All about elasticity of demand
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The document discusses the concept of elasticity of demand, detailing price elasticity, income elasticity, and cross elasticity. It explains how demand responds to changes in price, consumer income, and the prices of related goods, alongside various types of elasticities such as perfectly elastic, perfectly inelastic, and unitary elastic demand. Additionally, it covers the role of advertising elasticity in influencing demand through effective marketing strategies.
All about elasticity of demand
- 1. All About Elasticity of Demand Price Elasticity Income Elasticity Cross Elasticity Advertisements Elasticity Prepared By: Mohammed Jasir PV Asst. Professor MIIMS, Puthanangadi Contact : 9605 69 32 66
- 3. due to % Change in % Change in Demand Any determinants of demand • Elasticity of demand is defined as the ratio of % change in demand to the % change in one of the determinants of demand. • Demand for a commodity is elastic when a change in determinants leads to change in demand. Elasticity of Demand
- 4. due to % Change in % Change in Demand Price The % change in the quantity demanded of a commodity due to a % change in its price Price Elasticity of Demand
- 5. due to % Change in % Change in Demand Income Income Elasticity of Demand The % change in the quantity demanded of a commodity due to a % change in consumers real income
- 6. due to % Change in % Change in Demand Price of Another Product Cross Elasticity of Demand The % change in the quantity demanded of a product due to a change in the price of another product
- 7. Types of Elasticity of Demand Elasticity of demand classified in to Three 1) Price elasticity of demand 2) Income elasticity of demand 3) Cross elasticity of demand
- 8. Price Elasticity Of Demand • Price elasticity of demand is the ratio of the percentage change in the quantity demanded of a commodity due to a percentage change in its price. • In other words it measures the degree of change of demand in response to change in price. • Change in demand due to change in Price
- 9. Price Elasticity Of Demand
- 11. Degree or kinds of price elasticity of demand 1. Perfectly Elastic Demand 2. Perfectly Inelastic Demand 3. Elasticity Equal to Unity 4. Elastic Demand (More Elastic Demand) 5. Inelastic Demand (Less Elastic Demand)
- 12. • Demand for a commodity is said to be perfectly elastic when a slight change in price leads to infinite change in quantity demanded. • Elasticity = Infinite Price Quantity demanded Y X Demand 0 10 Perfectly Elastic Demand
- 13. • Quantity demanded of a commodity remains the same irrespective of any rise or fall in price. • Elasticity = 0 Price Quantity Demanded Y X Demand 0 10 05 15 Perfectly Inelastic Demand Example: Common salt which is used for cooking
- 14. Elasticity Equal to Unity • When a given increase or decrease in price is making an equivalent increase or decrease in quantity demanded. • The % change in both the price and quantity demanded is the same. • Example: A fall in price by 10% leads to an increase in demand by 10% • Elasticity = 1 Price Quantity Demanded Y X Demand 0 10 20 10 15
- 15. Elastic Demand (More Elastic Demand) • Demand for a commodity is said to more elastic when a small change in price brings about a proportionately larger change in quantity demanded. • Elasticity: Greater Than One (Ep>1). Price Quantity Demanded Y X Demand 0 08 10 10 20
- 16. Inelastic Demand (Less Elastic Demand) • When A given change in price leads to A proportionately smaller change in quantity demand. • Elasticity: Less Than One (Ep<1) Price Quantity Demanded Y X Demand 0 04 10 10 12
- 17. Price Quantity Demanded Y X Demand 0 10 Quantity Demanded Y X Demand 0 10 05 15 Price Quantity Demanded Y X Demand 0 05 10 10 20 Price Quantity Demanded Y X Demand 0 08 10 10 20 Price Quantity Demanded Y X Demand 0 04 10 10 12 Inelastic Demand (Less Elastic Demand) Perfectly Elastic Demand Perfectly Inelastic Demand Price Elasticity Equal to Unity Elastic Demand (More Elastic Demand)
- 18. Income Elasticity of Demand • The rate of change in quantity demanded due to change in the income of the consumer is known as “income elasticity”. • “income elasticity of demand means the ratio of the percentage change in the quantity demanded to the percentage change in income”. by Watson
- 19. Income Elasticity Of Demand • Example: If a 10% increase in income, the quantity of a good demanded increased by 20% , the income elasticity of demand would be 20%/10%= 2
- 20. Income Quantity Demanded Quantity Demanded 10 K 15 K Income 10 K 15 K 20 Kg 30 Kg 20 Kg 30 Kg Income Elasticity Can Be.. Positive Income Elasticity Negative Income Elasticity Income Demand Income Demand
- 21. Positive and Negative • A negative income elasticity of demand is associated with inferior goods that is an increase in income will lead to changes to more luxurious substitutes resulting in fall in the quantity demanded. • A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in quantity demanded.
- 22. Cross Elasticity Of Demand • Shows the relationship between the demand for one commodity and price of another commodity • The percentage change in the quantity demanded of a product in response to a change in the price of another product • Price of some related product also causes a variation in the demand for a commodity • Example: When the price of diesel car increases , the demand for petrol car increases, this type of goods is called substitute goods. • When the price of diesel increases, the demand for diesel car decreases, this types of goods is called complements goods.
- 24. Cross Elasticity Of Demand
- 26. due to % Change in % Change in Demand Advertisement Advertising Elasticity of Demand Advertising elasticity is a measure of an advertising campaign's effectiveness in generating new sales.
- 28. Advertising elasticity of Demand • Advertising elasticity of demand (AED) is a measure of a market's sensitivity to increases or decreases in advertising saturation. • Advertising elasticity is a measure of an advertising campaign's effectiveness in generating new sales. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in advertising expenditures. • A positive advertising elasticity indicates that an increase in advertising leads to a rise in demand for the advertised good or service.
- 29. Elasticity of Demand – Price Elasticity of Demand • Perfectly elastic • Perfectly Inelastic • Unitary Elastic • More Elastic • Less Elastic – Income Elasticity • Positive and Negative – Cross Elasticity