ELASTICITY OF DEMAND INTRODUCED BY ALFRED MARSHALL ELASTICITY OR RESPONSIVENESS OF DEMAND IN A...
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Transcript of ELASTICITY OF DEMAND INTRODUCED BY ALFRED MARSHALL ELASTICITY OR RESPONSIVENESS OF DEMAND IN A...
![Page 1: ELASTICITY OF DEMAND INTRODUCED BY ALFRED MARSHALL ELASTICITY OR RESPONSIVENESS OF DEMAND IN A MARKET IS GREAT OR SMALL ACCORDING AS THE AMOUNT DEMANDED.](https://reader034.fdocuments.in/reader034/viewer/2022051621/56649f1f5503460f94c36d3e/html5/thumbnails/1.jpg)
ELASTICITY OF DEMAND
• INTRODUCED BY ALFRED MARSHALL• ELASTICITY OR RESPONSIVENESS OF
DEMAND IN A MARKET IS GREAT OR SMALL ACCORDING AS THE AMOUNT DEMANDED INCREASES MUCH OR LITTLE FOR A GIVEN FALL IN PRICE AND DIMINISHES MUCH OR LITTLE FOR A GIVEN RISE IN PRICE.
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TYPES OF ELASTICITY OF DEMAND
• PRICE ELASTICITY OF DEMAND• INCOME ELASTICITY OF DEMAND• CROSS-ELASTICITY OF DEMAND
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PRICE ELASTICITY OF DEMAND
• DEGREE OF RESPONSIVENESS OF QUANTITY DEMANDED TO A CHANGE IN PRICE IS CALLED PRICE ELASTICITY OF DEMAND. =
PERCENTAGE CHANGE IN QUANTITY DEMANDED
PERCENTAGE CHANGE IN PRICESYMBOLICALLY
eP =Q/QP/P
P
Q
CHANGE
PRICE
QUANTITY
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MEASUREMENT OF PRICE ELASTICITY OF DEMAND
• PERCENTAGE METHOD• POINT METHOD OR SLOPE
METHOD• TOTAL OUTLAY METHOD• ARC METHOD
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PERCENTAGE METHOD• RELATIVE CHANGE IN DEMAND DIVIDED BY
RELATIVE CHANGE IN PRICE OR PERCENTAGE CHANGE IN DEMAND DIVIDED BY PERCENTAGE CHANGE IN PRICE.
eP =Q
P
%
%
FOR EXAMPLE IF PRICE OF RICE INCREASES BY 10% AND DEMAND FOR RICE FALLS BY 10% eP = 15/10 = 0.5THIS MEANS THAT DEMAND FOR RICE IS INELASTIC
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MEASURES OF ELASTICITY
• REALTIVELY ELASTIC IF e>1• REALTIVELY INELASTIC IF
e<1• UNITARY ELASTIC DEMAND
IF e=1• PERFECTLY INELASTIC
DEMAND IF e=0• PERFECTLY ELASTIC
DEMAND IF e=INFINITY
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RELATIVELY ELASTIC
O Q Q1
P1
P
D
QUANTITY DEMANDED
PRIC
E
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RELATIVELY INELASTIC
O Q Q1
P1
P
D
D
QUANTITY DEMANDED
PRIC
E
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UNITARY ELASTIC DEMAND
O Q1Q
P1
P
D
QUANTITY DEMANDED
PRIC
E
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PERFECTLY INELASTIC DEMAND
O Q
P1
P
D
QUANTITY DEMANDED
PRIC
E
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PERFECTLY ELASTIC DEMAND
O Q Q1
P D
QUANTITY DEMANDED
PRIC
E
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POINT METHOD
• WE CAN CALCULATE PRICE ELASTICITY OF DEMAND AT A POINT ON THE LINEAR DEMAND CURVE.
eP
LOWER SEGMENT OF DEMAND CURVE UPPER SEGMENT OF DEMAND CURVE
=
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D
C
.
.
A
B
E
AE – UPPER SEGMENTEB – LOWER SEGMENT
O
POINT METHODPR
ICE
QUANTITY DEMANDED
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For example in fig. the length of the demand curve AB is 4cm.
• Ep at point E ,ep = EB/EA = 2/2 = 1• Ep at point D = (middle point of EB portion of
demand curve) DB/DA = 1/3 = 0.3 ep<1• Ep at point c(middle point of EA portion of
demand curve) = CB/CA = 3/1 = 3 ep >1• Ep at point B = 0/AB = 0/4 = 0• Ep at point A = AB/0 = 4/0 = infinity
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TOTAL OUTLAY METHODWe can measure elasticity through a change in expenditure on
commodities due to a change in price
• Demand is elastic if total outlay or expenditure increases for a fall in price(ep>1)
• Demand is inelastic if total outlay or expenditure falls for a fall in price(ep<1)
• Demand is unitary if total expenditure does not change for fall in price(ep=1)
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TYPES OF ELASTICITY OF DEMANDCHANGES IN PRICE
Ep = 1 Ep<1 Ep>1
FALL IN PRICE
TOTAL OUTLAY REMAINS CONSTANT
TOTAL OUTLAY FALLS
TOTAL OUTLAY RISES
RISE IN PRICE
TOTAL OUTLAY REMAINS CONSTANT
TOTAL OUTLAY RISES
TOTAL OUTLAY FALLS
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ARC METHOD
• SEGMENT OF DEMAND CURVE BETWEEN TWO POINTS IS CALLED AN ARC.
Ep = q1 – q2 / P1-P2 Q1+q2 P1+P2
= q Q1+q2 /
PP1+P2
Q = change in qty demandedP = change in price of the commodityP1 = original priceP2 = New priceQ1 = original qtyQ2 = new qty
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ARC ELASTICITY
O Q1 Q2
P1
A
B
P
QQUANTITY DEMANDED
PRIC
E
P1
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INCOME ELASTICITY OF DEMAND
• DEGREE OF RESPONSIVENESS OF DEMAND TO CHANGE IN INCOME.
Ey = Percentage change in qty demanded Percentage change in income
Ey = q/q x y/ yQ- quantity demandedY - income
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Cross elasticity of demand
• Responsiveness of demand to change in price of realted goods.
Ec = Percentage change in qty demanded of commodity X Percentage change in price of commodity Y
Ec= qx/ py x py/qx
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