Measurment of elasticity of demand
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This document discusses the measurement of elasticity, including: 1. Defining elasticity of demand as the responsiveness of quantity demanded to changes in price or other factors. 2. Describing the three main types of elasticity - price elasticity, income elasticity, and cross elasticity. 3. Explaining the different categories of price elasticity, from perfectly elastic to perfectly inelastic demand, and providing examples of goods that fall under each category.
Measurment of elasticity of demand
- 1. Measurement of Elasticity This Presentation on Measurement of elasticity was prepared By Mr.Prem Raj Bhatta Nepal Western Academy Dhagadhi-2 , Kailali, Nepal This Topic Contains: #Meaning of Elasticity of Demand, #Types of Elasticity of Demand,
- 2. 1. Meaning of Elasticity of Demand Elasticity of demand refers to the responsiveness of dependent variable to the change in independent variable. It is a measure of how much the quantity demanded of a commodity responds to a change in the price of the commodity, income of the consumer, prices of related goods etc. In other words, elasticity of demand refers to the ratio of percentage change in quantity demanded of a commodity to the percentage change in any determinant of demand. Elasticity of demand can also be expressed as follows; 풆풅= - % 풄풉풂풏품풆 풊풏 풒풖풂풏풅풊풕풚 풅풆풎풂풏풅풆풅 % 풄풉풂풏품풆 풊풏 풂풏풚 풅풆풕풆풓풎풊풏풂풏풕 풐풇 풅풆풎풂풏풅 It’s a sensitivity or responsiveness of demand to the change in an independent variable, or… It is the result calculated as the percentage change in demand divided by percentage change in an independent variable
- 3. 2-Types of Elasticity of Demand Elasticity of demand is of three types. • Price Elasticity of Demand • Income Elasticity of Demand • Cross elasticity of Demand 2.1. Price Elasticity of Demand • Price elasticity of demand is a measure of how much the quantity demanded of a commodity responds to a change in the price of that commodity. In other words, it is the radio of the percentage change in quantity demanded of a commodity to the percentage change in its price, other things being equal. • It is expressed as follows; 풆풑= - % 풄풉풂풏품풆 풊풏 풒풖풂풏풕풊풕풚 풅풆풎풂풏풅 % 풄풉풂풏품풆 풊풏 풑풓풊풄풆
- 4. It is the percentage change in quantity divided by percentage change in price, or Responsiveness of demand to changes in price. Mathematically, price elasticity of demand is expressed as follows; ep=− Q2 −Q1 Q1 X 100 P2−P1 P1 X 100 ep=− ΔQ Q1 ΔP P1 ep=− ΔQ ΔP X P1 Q1 Where; ΔQ = Change in Quantity ΔP = Change in price P1 = Initial Price P2 = New price Q1 = Initial quantity Q2 = New quantity
- 5. For example, Suppose the quantity demanded of sugar was 200 kg at Rs,50 per kg. when price rose up to Rs. 60 per kg, demand for sugar decreased to 180 kg. Solution, Initial quantityQ1=200kg, New quantityQ2=180 kg Initial price P1=50 New price P2 = 60 ΔQ= 180 – 200 = - 20 ΔP = 60 – 50 = 10 Here, ep= - ΔQ ΔP x P1 Q1 Substitute the values in the above formula. 5
- 6. 푒푝 =- −20 10 x 50 200 = 0.5 ans. Note:- 푒푝 or the coefficient of price elasticity of demand is always negative because when price changes, demand moves in opposite direction. But the negative sign (- ) is ignored while using the coefficient.
- 7. * 2.1.1-Types of Price Elasticity of Demand Price elasticity of demand is generally divided under the following sub headings; 1. Perfectly Elastic Demand 2. Relatively Elastic Demand, or More than unity (one) 3. Unitary Elastic Demand, or Equal to unity (one) 4. Relatively Inelastic Demand, or Less that Unity (one) 5. Perfectly Inelastic Demand All these types of price elasticity demand have been explained as under.
- 8. 1- Perfectly elastic Demand (푒푝= ∞) Price elasticity of demand is said to be perfectly elastic when a small reduction in prices causes the buyers to increase the quantity demanded from zero to all they wanted and a small rise in price makes them cut in demand completely. The demand in such a case hyper-sensitive and elasticity of demand is infinite. Such a price elasticity of demand is rare in actual life. The following figure shows the nature of perfectly elastic demand. In the figure, at per unit price Rs.11 demand is zero unit and a fall in price by Rs. 1 has caused an increase in demand by 100 units. Here, P1=11, P2=10 ,Q1=0 & Q2=100 Fig-1 D D Y price 11 ΔQ = 100 & ΔP=1 푒푝 = - Δ퐐 Δ퐏 X 퐏ퟏ 퐐ퟏ 푒푝= − ퟏퟎퟎ ퟏ X ퟏퟏ ퟎ 푒푝= ퟏퟏퟎퟎ ퟎ 푒푝 = ∞ ans. X 100 10 0 Quantity
- 9. 2-Rlatively Elastic Demand (풆풑 > ퟏ) Price elasticity of demand said to be relatively elastic or greater than one when the percentage change in quantity demanded is greater than the percentage change in price. Relatively elastic demand is shown in figure-2 . In the figure, quantity demanded is 5 unit at Rs. 10, when per unit price falls to Rs.5, demand will rise to 15 units. The percentage change in price is 50% and percentage change in quantity demanded is 200%. Elasticity of demand (푒푝) is 4, which is greater that one (4>1). Here, given Q1=5, Q2=15 P1=10, P2=5 ΔQ= Q2-Q1, 15-5, 10 ΔP= P2-P1, 5-10, -5 10 5 A 50% B 200% P 0 5 10 15 Q Quantity Price Fig - 2
- 10. Fig -3 10 푒푝= - ΔQ ΔP X P1 Q1 푒푝= - 5 −5 x 10 10 푒푝= 1 Ans. Or, 푒푝= 50% 50% 푒푝= 1 3- Unitary Elastic Demand (풆풑=1) • Price elasticity of demand is said to be unitary or equal to one when the percentage change in quantity demanded equals to the percentage change in its price. It is shown in the figure-3. • The figure shows that the initial price is Rs. 10 and at this price quantity demanded is 10 units. When the price falls to Rs, 5, quantity demanded extents to 15 units. It means the change in quantity demanded(50%) is equal to the change in price(50%). Given, Q1=10, Q2=15, P1=10, P2=5 • %change in price=(P2-P1)/P1 X 100 • =(5-10)10 X 100 • = 50% • %change in demand=(Q2-Q1)Q1X100 • = (15-10)10X100 • = 50% P Q A B D D 10 15 5 0 50% 50% Price Quantity Note :- ΔQ=Q2-Q1 & ΔP=P2-P1
- 11. Fig -4 10 4 60% 50% 푒푝 = - Δ푄 Δ푃 X 푃1 푄1 푒푝 = - 5 −6 x 10 10 푒푝 = 0.83 ans. Here, 푒푝 < 1 4- Relatively Inelastic Demand (풆풑< 1) Price elasticity of demand is said to be relatively inelastic or less than unity, when the percentage change in quantity demanded is less than that of the percentage change in price. It is shown in the figure – 4. The figure shows that quantity demanded of the commodity is 10 units at the initial price Rs.10 and a fall in the price from Rs. 10 to 4 causes an increase in demand from 10 to 15 units. The quantity demanded has changed by 50% whereas the price has changed by 60%. The percentage change in demand is less that that of the percentage change in price. Given, QI=10, Q2=15, P1=10 & P2= 4 % change in demand ΔQ= (Q2-Q1)/Q1 x100 = (15-10)/10 x100 = 50% %change in price ΔP=(P2-P1)/P1x 100 = (4-10)/10 x 100 = - 60%0r 60% Q P D D A B 0 5 10 15 Price Quantity Note:- ΔQ =Q2-Q1 & ΔP=P2-P1
- 12. Fig-5 4 2 푒푝= - Δ푄 Δ푃 A B X 푃1 푄1 푒푝= - 0 50 X 4 10 푒푝= 0 ans. 5- Perfectly Inelastic demand (풆풑= 0) • Price elasticity of demand is said to be perfectly inelastic when quantity demanded of a commodity remains unchanged or unresponsive even if there is any change in price. The nature perfectly inelastic demand has been shown in the figure- 5.The figure shows that initial quantity demanded of a commodity is 10 units at initial price Rs. 4 but there is no change or zero percent change in quantity demanded even if the price falls from Rs. 4 to 2 by 50%. Hence, quantity demanded is perfectly inelastic or equal to zero. • Given, Q1=10, Q2=10, P1=4 & P2=2 % change in demand ΔQ=(Q2-Q1)/Q1X100 • =(10-10)/10X100 • = 0% %change in price ΔP=(P2-P1)/P1X100 • =(2-4)/4X100 • =-50% or 50% Q P D D 0 10 Quantity Price 50% 푒푝= 0% 50%, 표푟, 푒푝=0
- 13. Table showing elasticity of various goods * Let’s summarize the slope of demand curves 1- perfectly elastic (horizontal) 2- relatively elastic (flatter) 3- unitary elastic (steeper) 4- relatively inelastic (more steeper) 5- perfectly inelastic (vertical) Types of price elasticity of demand Variety of goods 1-Perfectly elastic No, practical importance, rare use 2- Relatively elastic Luxurious goods and goods having close substitutes 3- Unitary elastic No specific goods 4- relatively elastic Goods of daily uses and goods having no close substitutes 5- perfectly inelastic most necessary goods and services, like medicine, drugs
- 14. Fig- 6 A B D D P Q 6 4 0 80 120 3- Midpoint Method of Calculating Price Plasticity If we try to calculate the price elasticity of demand between two points on a demand curve, we will face an annoying problem; that is, the elasticity from point A to point B seems different from the elasticity from point B to point A. For example, consider the figure-5 and following calculations. From point A to B ΔP=(6-4)/4x100=50% ΔQ=(80-120)/120x100=33.33% From point B to A ΔP=(4-6)/6x100=33.33% ΔQ=(120-80)/80x100=50% From point A to B 푒푝= 33.33% / 50% = 0.66 From point B to A 푒푝= 50% / 33.33% = 1.5 It is seen in the above calculations that when we move from point A to B and from point B to A on the same demand curve, the coefficient of price elasticity of demand differs. This problem is avoided by using midpoint or average method of calculating elasticity.
- 15. To calculate elasticity by midpoint or average or midway method, the following formula is applied. 푒푝 = - 푄2−푄1 (푄2+푄1)/2 푥 100 푃2−푃1 (푃2+푃1)/2 푥 100 푒푝 = - Δ푄 Δ푃 x 푃+푃1 푄2+푄1 Now, from point A to B ΔQ=80-120, =-40 ΔP=