3. elasticity of demand
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Elasticity of demand refers to the inverse relationship between price and quantity demanded of a good. There are two main types of elasticity - elastic demand, where a small price change leads to a large quantity change, and inelastic demand, where a large price change results in a small quantity change. Elasticity can be measured using various methods including percentage, point, and arc methods to calculate price, income, substitution, and complementary elasticities. The elasticity of a good is determined by factors like availability of substitutes, level of expenditure, and time period. Elasticity analysis has practical applications in areas like taxation, monopoly pricing, and economic policymaking.
3. elasticity of demand
- 1. Elasticity of Demand Elasticity of Demand: the inverse relationship between price and demand. The changing rate between price and demand. Two types of elasticity of demand: i) Elastic demand: a small change in price may lead to a great change in demand. ii) Inelastic demand: a big change in price may not lead to a great change in demand, daily used, necessary goods. Basic Forms of Elasticity of Demand: i) Price elasticity: changing rate of price and demand ii) Income elasticity: changing rate of income and demand iii) Cross elasticity: changing rate of related product a) Substitution elasticity: elasticity of substitution between two substitution goods like tea and sugar. b) Complementary: elasticity of substitution between two complimentary goods like bat and ball.
- 2. Elastic and Inelastic Demand D D Y O X P A Ai R Ri Elastic Y P Pi O D R Ri A Ai X Inelastic D Pi Y
- 3. Price Elasticity Y 10 05 0 X2 4 D D Income Elasticity 80 40 4 6 D D SubstituteComplimentary Tea Coffee Bat Ball 0 Y X
- 4. Methods of Measuring Elasticity of Demand Four important methods of elasticity of demand 1. Numerical or percentage method: we can measure ED by using the formula; percentage change in quantity demanded divided by percentage change in price. 2. Point method or geometric method: tells us how to measure ED of the point of demand curve. Different point of the demand curve have different elasticity. 3. Arc method: tells us how to measure ED in between two point of the demand curve; where price and demand changes are very negligible. 4. Expenditure and revenue method: tells us how to measure ED of demand on the basis of consumer expenditure and revenue.
- 5. 1. Numerical or Percentage Method Y P Pi 0 D D R Ri A Ai X ED = 1 Y D D R RiP Pi A Ai 0 X ED = > 1 P Pi Y D D 0 R Ri A Ai X ED = < 1 ED = Infinity Y D 0 X D Y 0 D D X ED = Zero
- 6. Measurement of Elasticity ED= ∝ =∝= ∆ ∆ ==∆=∆ %0 %20 % % 20%,%0% P Q EPQP ED= 0 0 %50 %0 % % %0,%50% == ∆ ∆ ==∆=∆ P Q EPQP ED= >1 12.1 %50 %60 % % %60%,%50% >== ∆ ∆ ==∆∆ P Q EPQP ED= <1 14. %50 %20 % % 20,%50% <== ∆ ∆ ==∆=∆ P Q EPQP ED= 1 1 %50 %50 % % 50,%50% == ∆ ∆ ==∆=∆ P Q EPQP
- 7. Point and Arc Method Y D D O X . . . . . ED =inf ED= > 1 ED =1 ED =<1 ED = 0 Point Y Pi P2 O D D Qi Q2 X A B Arc ....
- 8. Factors Determining Elasticity of Demand i) Nature of product: necessaries products: rice, medicine are IED. Fashion or luxury goods are ED. ii) Substitute product: coffee and tea are ED. iii) Luxury product: television, mobile set ED. iv) Expenditure: if he wants to spend more it is ED. v) Goods having several use: LP gas in Rajshahi is ED. vi) Joint demand: high price of oil, less demand for car ED vii) Level of price: very expensive or very low priced is ID. viii) Level of income: demand of a poor people is elastic and demand of the rich people is inelastic. ix) Time period: demand for short is elastic and demand for the long time is inelastic.
- 9. Practical Applications of Elasticity of Demand i) Taxation: high taxes are charged that demand is elastic ii) Monopoly price: In case of elastic, fix high price iii) Joint product: producer is guided by joint product iv) Increasing return: Profit depend on elasticity v) Output: what amount will be produced vi) Wages: demand for particular labor vii) Effect on economy: distribution of national income viii) International trade: determine terms of trade ix) Economic policy: business cycle, policy, inflation control and consider by elasticity of demand. x) Rate of foreign exchange: when fixing the rate of exchange, the govt. has to consider the elasticity of demand
- 10. Practical Applications of Elasticity of Demand i) Taxation: high taxes are charged that demand is elastic ii) Monopoly price: In case of elastic, fix high price iii) Joint product: producer is guided by joint product iv) Increasing return: Profit depend on elasticity v) Output: what amount will be produced vi) Wages: demand for particular labor vii) Effect on economy: distribution of national income viii) International trade: determine terms of trade ix) Economic policy: business cycle, policy, inflation control and consider by elasticity of demand. x) Rate of foreign exchange: when fixing the rate of exchange, the govt. has to consider the elasticity of demand