELASTICITY OF DEMAND Price elasticity of demand is the ratio of the percentage change in the quantity demanded of a commodity to a percentage change in its price. E=(-)Percentage change in quantity demanded Percentage change in price

Degrees And Measurement Of Elasticity of demand roll no. 4056 Presented by : priyanka parmar roll no. 4056

Perfectly elastic demand Perfectly inelastic demand The study of the concept of elasticity of demand is divided into 5 categories : Perfectly elastic demand Perfectly inelastic demand Unitary elastic demand Elastic demand Inelastic demand

Perfectly elastic demand A perfectly elastic demand is one in which a little change in price will cause an infinite change in demand. A very little rise in price causes the demand to fall to zero and a very little fall in price causes the demand to extend to infinity. Under perfect competition , demand curve of firm is perfectly elastic.

Perfectly inelastic demand: A perfectly inelastic demand is one in which a change in price produces no change in quantity demanded. Change in prices causes no change in demand. In this case , elasticity of demand is zero or E = 0.

Unitary elastic demand Unitary elasticity of demand is one in which a percentage change in price produces an equal percentage in demand. In this case the demand curve is Rectangular Hyperbola. In this case elasticity of demand is unitary or E = 1.

Elastic demand : Greater than unitary elastic demand is one in which a given percentage change in price produces relatively more percentage change in demand. Demand curve D represents greater than unitary elastic demand. In this case elasticity is greater than unitary i.e. E>1.

Inelastic demand Less than unitary elastic demand is one in which a given percentage change in price produces relatively less percentage change in demand. Demand curve D represents less than unitary elastic demand. In this case elasticity of demand is less than unitary or E<1.

Measurement of price elasticity of demand :- Total expenditure method Proportionate method Point elasticity method Arc elasticity method Revenue method

Total expenditure of demand According to this method , in order to measure Ed it is essential to know how much and in what direction the total exp changes as a result of change in price . Ed is unity when due to rise or fall in price of a good total exp remains unchanged. E=1 Ed is greater than unity when due to fall in price total exp goes up and viceversa. E>1 Ed is less than unity when due to fall in price total exp goes down and due to rise in price total exp goes up . E<1

Proportionate method According to this method proportionate change in demand is divided by proportionate change in price. Ed = prop change in demand for good X prop change in price of good X OR Ed = change in quantity demanded initial demand change in price initial price

Point elasticity of demand (i) Linear demand curve

(ii) Non linear demand curve When demand curve is non linear , then to know the elasticity of demand at any point located on it a tangent is so drawn as to touch this point . The point will divide the tangent into two parts . Lower segment of the tangent is then divided by the upper segment . The resultant dividend will indicate price elasticity of demand.

Arc elasticity When elasticity is computed between two separate points on a demand curve the concept is called arc elasticity. It is calculated with the help of following formula : E= Q divided by P ½( Q1 + Q) ½(P1 + P) Here , Q= initial demand Q1=new demand P=initial price P1= new price.

Revenue method Sale proceeds that a firm earns by selling its products is called its revenue. When total revenue is divided by the number of units sold we get average revenue. Additions made to the total revenue by the sale of one more unit of the commodity is called marginal revenue. Average revenue curve of a firm is called demand curve. Price elasticity of demand is measured by the following formula :- E = A A – M Here, E= price elasticity of demand A= average revenue M= marginal revenue .

FACTORS DETERMINING THE PRICE ELASTICITY OF DEMAND Presented by : Pratima yadav 4054

1. NATURE OF THE COMMODITY 2. AVAILABILITY OF SUBSTITUTES 3 1.NATURE OF THE COMMODITY 2.AVAILABILITY OF SUBSTITUTES 3.GOODS WITH DIFEERENT USES 4.POSTPONEMENT OF THE USE 5.INCOME OF THE CONSUMER 6.HABIT OF THE CONSUMER 7.PROPORTION OF INCOME SPENT ON A COMMODITY 8.PRICE LEVEL 9.TIME 10.JOINT DEMAND

INCOME ELASTICITY OF DEMAND INCOME ELASTICTY OF DEMAND means the ratio of the percentage change in the quantity demanded to the percentage change in income

MEASUREMENT OF INCOME ELASTICITY Income elasticity can be measured by the following formula: Ey= proportionate change in quantity demanded proportionate change in income

DEGREE OF INCOME ELASTICITY OF DEMAND (1) POSITIVE INCOME ELASTICITY OF DEMAND : Income elasticity of demand for a good is positive, when with an increase in the income of a consumer, his demand for the good increases and with the decrease in the income of consumer , his demand for the good decrease.

Positive income elasticity of demand can be of three types; UNITARY INCOME ELASTICITY OF DEMAND: Positive income elasticity of demand is unitary when a given percentage change in income is followed by equal percentage change in demand. Ey=100% =1 100% (2) LESS THAN UNITARY INCOME ELASTICITY OF DEMAND: Positive income elasticity of demand is less than unitary when percentage change in demand is less than percentage change in income Ey= 50% =1 100% 2 (3) MORE THAN UNITARY INCOME ELASTICITY OF DEMAND: Positive income elasticity of demand is more than unitary when percentage change in demand is more than percentage change in income Ey= 200% =2

NEGATIVE INCOME ELASTICITY OF DEMAND: Income elasticity of demand is negative when increase in the income of the consumer is accompanied by fall in demand of a good and decrease in income is followed by rise in demand. Negative income elasticity refers to inferior goods, also known as giffen goods.

ZERO INCOME ELASTICITY OF DEMAND: Income elasticity of the demand is zero, when change in income of consumer evokes no change in his demand. Demand for necessaries like , kerosene oil, salt, etc. has zero income elasticity of demand.

TOPICE – CROSS ELASTICITY OF DEMAND SUBMITTED TO – MS. POONAM (ASST. PROFFESSOR) (ECONOMICE DEPARTMENT) SUBMITTED BY- TANIYA MAHAJAN ( BCOM-2 YEAR) (4010) ( PGGCG11 CHD)

CROSS ELASTICITY OF DEMAND DEFINITIONS GIVE BY- FERGUSON The cross elasticity of demand is the proportional change in the quantity of- x good demand resulting from a given relative change in the price of the related goods- y

According to leibhafsky “The cross elasticity of demand is a measure of the responsiveness of the purchase of y to the change in the price of x”.

MEASUREMENT OF CROSS ELASTICITY OF DEMAND

DEGEES OF CROSS ELASTICITY OF DEMAND POSITIVE NEGATIVE ZERO

POSITIV E When goods are substitutes of each other, then a given percentage rise in the price of goods will lead to a given percentage increase in the demand for the other goods. In other words , cross elasticity of demand is positive in case of substitutes. For example ,rise in the price of coffee will lead to increase in demand, because the two are close substitutes of each other.

POSITIVE

EXAMPLE when price of coffee is 50 paise per cup , then demand for tea is 50 cups. If price of coffee to rise to 70 paise per cup , then demand for tea goes up to 100cups.thus cross elasticity of demand for tea can be calculated by this formula. Qx = 50 cups; Qx1 =100cups ; Qx= 100-50 =50cups of tea. Py1=70 paise; Py =70- 50=20p here x stand for tea and Y for coffee Thus cross elasticity of demand for is greater than unity

NEGATIVE In case of complementary goods ( jointly demand goods) , percentage rise in the price of one lead to percentage fall in the demand for the other. Consequently , cross elasticity of demand is negative and the same is indicated by putting a minus (-) sign before the number of cross elasticity of demand.

EXAMPLE Suppose bread and butter are complementary goods when price of bread rise to 80paise per piece, then demand for butter is 10kg . With the rise of price of bread to Rs 1.20 , demand for bread falls to 5kg in this situation , cross elasticity of demand for butter is calculated- Py – 80 paise , Py1 – 120 paise Py= 120-80 = 40 paise Qx = 10 kg:Qx1= 5kg Qx= 5-10= -5kg Ec= -1 ( here x stand for butter and y for bread)

ZERO CROSS ELASTICITY OF DEMAND It is When two goods are not related to each other. FOR EXAMPLE Rise in the price of wheat will have no effect on demand for shoes. Their cross elasticity of demand will be called zero.

IMPORTANCE OF PRICE ELASTICITY OF DEMAND When a monopolist sells its product at different price, it is called price discrimination. A monopolist can practise price discrimination when price elasticity of demand for his product for different uses and for different consumers is different. He will charge more price from those consumer whose demand is inelastic and less price from those whose demand is elastic . PRICE DISCRIMINATION A monopolistic always takes into consideration the price elasticity of demand of his product while determing its price (1) if it is elastic , he will fix low price per unit. Lower price means large sales and hence sales and hence, large total revenue (2) if demand is inelastic , he will fix higher price per unit. Higher price with demand reaming more or less constant. Determination Of price Under monopoly

PRICE DETERMINATION OF JOINT SUPPLY Goods which are produced simultaneously in the same act of production are called joint –supply goods for e.g. cotton and cotton seeds : oil and oil cakes etc elasticity of demand of such goods is taken into consideration while fixing their price. If demand for cotton is inelastic and that of cotton – seeds elastic , then price for cotton will be fixed more and that of cottonseeds will be less. PRICE DETERMINATION OF JOINT SUPPLY

ADVANTAGE TO FINANCE MINISTER While planning new taxes, a finance minister takes into consideration elasticity of demand. (!) taxes on goods having elastic demand will yield less revenue. It is so because taxes will raise their price and thus bring down their demand . Less demand means less revenue. ADVANTAGE TO FINANCE MINISTER