ELASTICITY OF DEMAND Degree of responsiveness of demand to change in any of its determinants is...
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Transcript of ELASTICITY OF DEMAND Degree of responsiveness of demand to change in any of its determinants is...
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 coefficient
Type of elasticity Description
Ed=0 Perfectly Inelastic Quantity demanded does not change with price at all
Ed<1 Inelastic or less than unit elastic
% change in demand is less than % change in price
Ed=1 Unit elastic
% change in demand is equal to % change in price
Ed>1 Elastic 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
A BC
Methods of Measurement of Price Elasticity of Demand
• Total Outlay Method or Total Expenditure Method
• Point Method and
• Arc Method
Total out lay Method
Sugar
Cloth
Cheese
P Q TQ P Q TQ P Q TQ
18 10 180 18 10 180 18 10 180
15 11 165 15 12 180 15 14 210
12 12 144 12 15 180 12 20 240
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
priceEd=1
Ed=1
Ed<1
Ed
Ed>1
Ed=
=0
∞