Elasticity-Of-Demand 8552087 Powerpoint

ELASTICITY OF
DEMAND
Ch.Naresh
BBA
Gen Next Business School
Introduction
 The law of demand explains the direction of
change in the quantity demanded, due to the
changes in the price in case of normal goods.
 Law of demand explains only the direction
but not magnitude of change i.e.,
 Law of demand does not explain how much
quantity demanded will change, in response
to change in the price, the concept of
ELASTICITY OF DEMAND explain this.
 The concept of ELASTICITY OF DEMAND
is very important to the Economic theory as
it explains the extent to which the demand
changes when the price changes.
 ELASTICITY OF DEMAND in general it
refers to PRICE ELASTICITY OF
DEMAND.
 ELASTICITY OF DEMAND is always
negative (-) for NORMAL GOODS. This is
due to inverse relationship between PRICE
& DEMAND.
Definition of PRICE ELASTICITY OF
DEMAND
 Degree to which quantity demanded responds

to a change in price is known as PRICE
ELASTICITY OF DEMAND.
 In other words, the PRICE ELASTICITY OF

DEMAND is the ratio of percentage change in
quantity demanded, to percentage change in
price.
Mathematically it can be expressed as follows
 PRICE ELASTICITY OF DEMAND (Ep) =
Percentage change in quantity demanded

/Percentage change in price.
OR
 (Ep) = Proportionate change in quantity
demanded / Proportionate change in price.

 Proportionate change in quantity demanded
=change in demand / initial demand

 Proportionate change in price = change in
price / initial price

TYPES OF ELASTICITY OF
DEAMAND
 The following are various types of
ELASTICITY OF DEAMAND
1. PRICE ELASTICITY OF DEMAND

2. INCOME ELASTICITY OF DEMAND
3. CROSS ELASTICITY OF DEMAND
4. ADVERTISEMENT ELASTICITY OF
DEMAND
 PRICE ELASTICITY OF DEMAND: it
refers to the responsiveness of quantity
demanded to changes in prices.
MEASUREMENT
PRICE ELASTICITY OF DEMAND (Ep):
 (Ep) = Proportionate change in quantity

demanded / Proportionate change in price.
 INCOME ELASTICITY OF DEMAND: it
demanded to changes in the incomes of the
consumers.
MEASUREMENT
 INCOME ELASTICITY OF DEMAND
(Ei) = Proportionate change in quantity

demanded / Proportionate change in income
 CROSS ELASTICITY OF DEMAND: it
demanded to changes in the prices of the
related goods, say which may be substitute
goods.
MEASUREMENT
CROSS ELASTICITY OF DEMAND (Ec):
(Ec) = Proportionate change in quantity

demanded / Proportionate change in prices of
related goods.
 ADVERTISEMENT ELASTICITY OF
DEMAND: it refers to the responsiveness of
quantity demanded to changes in the
advertisement efforts & expenditure.
MEASUREMENT
 ADVERTISEMENT ELASTICITY OF
DEMAND (Ea):
(Ea) = Proportionate change in quantity

demanded / Proportionate change in
advertisement efforts or cost.
TYPES OF PRICE
ELASTICITY OF
DEMAND
 Based on numerical values price elasticity of
demand can be of five (5) types.
1) Perfectly elastic demand (Ep = α)

2) Perfectly inelastic demand (Ep = 0)
3) Unit elastic demand (Ep = 1)
4) Relatively elastic (Ep = > 1)
5) Relatively inelastic (Ep = < 1)
Perfectly elastic demand
 Perfectly elastic demand is also called as
infinitely elastic demand.
 It means small change in price leads to an
infinite expansion in demand.
 Even if the price remain same the quantity
demanded increases.
 Perfectly elastic demand curve is horizontal
straight line to X axis
Price
O
Q1 Q2
Demand
• Perfectly elastic demand curve is horizontal straight line to X axis
• Even if the price remain same the quantity demanded increases.

Perfectly inelastic demand
 In perfectly inelastic demand even with a great
fall or rise in the price the quantity demanded
of the product does not change.
 perfectly inelastic demand curve is vertical
straight line parallel to Y axis
p
p1
o m
 perfectly inelastic demand curve is vertical
straight line parallel to Y axis
 What ever may be the change in the price high
or low the quantity demanded is the same.
Unit elastic demand
 Proportionate change in price leads to a
proportionate change in quantity demand is
called unit elastic demand.
 If demand increases by 1% for a 1% fall in the
price, the elasticity of demand is equal to 1.
 When the change in demand is equal to change
in price is called unit elasticity demand.
Relatively elastic
 It means Proportionate change in price leads to
more than proportionate change in quantity
demanded is called Relative elastic demand.
 If demand increases by more than 1% for a 1%
fall in the price, the elasticity of demand is
said to be Relative elastic demand.
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ELASTICITY OF

 Degree to which quantity demanded responds

 In other words, the PRICE ELASTICITY OF

Percentage change in quantity demanded

demanded / Proportionate change in price.

=change in demand / initial demand

price / initial price

1. PRICE ELASTICITY OF DEMAND

 (Ep) = Proportionate change in quantity

(Ei) = Proportionate change in quantity

(Ec) = Proportionate change in quantity

(Ea) = Proportionate change in quantity

1) Perfectly elastic demand (Ep = α)

• Perfectly elastic demand curve is horizontal straight line to X axis

• Even if the price remain same the quantity demanded increases.

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