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Price elasticity of demand

By,
RAMANUJAN CE

MEANING Of Demand
Conceptually the term demand implies a desire for a commodity backed by the ability and willingness to pay for it. Unless a person has adequate purchasing power or resources and the preparedness to spend his resources, his desire for a commodity would not be considered as his demand

ELASTICITIES OF DEMEND
IMPORTANCE OF THE ELASTICITY OF DEMAND
The concept of elasticity of demand plays a crucial role in business-decision regarding maneuvering of prices with a view to making larger profits. For instance, when cost of production is increasing, the firm would want to pass the rising cost on to the consumer by raising the price. Firm may decide to change the price even without in the cost of production.

Types of demand
1) Price Elasticity of Demand 2) Income Elasticity of Demand

3) Cross Elasticity of Demand

Price elasticity of demand


Price elasticity of demand is generally defined as the responsiveness or sensitiveness of demand for a commodity to the changes in its price. Elasticity of demand is the percentage change in demand as a result of one percent change in the price of the commodity.
Percentage change in quantity demanded
ep = Percentage change in price

TYPES OF PRICE ELASTICITY OF DEMAND


Elastic Demand Inelastic Demand Unitary Elastic Demand Perfectly Elastic Demand Perfectly Inelastic

ELASTIC DEMAND
y P R I C E D Relatively elastic demand curve D

demand

When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.

INELASTIC DEMAND
Y

Relatively inelastic demand curve


P R D

I
C E D O X demand

When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand

UNITARY ELASTIC DEMAND When the


y P R I C E D 0 demand x Elasticity of demand equal to utility curve D

proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand

PERFECTLY ELASTIC DEMAND When the


y P R I D Perfectly elastic demand curve

C
E

demand for a product changes increases or decreases even when there is no change in price, it is known as x perfect elastic demand.

PERFECTLY INELASTIC DEMAND


Y P R I C E D Perfectly inelastic demand curve

D demand

If the demand for a commodity does not in spite of an increase or decrease in its price, the demand is perfectly inelastic . In other words quantity demanded is nonresponsiveness or inelastic to price to price changes

Cross-elasticity of demand
It is the measure of the responsiveness of demand for a commodity to the changes in the price of its substitutes and complementary goods. Cross elasticity of demand for tea is the percentage change in its quantity demanded with respect to the changes in the price of its substitute goods.
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Goods are substitute for one another, their demand has positive cross elasticity because increase in the price of one, increase in the demand for other. And the demand for the complementary goods has negative cross elasticity, because increase in the price of a good decreases the demand for its complementary goods

Income elasticity of demand


Income Elasticity of Demand is defined as the percentage change in the quantity demanded of a good divided by the percentage change in the income of the consumer.
Q Ey = Y Q Y

Nature of the Commodity Uses or application of the commodity Availability of Substitutes Proportion of Income spent on a commodity Price of Goods Income of Consumers Time Period