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Kishor Bhanushali
Elasticity of Demand
The extent to which the quantity demanded will rise (fall) due to fall (rise) in the price of the same good or a related good or due to the rise in the income of the consumer Analysis of demand sensitivity with respect to prices of goods and income helps the business to forecast market trends in future
Price Elasticity
ep = Percentage Change in Quantity Demanded Percentage Change in Price = Change in Quantity Demanded Quantity Demanded Initially = Where
Qd P
*
P
Qd
P0
P1
S D
Q0
Q1
Quantity Demanded
ep
P0 + P1
Q0 + Q1
Measurement of point elasticity is same as the price elasticity of demand in a limiting sense Here changes in quantity demanded and price are infinitesimally small Point elasticity of demand is different at different point on the demand curve
Price
ep = 1
ep < 1
ep = 0 0 Quantity Demanded
Tow demand curves may have the same slope but different elasticities as well as different slope and the same elasticities
Price C A The absolute elasticity of demand curve AB is more than that of demand curve CD, in spite of their slopes being the same
Quantity Demanded
Price
Elasticities of both the curves are equal , where as their slopes are different
C Quantity Demanded
Supply
Total Revenue = OAEQ A E Total Expenditure = OAEQ
Demand 0 Q Quantity
Predicting Changes in Total Revenue and Total Expenditure in Response to Price Increase
Price New Supply Curve Old Supply Curve Gain in revenue P2 F
P1
Q2
Q1
Quantity
Predicting Changes in Total Revenue and Total Expenditure in Response to Price Increase
Summary of Elasticity Measures (increase in Price) Unitary Elastic % Q = %P Relatively Elastic Perfectly Elastic % Q > %P % Q = 0 e =1 e>1 e = No Change Decrease -
Relatively Inelastic
Perfect inelastic
% Q < %P
% Q = 0
e<1
e =0
Increase
Increase
Income Elastic
Q2 E1 Income elasticity of demand is greater than one. In this case as income increases, the quantity demanded also increases. But the percentage increase in demand is more than percentage increase in income Y2
Quantity Demanded
Q1
Y1
Income
Income Inelastic
Quantity Demanded E2
Q1 Q2 E1
Income elasticity is between zero and one. In this case, as income increases quantity demanded increases but the percentage increase in quantity demanded is less than percentage increase in income
Y1
Y2
Income
Income
The advertising elasticity of demand measures an extent to which the demand of a product will be influenced by advertisement and other promotional activities. Advertising elasticity of demand measures the responsiveness of quantity demanded to changes in the expenditure on advertising and other sales promotional activities.
eA
Q =