Presentation by

S.VINAY BHARGAV
D.SAI MOHAN KUMAR
“The concept of elasticity of demand and of
cross-elasticity of demand are the essential
heart of the meaning of the economic concept
of demand.”
- CHESTER R. WASSON
“Elasticity of Demand is defined as the
percentage change in quantity demanded
caused by one percent change in the
demand determinant under consideration.”

percentage change in quantity demanded of goods X

Ed =
Percentage change in determinant Z
There are two kinds of elasticity measurements.
They are:

1.Point Elasticity

2. Arc Elasticity
It relates to the elasticity at a particular point on
the demand curve.

FORMULA:

Q Z
E=
Z Q
 Mid point of the chord

D
Price
P1 A

P2
B D

O Q Q1 Q2
Quantity Demanded
 Types of Demand Elasticities
Price Elasticity of demand
Income Elasticity of demand
Cross Elasticity of demand
Promotional Elasticity of demand
Expectations Elasticity of demand.
 Price Elasticity of Demand
“The measure of relative responsiveness of quantity
demanded to price along a given demand curve is
known as price elasticity of demand.”

Percentage change in quantity demanded of goods X

E= Percentage change in price of good X

Q P1
E=
P Q1
 Types of Price Elasticity
1. Perfectly elastic demand
2. Absolutely inelastic demand
3. Unit elasticity of demand
4. Relatively elastic demand
5. Relatively inelastic demand
Price
P

O Q Q1 Q2
Quantity Demanded
 P2

Price
P1

O Q
Quantity Demanded
 D

P1
Price P
P2

Q
D

O Q1 Q2
Quantity Demanded
 D

Price
P1
P
P2

Q
D

O Q1 Q2
Quantity Demanded
 D

P1
Price P
P2

D
Q

O Q1 Q2
Quantity Demanded
Measurement of Price Elasticity of Demand

Elasticity of demand can be measured with the help of

following four techniques:

1. Analytical Approach
2. Graphical Measure
3. Slope Measure
4. Total Outlay Method
 A

P1 C
Price
P2 E D

O Q1 Q2
Quantity Demanded
Determinants of Price Elasticity of Demand

The number and closeness of the substitutes.

The share of the commodity in buyers’ budget.
Nature of the commodity.
Number of uses a commodity can be put to.
Habit forming characteristics.
Time period.
 Income Elasticity of Demand
Income elasticity of demand for a commodity shows the
extent to which the consumer’s demand for the
commodity changes as a result of a change in income.

Percentage change in quantity demanded of goods X

Ey =
Percentage change in income of the consumer

Q Z
E=
Z Q
Types of Income Elasticity of Demand
1. High Income Elasticity of Demand.
2. Unitary Income Elasticity of Demand.
3. Low Income Elasticity of Demand.
4. Zero Income Elasticity of Demand.
5. Negative Income Elasticity of Demand.
 EY = 1 D

P2
Price P
P1
D

O Q1 Q2
Quantity Demanded
 D
EY > 1
P2
Price P
P1

D Q

O Q1 Q2
Quantity Demanded
 D

0< E< 1
P2
Price P
P1

D Q

O Q1 Q2
Quantity Demanded
 D

P1
Price P E= 0
P2

O Q
Quantity Demanded
 D

P1
Price P
P2

D
Q

O Q1 Q2
Quantity Demanded
Use of the concept of Income
Elasticity of Demand in Business
1. Planning of firm’s growth.
2. Forecasting demand.
3. Formulating marketing strategy.
Cross Elasticity of Demand
Cross Elasticity of demand is defined as the ratio of
the percentage change in the demand for one good
to the percentage in the price of some other related
good.

Qx P1
Exy = Py Q1
 Y

P2
Price
of
coffee P1

D
X
O Q1 Q2
Quantity of Tea
 Y
D

P1
Price
of
Bread P2

X
O Q1 Q2
Quantity of butter
 Proportionate change in quantity demanded for product X
E XY =
Proportionate change in price of product Y

Significance of cross elasticity of demand:

•Knowledge of cross Elasticity of demand helps a

firm to estimate the likely effect of pricing decisions
of its traders dealing in related products on sales

•Helps in defining industry

Advertising Elasticity of demand measures the
response of quantity demand to change in
expenditure on advertising and other sales
promotional activities
Proportionate change in sales
E A =
Proportionate change in Advertising expenditure
 FORMULA:
Q A
EA = A Q

Significance of Advertising elasticity of demand:

• The advertising agencies richly depend on this

concept to provide consultancy for their clients about
the advertisement budgets for a given level of sales
activity.
Factors influencing Advertising Elasticity of
Demand
1. Stage of product market.
2. Effect of advertising in terms of time.
3. Influence of advertising rivals.
Elasticity of price expectations may be defined as
the ratio of the relative change in expected future
prices to the relative change in current price.
 Proportionate change in expected future price
E pe
=
Proportionate change in current price

E pe = Ep Cp
Cp Ep
Significance of the Concept of Elasticity
of Demand

1. Level of Output and Price.

2. Fixation of rewards for Factors of Production.
3. Government Policies.
4. Demand Forecasting.
Elasticities of Demand and
managerial Decision Making
 Factors that can be under control of the firm.
price, advertising expenditure, quantity, quality of product.

 Factors that are beyond control of the firm.

tastes, incomes of consumers, competitor’s price