Understanding Elasticity of Demand in Economics

Elasticity of Demand
 
Examples
 
As a result of fall in the price of radio from Rs.
500 to Rs. 400, quantity demanded increases
from 100 radios to 150 radios.
As a result of fall in the price of wheat from
Rs. 10 per kg to Rs. 9 per kg, the demand
increases from 500 kgs to 520 kgs.
As a result of a fall in the price of salt from Rs.
3 per kg to Rs. 2.50 per kg, the demand
increases from 1000 to 1005 kgs.
 
Definition
 
Elasticity of Demand as the responsiveness of the
quantity demanded of a good to changes in one
of the variables on which demand depends.
It is the percentage change in quantity demanded
divided by the percentage change in one of the
variables on which demand depends.
These variables are price of the commodity, price
of the related commodities, income of the
consumers.
 
Price Elasticity
 
It expresses the response of quantity demanded
to a change in its price, ceteris paribus.
Price Elasticity = Ep
Ep = % change in quantity demanded
  
------------------------------------------------
   
% change in price
Ep= Change in quantity X Original price
 
    ------------------------
 
   ------------------------
 
   Change in price           Original quantity
 
Example
 
The price of a commodity decreases from Rs.
6 to Rs.  4 and the quantity demanded
increases from 10 units to 15 units.  Find the
co-efficient of price elasticity.
 
Interpreting numerical values of
elasticity of demand
 
The numerical value of elasticity of demand
can assume any value between zero and
infinity
Elasticity is zero, if there is no change in
quantity demanded when price changes.
Elasticity is one if the percentage change in
quantity demanded is equal to the percentage
change in price.
 
Interpreting numerical values of
elasticity of demand
 
Elasticity is greater than one when the
percentage change in quantity demanded is
more than the percentage change in price.
Elasticity is less than one when the percentage
change in quantity demanded is less than the
percentage change in price
Elasticity is infinity when a small reduction in
price raises the demand from zero to infinity.
 
Methods of measuring elasticity
 
Percentage method
( Suppose quantity demanded of coconut is
initially 800 units at a price of Rs. 10 and
increases to 1000 units when price falls to Rs.
8. Calculate price elasticity of demand of
coconut)
 
Point elasticity of demand
 
Refers to measuring the elasticity at a particular
point on the demand curve.
Defined as dq/dp x p/q
Where dq/dp is the derivative of quantity q w.r.t
price p on the demand curve.
Point elasticity = Upper segment / Lower segment
 
Arc Elasticity method
 
Arc elasticity measures elasticity at the mid point
of an arc between any two points on a demand
curve.
Elasticity = q1-q2/q1+q2   X p1 +p2/ p1-p2
Where p1 = original price
  
       q1 = original quantity
  
        p2 = new price
  
       q2 = new quantity
 
Total outlay method
 
Elasticity is measured by comparing
expenditure levels before and after any
change in price.
 
Determinants of price elasticity of
demand
 
Availability of substitutes
Proportion of income spent on the commodity
Nature of need that the commodity satisfies
Number of uses to which a commodity can be put
Time
Consumer habits
Price range
 
Income elasticity of demand
 
Income elasticity is the degree of responsiveness
of quantity demanded to a small change in the
income of the consumers
The relationship between income elasticity of
goods and proportion of income spent on it can
be described in the following propositions.
 
Propositions
 
If the proportion of income spent on goods remain the
same as income increases, then income elasticity for the
goods is equal to one.
If the proportion of income spent on goods Increases as
income increases, then income elasticity for the goods is
greater than one
If the proportion of income spent on goods decreases as
income increases, then income elasticity for the goods is
less than one
 
Positive Income elasticity of demand
 
When with an increase in the income of the
consumer, the demand for the good increases
and vice versa.
It is positive in case of normal goods
 
Negative Income elasticity of demand
 
When increase in income of the consumer is
accompanied by a fall in the demand of goods
It happens in case of inferior goods or Giffen
goods
 
Zero Income elasticity of demand
 
When change in the income of a consumer
does not have any effect on the demand
Demand for necessaries like oil, salt etc have
zero income elasticity of demand
 
Cross Elasticity of Demand
 
Cross elasticity of demand is the change in the demand of one good
in response to a change in the price of another good.
 
 
Ec = ∆q
x  
  
p
y
                      ---------                
X
 
-----------
  
   
∆p
y
 
  
 
 q
x
Where Ec = Cross elasticity of demand
 
  
 q
x = 
original quantity demanded of  X
  
 ∆q
x   = 
Change in quantity demanded of X
  
 
py  = Original price of Y
  
∆p
y = Change in Price of Y
 
Positive cross elasticity of demand
 
It is positive in case of substitute goods.
For ex, a rise in the price of coffee will lead to
a rise in demand for tea.
The curve slopes upward from left to right
 
Negative cross elasticity of demand
 
It is negative in case of complementary goods
For ex, an increase in the price of bread will
lead to a fall in the demand for butter
The curve slopes downward from left to right
 
Zero cross elasticity of demand
 
Cross elasticity demand is zero when two
goods are not related to each other.
For ex, rise in the price of wheat will have no
effect on the demand for shoes.
 
Read the following data and answer
the questions
 
XYZ are 3 commodities. X and Y are complements whereas X and Z
are substitutes.
A shopkeeper sells commodity X at Rs. 40 per piece. At this price he
is able to sell 100 pieces of X per month. After some time he
decreases the price of X to Rs. 20. Following the price decrease:
He is able to sell 150 pieces a month
The demand for Y increases from 25 units to 50 units
The demand for commodity Z decreases from 150 units to 75 units
 
Quiz
 
The price elasticity of demand when the price
of X decreases from Rs. 40 to Rs. 20 will be
equal to :
1.5
1.0
1.66
0.6
 
Quiz
 
The cross elasticity of demand for Y when the
price of X decreases from Rs. 40 to Rs. 20 is
equal to:
+1
-1
-1.5
1.5
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Elasticity of demand refers to the responsiveness of quantity demanded to changes in factors like price, related commodities, and consumer income. This concept helps analyze how demand fluctuates with price changes, with examples and calculations provided. Interpretations of numerical values and the importance of price elasticity are also explained in detail.


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  1. Elasticity of Demand By Dr. Dr. V.S. V.S. Karpe Karpe Dept. of Economics Sarvajanik Arts & Commerce College, Visarwadi, Tal. Navapur, Dist. Nandurbar (MH)

  2. Examples As a result of fall in the price of radio from Rs. 500 to Rs. 400, quantity demanded increases from 100 radios to 150 radios. As a result of fall in the price of wheat from Rs. 10 per kg to Rs. 9 per kg, the demand increases from 500 kgs to 520 kgs. As a result of a fall in the price of salt from Rs. 3 per kg to Rs. 2.50 per kg, the demand increases from 1000 to 1005 kgs.

  3. Definition Elasticity of Demand as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends. It is the percentage change in quantity demanded divided by the percentage change in one of the variables on which demand depends. These variables are price of the commodity, price of the related commodities, income of the consumers.

  4. Price Elasticity It expresses the response of quantity demanded to a change in its price, ceteris paribus. Price Elasticity = Ep Ep = % change in quantity demanded ------------------------------------------------ % change in price Ep= Change in quantity X Original price ------------------------ ------------------------ Change in price Original quantity

  5. Example The price of a commodity decreases from Rs. 6 to Rs. 4 and the quantity demanded increases from 10 units to 15 units. Find the co-efficient of price elasticity.

  6. Interpreting numerical values of elasticity of demand The numerical value of elasticity of demand can assume any value between zero and infinity Elasticity is zero, if there is no change in quantity demanded when price changes. Elasticity is one if the percentage change in quantity demanded is equal to the percentage change in price.

  7. Interpreting numerical values of elasticity of demand Elasticity is greater than one when the percentage change in quantity demanded is more than the percentage change in price. Elasticity is less than one when the percentage change in quantity demanded is less than the percentage change in price Elasticity is infinity when a small reduction in price raises the demand from zero to infinity.

  8. N u m e r ic a l m e a s u r e o f D e s c r ip t io n T e r m in o lo g y e la s t ic it y Z e r o Q u a n t it y d e m a n d e d P e r fe c t ly in e la s t ic d o e s n o t c h a n g e a s p r ic e c h a n g e s G r e a t e r t h a n z e r o , b u t Q u a n t it y d e m a n d e d In e la s t ic le s s t h a n o n e c h a n g e s b y a s m a lle r p e r c e n t a g e t h a n t h e p r ic e r is e O n e Q u a n t it y d e m a n d e d U n it e la s t ic c h a n g e s b y t h e s a m e p e r c e n t a g e a s t h e c h a n g e in p r ic e G r e a t e r t h a n o n e b u t Q u a n t it y d e m a n d e d E la s t ic le s s t h a n in fin it y c h a n g e s b y a la r g e r p e r c e n t a g e t h a n t h e p r ic e r is e In fin it y P u r c h a s e r s a r e p r e p a r e d P e r fe c t ly e la s t ic t o b u y a ll t h e y c a n o b t a in a t s o m e p r ic e a n d n o n e a t a ll a t a n e v e n s lig h t ly h ig h e r p r ic e

  9. Methods of measuring elasticity Percentage method ( Suppose quantity demanded of coconut is initially 800 units at a price of Rs. 10 and increases to 1000 units when price falls to Rs. 8. Calculate price elasticity of demand of coconut)

  10. Point elasticity of demand Refers to measuring the elasticity at a particular point on the demand curve. Defined as dq/dp x p/q Where dq/dp is the derivative of quantity q w.r.t price p on the demand curve. Point elasticity = Upper segment / Lower segment

  11. Arc Elasticity method Arc elasticity measures elasticity at the mid point of an arc between any two points on a demand curve. Elasticity = q1-q2/q1+q2 X p1 +p2/ p1-p2 Where p1 = original price q1 = original quantity p2 = new price q2 = new quantity

  12. Total outlay method Elasticity is measured by comparing expenditure levels before and after any change in price. Elasticity of demand E p > 1 Price Increases Decreases Same Increases Decreases Total expenditure Decreases Increases Unchanged Increases Decreases Ep=1 Ep<1

  13. Determinants of price elasticity of demand Availability of substitutes Proportion of income spent on the commodity Nature of need that the commodity satisfies Number of uses to which a commodity can be put Time Consumer habits Price range

  14. Income elasticity of demand Income elasticity is the degree of responsiveness of quantity demanded to a small change in the income of the consumers The relationship between income elasticity of goods and proportion of income spent on it can be described in the following propositions.

  15. Propositions If the proportion of income spent on goods remain the same as income increases, then income elasticity for the goods is equal to one. If the proportion of income spent on goods Increases as income increases, then income elasticity for the goods is greater than one If the proportion of income spent on goods decreases as income increases, then income elasticity for the goods is less than one

  16. Positive Income elasticity of demand When with an increase in the income of the consumer, the demand for the good increases and vice versa. It is positive in case of normal goods

  17. Negative Income elasticity of demand When increase in income of the consumer is accompanied by a fall in the demand of goods It happens in case of inferior goods or Giffen goods

  18. Zero Income elasticity of demand When change in the income of a consumer does not have any effect on the demand Demand for necessaries like oil, salt etc have zero income elasticity of demand

  19. Cross Elasticity of Demand Cross elasticity of demand is the change in the demand of one good in response to a change in the price of another good. --------- X py Where Ec = Cross elasticity of demand qx = original quantity demanded of X qx = Change in quantity demanded of X py = Original price of Y py = Change in Price of Y Ec = qx py ----------- qx

  20. Positive cross elasticity of demand It is positive in case of substitute goods. For ex, a rise in the price of coffee will lead to a rise in demand for tea. The curve slopes upward from left to right

  21. Negative cross elasticity of demand It is negative in case of complementary goods For ex, an increase in the price of bread will lead to a fall in the demand for butter The curve slopes downward from left to right

  22. Zero cross elasticity of demand Cross elasticity demand is zero when two goods are not related to each other. For ex, rise in the price of wheat will have no effect on the demand for shoes.

  23. Read the following data and answer the questions XYZ are 3 commodities. X and Y are complements whereas X and Z are substitutes. A shopkeeper sells commodity X at Rs. 40 per piece. At this price he is able to sell 100 pieces of X per month. After some time he decreases the price of X to Rs. 20. Following the price decrease: He is able to sell 150 pieces a month The demand for Y increases from 25 units to 50 units The demand for commodity Z decreases from 150 units to 75 units

  24. Quiz The price elasticity of demand when the price of X decreases from Rs. 40 to Rs. 20 will be equal to : 1.5 1.0 1.66 0.6

  25. Quiz The cross elasticity of demand for Y when the price of X decreases from Rs. 40 to Rs. 20 is equal to: +1 -1 -1.5 1.5

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