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The concept of_elasticity_of_demand1
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Transcript of The concept of_elasticity_of_demand1
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The Concept of Elasticity of Demand
Presented By:
Dr. Kavita SrivastavaAssistant Professor
Department of Management
ITS,Ghaziabad
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Definition of Elasticity of Demand
• “Elasticity of demand is defined as the degree of responsiveness of demand of a commodity to the change in its determinants”
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The Concept of Elasticity of demand plays a crucial role in Business Decision making:
• Elasticity of demand helps the firms in fixing high prices if the cost of production increases and hence earn higher profits.
• When cost of production increases the firm will like to pass it to the consumers in the form of increased price of the commodity.
• Whether raising the price will be beneficial or not will depend upon:
The price elasticity of demand for the product. The price elasticity of demand of its substitutes.
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Increasing price will be beneficial only if:
• Demand for the product is less elastic.• Demand for its substitutes is less elastic.
Although most businessmen are intuitively aware of the elasticity of demand of the goods they produce, the use of elasticity of demand adds precision to their business decisions.
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The concepts of elasticity of demand used in
business decision making
• Price elasticity of demand• Cross elasticity of demand• Income elasticity of demand
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Price elasticity of demand
• Price elasticity of demand is defined as;
“the degree of responsiveness of demand to the change in its price”.
or,
ep = % change in quantity demanded
% change in price
ep= ΔQ × P
ΔP Q
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Measurement of elasticity of demand
• Graphical Method
• Point Method
• Expenditure Method
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Graphical Method
• Perfectly Elastic Demand (ep= infinity)
P D
O X
Y
Q Q1
Quantity Demanded
price
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• Perfectly inelastic demand (ep = 0)
Y
XOQ
D
P
P1
Quantity Demanded
price
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Less Elastic Demand (ep<1)
Y
XO
D
D
P1
P
Q1 QQuantity Demanded
price
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• Relative Elastic Demand
O X
Y
D
D
P
P1
Q1 Q
Quantity Demanded
price
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• Highly Elastic Demand (ep>1)
Y
XO
D
DP
P1
Q1 Q
Quantity Demanded
price
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Point Elasticity of Demand
ep=1
ep=0
ep<1
ep=infinity
ep>1Formula :ep=lower segment upper segment
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Expenditure Method
• Elastic Demand ( ep>1)
P
(Rs.)
Q
(Nos.)
TE
(Rs.)
6 10 60
5 13 65
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P
(Rs.)
Q
(Nos.)
TE
(Rs.)
6 10 60
5 11 55
Inelastic Demand (ep<1)
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• Unitary Elastic Demand (ep=1)
P
(Rs.)
Q
(Nos.)
TE
(Rs.)
6 10 60
5 12 60
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Income elasticity of Demand
• Income elasticity of demand is defined as the degree of responsiveness of demand of a commodity towards the change in income of the individual.
• Formula :
ey= ΔQ × Y
ΔY Q
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Cross Elasticity of Demand
• “The cross elasticity of demand is defined as degree of responsiveness of demand of Commodity X to the change in price of the Commodity Y”.
• Formula :
ep= ΔQx × Py
ΔPy Q
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Determinants of price elasticity of demand
• Availability of substitutes
• Nature of commodity
• Proportion of income spent
• Number of uses of commodity
• Postponement of consumption