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ELASTICITY OF DEMAND
Orange City Institute of Higher Education, Nagpur

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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.
percent change in A Coefficien t of Elasticity percent change in B
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Definition Of Price Elasticity Of Demand

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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) 2) 3) 4) 5) Perfectly elastic demand Relatively elastic demand Elasticity of demand equal to utility Relatively inelastic demand Perfectly inelastic demand Let Us See Some Views On Them
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Perfectly elastic demand

y P R I D

C
E

When the Perfectly elastic demand for a demand curve product changes increases or D decreases even when there is no change in price, it is known as perfect elastic x demand. Orange City Institute of Higher Education, Nagpur

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Relatively elastic demand

y P R I C E D D Relatively elastic demand curve

demand

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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

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

y P R I C E Elasticity of demand equal to utility curve D

D
0 x

demand

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Relatively inelastic demand

Y

D
P R

Relatively inelastic demand curve

I
C E

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

D
O X demand
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Perfectly inelastic demand

Y D

P R

I
C E

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

D demand

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

Y

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P R D

I
C E

WHERE D1) Perfectly elastic demand D1 D2)Relatively elastic demand D2 D3)Elasticity of demand D3 equal to utility D4 D4)Relatively inelastic demand D5 X D5)Perfectly inelastic DEMAND Orange City Institute of Higher Education, Nagpur demand

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Measurement Of Price Elasticity Of Demand

There are main methods like 1. Percentage method or proportionate method 2. Total outlay method or total revenue method 3. Geometric method or point method 4. Arc elasticity of demand
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Factors Affecting Price Elasticity Of Demand

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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 demand

D

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P A Income D

B S Quantity Demanded

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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 demand

Price

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Total Revenue
B S

Quantity Demanded (000s)

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Zero Income elasticity of demand

Y D

Income
O

D
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Quantity Demanded

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All Income Graphs Representation

Y F

E
Income C B A D

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Quantity Demanded

Measurement Of Income Elasticity Of Demand

Proportionate change in Demand Income Elasticity Of Demand = Proportionate change in Income

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i.e. q Income Elasticity Of Demand = Q

y Y

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Measurement Of Income Elasticity Of Demand

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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
Orange City Institute of Higher Education, Nagpur

Measurement Of Income Elasticity Of Demand

Thus Income Elasticity of Demand q y + = Y
Q

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

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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

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