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ELASTICITY OF DEMAND How wud u react if one morn u woke up to know that price of tea has risen by 100% or ur Dr prescribes a penicillin for pnemonia &

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Presentation on theme: "ELASTICITY OF DEMAND How wud u react if one morn u woke up to know that price of tea has risen by 100% or ur Dr prescribes a penicillin for pnemonia &"— Presentation transcript:

1 ELASTICITY OF DEMAND How wud u react if one morn u woke up to know that price of tea has risen by 100% or ur Dr prescribes a penicillin for pnemonia & chemist jst raised the price or movie rates go up by 100%

2 Test u r demand sensitivity for the foll goods & services-shoelaces, sugar,electric bulbs, pens, ATM service,mobiles,cigarettes,gold,tvset books,3Bhkflat,4wheeler,coffee,MFs,footwear,as pirin,music player,refrigerator,cold drinks, parle- G,stones. Measures devised to know how consumers alter their purchases in response to changes in various attributes of firms goods & services is elasticity

3 TYPES OF DD ELASTICITY Price- %change in demand/%change in price of the same product Income- %change in demand/%change in consumers income. Cross-% change in demand/% change in price of related product. Promotional-% change in demand/% change in advertising expenses.

4 PRICE ELASTICITY & REVENUE Several firms now focus on Pe in the form of revenue mgt. Price Quantity

5 ARC & POINT ELASTICITY Arc els is the average els over a segment of the demand curve. Arc el=change in dd/change in price.P1+P2/Q1+Q2 Point els relates to els at a particular point on the demand curve. Point el= lower seg/upper seg.

6 Determinants of Ed Pe substitutes Time Nature of product Habit Share in income Ye Business cycles Economic growth Standard of living Ae Product stage Time Rival co Nature of product

7 Determinants of Pe 1)Can people find a substitute when the price goes up? If Yes, then Pe will be high Foreign travel has high elasticity because there is a substitute- Domestic travel In case of eggs, people will continue to buy them even if price rises The degree of substitutability depends on whether the product is a necessity or luxury

8 There are no good substitute for your first telephone line which is almost a necessity if you want to communicate with the outside world, but a second line is more a luxury & has higher Pe 2)Big Ticket Vs Little Ticket Items- if the price of foreign travel doubles, many people will not be able to afford travel abroad, but even if price of newspaper doubles most people can still afford to buy it

9 Price elasticity 3) Temporary Vs Permanent Price change- Suppose Vijay sales announces a discount offer on a TV set to last for one day, then people will shift their purchases to the sale day. 4) Differences in preferences- Young cigarette smokers are more sensitive to changes in price than older smokers

10 Price elasticity Long run Vs short run- When the price of oil rises people can reduce their quantity demanded only in the SR by driving less & using other modes of transport, which seems difficult or impossible In the LR when it comes to buying a new car most people will buy a more fuel efficient car

11 Business application of Ed Monopolist while using price discrimination Super market, factor pricing, use of machines, taxation policy, foreign trade, product diversification, pricing strategies etc. Thus computer technology enables firms to keep records of each customer-their likes dislikes, their sensitivity & so on. A manager who doesnt understand elasticity's is at a comparative disadvantage.


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