Description
Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price.
Summary of the points which we are going to discuss throughout the chapter,
Introduction Definition of elasticity of demand Measurement of elasticity of demand Price Elasticity Meaning Types Measurement Relationship between Price elasticity, AR & MR Determinants Example 5-2
Income Elasticity Meaning Types Relation between income elasticity of goods Relation between income elasticity of demand & propensity to consume Example 5-3 Difference between income elasticity & income sensitivity Use in Business Cross Elasticity Advertising(Promotional) Elasticity Example 5-4 Price & Income Elasticity of Imports & Exports Example 5-5
Elasticity of Price Expectations Significance of concept of elasticity of demand Case Study
Introduction to Elasticity of Demand
Law of Demand Responsiveness
Definition
“Elasticity of demand is defined as percentage change in quantity demanded due to percentage change in demand determinant”
Equation
E = % change in quantity demanded of good (X) %change in demand determinant (Z)
Symbolically,
E = ?Q/?Z * Z/Q
Where, E = elasticity of demand ? = change Q = quantity demanded Z = demand determinant (PX, PR, Y, EPX, A) Value Value Response Response
Measurement of elasticity
1. Point elasticity E = ?Q/?Z * Z/Q 2. Arc elasticity
Price elasticity of demand
Definition
“The measure of relative responsiveness of quantity demanded to price along a given demand curve is known as price elasticity of demand”
Types of price elasticity
I. Perfectly elastic demand II. Absolutely inelastic demand III. Unit elasticity of demand IV. Relatively elastic demand V. Relatively in elastic demand
Perfectly elastic demand
Absolutely inelastic demand
Unit elasticity of demand
Relatively elastic demand
Relatively inelastic demand
Measurement of price elasticity of demand
a) Analytical approach OR Percentage measure
b) Graphical measure
c) Slope measure OR mathematical method d) Outlay method
The relationship between Price elasticity of demand, AR & MR
Graphical representation of the relationship
Determinants of price elasticity of demand
I. The number & closeness of the substitutes.
II. The share of commodity in buyers’ budget. III. Nature of the commodity. IV. Number of uses a commodity can be put to. V. Habit-forming characteristics. VI. Time period
EXAMPLE: Price elasticity for clothing increases with time
COMMODITY Clothing(U.S.) SHORT RUN -0.90 LONG RUN -2.90
Tobacco products(U.S.) Jewelry & watches (U.S.) Beer(U.S.) Wine(Canada)
-0.46 -0.41 -1.72 -0.88
-1.89 -0.67 -2.17 -1.17
COMMODITY Household natural gas(U.S.) Household electricity(U.S.)
SHORT RUN -1.40 -2.10
LONG RUN
-0.13
-1.89
Public transport(England)
Public transport(France)
-0.51
-0.32
-0.69
-0.61
Gasoline(U.S.)
Gasoline(Canada) Gasoline(Australia)
-0.25
-0.15 -0.12
-0.92
-0.60 -0.58
Income Elasticity of demand
Definition
“ Income elasticity of demand shows the extent to which a consumer's demand for the commodity changes as a result of a change in his income”
Types of price elasticity
I. High income elasticity
II. Unitary income elasticity III. Low income elasticity IV. Zero income elasticity V. Negative income elasticity
High income elasticity
Unitary income elasticity
Low income elasticity
Zero income elasticity
Negative income elasticity
EXAMPLE:
European Cars Are Luxurious, Flour Is an Inferior Good
COMMODITY INCOME ELASTICITY
Household Electricity European cars Asian cars Domestic cars Beef Cigarettes Chicken Flour
1.94 1.93 1.65 1.63 1.06 0.50 0.28 -0.36
Relation between income elasticity of goods
Sum of income elasticities for all goods consumed by a consumer must add up to unity.
Where,
KXieXi + KYeYi = 1 KX = proportion of income spent on good X; KY = proportion of income spent on good y; eXi = income elasticity of demand for good X; and eYi = income elasticity of demand for good y.
Distinction between “Income Elasticity of Demand” and “Income Sensitivity of demand”
Equation
% change in rupee expenditure during period “t” % change in disposable income during period “t”
Relation between Income elasticity of demand and propensity to consume
MPC = ?C/?Y
APC = C/Y
Income elasticity,
EY = % change in consumption expenditure
% change in household income
Uses of the Income Elasticity of Demand in Business
I Planning For Firm’s growth
II Forecasting demand
III Formulating marketing Strategy
Cross elasticity of demand
Definition “ Cross elasticity is defined as the ratio of the % change in demand for one good to the % change in the price of some other related goods” Equation
eXY = ?qX/?pX * pY/qX
Cross elasticity(eXY) will have positive sign if two goods are substitutes. (0 < exy < ?) Cross elasticity(eXY) will have negative sign if two goods are complements.(-? < eXY < 0)
Promotional OR Advertising elasticity of demand
Definition “ Advertising elasticity f demand measures the response of quantity demand to change in expenditure on advertising and other sales promotion activities” Equation ?A = ?Q/?A * A/Q
Factor influencing advertising elasticity of demand
I. Stage of product market.
II. Effect of advertising in terms of time.
III. Influence of advertising by rivals.
Elasticity of Price expectations
Equation
% change in expected future price % change in current price
Symbolically,
Epe = ?Ep/Ep * Cp/Ep
Significance of the concept of elasticity of demand
I. Level of output and Price.
II. Fixation of rewards for factors of production.
III. Government policies.
Price elasticity and Income elasticity of Imports and Exports
1. Price elasticity of demand Pe= ?Q/?P * P/Q Price Qty demanded
2. Income elasticity of demand Ye = ?Q/?Y * Y/Q Income Qty demanded
EXAMPLE:
Price elasticity and Income elasticity of Imports and Exports in the real world
ELASTICITY SHORT RUN ELASTICITY 0.6 0.5 2.3 1.7 1.3 1
Price elasticity for Imports for U.S. Price elasticity for Exports for U.S. Income elasticity for Imports for U.S. Income elasticity for Imports for France Income elasticity for Imports for Canada Income elasticity for Imports for Japan, Germany, U.K. & Italy
Case Study
doc_976660845.pptx
Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price.
Summary of the points which we are going to discuss throughout the chapter,
Introduction Definition of elasticity of demand Measurement of elasticity of demand Price Elasticity Meaning Types Measurement Relationship between Price elasticity, AR & MR Determinants Example 5-2
Income Elasticity Meaning Types Relation between income elasticity of goods Relation between income elasticity of demand & propensity to consume Example 5-3 Difference between income elasticity & income sensitivity Use in Business Cross Elasticity Advertising(Promotional) Elasticity Example 5-4 Price & Income Elasticity of Imports & Exports Example 5-5
Elasticity of Price Expectations Significance of concept of elasticity of demand Case Study
Introduction to Elasticity of Demand
Law of Demand Responsiveness
Definition
“Elasticity of demand is defined as percentage change in quantity demanded due to percentage change in demand determinant”
Equation
E = % change in quantity demanded of good (X) %change in demand determinant (Z)
Symbolically,
E = ?Q/?Z * Z/Q
Where, E = elasticity of demand ? = change Q = quantity demanded Z = demand determinant (PX, PR, Y, EPX, A) Value Value Response Response
Measurement of elasticity
1. Point elasticity E = ?Q/?Z * Z/Q 2. Arc elasticity
Price elasticity of demand
Definition
“The measure of relative responsiveness of quantity demanded to price along a given demand curve is known as price elasticity of demand”
Types of price elasticity
I. Perfectly elastic demand II. Absolutely inelastic demand III. Unit elasticity of demand IV. Relatively elastic demand V. Relatively in elastic demand
Perfectly elastic demand
Absolutely inelastic demand
Unit elasticity of demand
Relatively elastic demand
Relatively inelastic demand
Measurement of price elasticity of demand
a) Analytical approach OR Percentage measure
b) Graphical measure
c) Slope measure OR mathematical method d) Outlay method
The relationship between Price elasticity of demand, AR & MR
Graphical representation of the relationship
Determinants of price elasticity of demand
I. The number & closeness of the substitutes.
II. The share of commodity in buyers’ budget. III. Nature of the commodity. IV. Number of uses a commodity can be put to. V. Habit-forming characteristics. VI. Time period
EXAMPLE: Price elasticity for clothing increases with time
COMMODITY Clothing(U.S.) SHORT RUN -0.90 LONG RUN -2.90
Tobacco products(U.S.) Jewelry & watches (U.S.) Beer(U.S.) Wine(Canada)
-0.46 -0.41 -1.72 -0.88
-1.89 -0.67 -2.17 -1.17
COMMODITY Household natural gas(U.S.) Household electricity(U.S.)
SHORT RUN -1.40 -2.10
LONG RUN
-0.13
-1.89
Public transport(England)
Public transport(France)
-0.51
-0.32
-0.69
-0.61
Gasoline(U.S.)
Gasoline(Canada) Gasoline(Australia)
-0.25
-0.15 -0.12
-0.92
-0.60 -0.58
Income Elasticity of demand
Definition
“ Income elasticity of demand shows the extent to which a consumer's demand for the commodity changes as a result of a change in his income”
Types of price elasticity
I. High income elasticity
II. Unitary income elasticity III. Low income elasticity IV. Zero income elasticity V. Negative income elasticity
High income elasticity
Unitary income elasticity
Low income elasticity
Zero income elasticity
Negative income elasticity
EXAMPLE:
European Cars Are Luxurious, Flour Is an Inferior Good
COMMODITY INCOME ELASTICITY
Household Electricity European cars Asian cars Domestic cars Beef Cigarettes Chicken Flour
1.94 1.93 1.65 1.63 1.06 0.50 0.28 -0.36
Relation between income elasticity of goods
Sum of income elasticities for all goods consumed by a consumer must add up to unity.
Where,
KXieXi + KYeYi = 1 KX = proportion of income spent on good X; KY = proportion of income spent on good y; eXi = income elasticity of demand for good X; and eYi = income elasticity of demand for good y.
Distinction between “Income Elasticity of Demand” and “Income Sensitivity of demand”
Equation
% change in rupee expenditure during period “t” % change in disposable income during period “t”
Relation between Income elasticity of demand and propensity to consume
MPC = ?C/?Y
APC = C/Y
Income elasticity,
EY = % change in consumption expenditure
% change in household income
Uses of the Income Elasticity of Demand in Business
I Planning For Firm’s growth
II Forecasting demand
III Formulating marketing Strategy
Cross elasticity of demand
Definition “ Cross elasticity is defined as the ratio of the % change in demand for one good to the % change in the price of some other related goods” Equation
eXY = ?qX/?pX * pY/qX
Cross elasticity(eXY) will have positive sign if two goods are substitutes. (0 < exy < ?) Cross elasticity(eXY) will have negative sign if two goods are complements.(-? < eXY < 0)
Promotional OR Advertising elasticity of demand
Definition “ Advertising elasticity f demand measures the response of quantity demand to change in expenditure on advertising and other sales promotion activities” Equation ?A = ?Q/?A * A/Q
Factor influencing advertising elasticity of demand
I. Stage of product market.
II. Effect of advertising in terms of time.
III. Influence of advertising by rivals.
Elasticity of Price expectations
Equation
% change in expected future price % change in current price
Symbolically,
Epe = ?Ep/Ep * Cp/Ep
Significance of the concept of elasticity of demand
I. Level of output and Price.
II. Fixation of rewards for factors of production.
III. Government policies.
Price elasticity and Income elasticity of Imports and Exports
1. Price elasticity of demand Pe= ?Q/?P * P/Q Price Qty demanded
2. Income elasticity of demand Ye = ?Q/?Y * Y/Q Income Qty demanded
EXAMPLE:
Price elasticity and Income elasticity of Imports and Exports in the real world
ELASTICITY SHORT RUN ELASTICITY 0.6 0.5 2.3 1.7 1.3 1
Price elasticity for Imports for U.S. Price elasticity for Exports for U.S. Income elasticity for Imports for U.S. Income elasticity for Imports for France Income elasticity for Imports for Canada Income elasticity for Imports for Japan, Germany, U.K. & Italy
Case Study
doc_976660845.pptx