By :-Aditya kashyap(M.B.A) (UOM) A’

ELASTICITY OF

DEMAND

•Elasticity is the concept economists use to describe the steepness or flatness of curves or functions. •In general, elasticity measures the responsiveness of one variable to changes in another variable.

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What is ELASTICITY?

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•Price Elasticity of demand can be defined as a measure of change in quantity demanded to the corresponding change in price. Below are the various types of elasticity of demand •Price elasticity's are almost always negative, although analysts tend to ignore the sign

Price Elasticity of Demand

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•Elastic demand.•Inelastic demand.•Unitary demand.•Perfectly elastic demand.•Perfectly inelastic demand.

Types Of Elasticity of Demand

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Elastic Demand – If the change in price leads to greater change than proportional change in demand then the demand for that good is price elastic. For example a 20% fall in price leads to a 30% increase in quantity demanded. Eg. Ice cream

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Elastic or relatively elastic demand

∞<Ed < -1

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Inelastic Demand – If the change in price leads to less than proportional change in demand then the demand for that good is price inelastic. For example a 30% increase in price leads to a 15% fall in quantity demanded Eg. sugar

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Inelastic or relatively inelastic demand

-1 < Ed > 0

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Unitary Demand – If the change in price leads to equal change in demand then the demand for that good is unitary. For example a 10% increase in price leads to 10% decrease in demand.

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Unitary elasticity demand

Ed = - 1

For example, a rise inthe price of gasoline at all stations may not reducegasoline sales significantly. However, a rise of anindividual station’s price will significantly affect thatstation’s sales.

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Unitary Demand – If the change in price leads to equal change in demand then the demand for that good is unitary. For example a 10% increase in price leads to 10% decrease in demand.

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Perfectly Elastic Demand – It refers to a situation when any change in price will see quantity demanded fall to zero.

Perfectly elastic demand

Ed = - ∞

The graph above illustrates that at prices above $20, quantity demanded is zero. However, when price is set below $20, quantity demanded increases infinitely.

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Perfectly Inelastic Demand – It refers to a situation when any change in price will not affect the demand for a good that is quantity demanded will remain unchanged irrespective of change in the price of that good.

Eg.as quantity is totally unresponsive of price, consumer has no alternative in perfectly inelastic demand, he will pay any price for it. examples are air, water, electricity etc.Eg. Air, water, electricity etc.Ed = 0

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FACTS ABOUT ELASTICITY

•It’s always a ratio of percentage changes.•That means it is a pure number -- there are no units of measurement ion elasticity.•Price elasticity of demand is computed along a demand curve.

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What’s the percent increase in price here because of the shift in supply?

pE = $2

QE

S

D

Q

price

S'

CIGARETTE MARKET

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TERMS TO LEARN

•Demand is ELASTIC when the numerical value of elasticity is greater than 1.•Demand is INELASTIC when the numerical value of elasticity is less than 1.•Demand is UNIT ELASTIC when the numerical value of elasticity equals 1.

NOTE: Numerical value here means “absolute value.”

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DETERMINANTS OF DEMAND ELASTICITY

•The more substitutes there are available for a good, the more elastic the demand for it will tend to be. [Related to the idea of necessities and luxuries. Necessities tend to have few substitutes.]•The longer the time period involved, the more elastic the demand will tend to be.•The higher the fraction of income spent on the good, the more elastic the demand will tend to be.

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OTHER ELASTICITY MEASURES

•In principle, you can compute the elasticity between any three variables.Income elasticity of demandCross price elasticity of demandElasticity of supply

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Each of these concepts has the expected definition. For example, income elasticity of demand is the percent change in quantity demand divided by a percent change income:

EINCOME =

Income elasticity of demand will be positive for normal goods, negative for inferior ones.

I in change %

Q in change %

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I hope that this presentation have gave you a brief knowledge about Elasticity of demand.

Conclusion

Thank You