ELASTICITY OF DEMAND Degree of responsiveness of demand to change in any of its determinants is called elasticity of demand.

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Presentation transcript:

ELASTICITY OF DEMAND Degree of responsiveness of demand to change in any of its determinants is called elasticity of demand

We have three different concepts of elasticity of demand Price elasticity of demand Cross elasticity of demand and Income elasticity of demand

Price elasticity of demand Price elasticity of demand or elasticity of demand, is the degree of responsiveness of the demand for commodity to a change in its price. Ed= Percentage change in quantity demanded Percentage change in price Ed=

Value of Elasticity Coefficients and their Description Value of Elasticity coefficie nt Type of elasticityDescription Ed=0Perfectly InelasticQuantity demanded does not change with price at all Ed<1Inelastic or less than unit elastic % change in demand is less than % change in price

Ed=1Unit elastic % change in demand is equal to % change in price Ed>1Elastic or more than unit elastic % change in demand is more than % change in price Ed=∞Perfectly elastic Purchasers are prepared to buy all they can obtain at some price and none at all at an even slightly higher price.

Perfectly Inelastic Q price

Perfectly Elastic quantity Price

Unit Elastic

Inelastic quantity Price

Elastic quantity price

Flat and steep curve More generally we can say that elasticity of demand at a common point will be more on a flatter curve than on a steeper curve.

quantity price d d d, D, R AB C

Methods of Measurement of Price Elasticity of Demand Total Outlay Method or Total Expenditure Method Point Method and Arc Method

Total out lay Method Sug ar Clot h Che ese PQTQPQ PQ

Point Method Measurement of elasticity on demand curve at a point is known as point elasticity of demand. Ed= Lower segment of the demand curve –Lower segment of the demand curve

Point Method Quantity price Ed=1 Ed<1 Ed Ed>1 Ed= =0 ∞