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PonderLaw of demand gives only the directionof change in quantity demanded inresponse to a given change in price.

How will you find the magnitude ofchange??

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Elasticity of Demand

Topics Covered Types of Elasticity Price Elasticity Degrees of Price Elasticity Methods of Measuring Elasticity Determinants of Price Elasticity of

Demand Revenue and Price Elasticity of

Demand

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Elasticity of Demand

Elasticity of demandmeasures the degree ofresponsiveness of thequantity demanded of acommodity to a given

change in any of thedeterminants of demand.

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Degrees of price elasticity

PerfectlyElastic

UnitaryElastic

Highly Elastic Highly Inelastic

PerfectlyInelastic

100

0 200 00

100

100

110

0 0

100

200

100

100

100

P

200

150

4 5

QQ

P

P

P

P

Q

Q

Q

Ep=Ep=0

ep>1 ep

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Methods of Measuring Elasticity

Ratio Method/percentagemethod/proportionate Method

Arc Elasticity Method

Total Outlay Method

Elasticity at different points on a lineardemand curve

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Determinants of elasticity

Nature of the commodity

Availability and proximity ofsubstitutes

Alternative uses of the commodity

Proportion of income spent on thecommodity

Time Items of addiction etc.

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Income elasticity

Income elasticity of demand measures thedegree of responsiveness of demand for acommodity to a given change in consumersincome.

Denoted as ey

% change in quantity demanded of commodity X

% change in income of consumer

ey

=

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Degrees of Income Elasticity

Positive Income Elasticity (eg.??)

Unit elastic

More elastic

Less elastic Perfect elastic

Perfect inelastic

Zero Income Elasticity (eg.????)

Negative Income Elasticity (eg.???)

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Degrees of cross elasticity

Positive cross elasticity

Think of the goods which have positivecross elasticity.

Why?

Negative cross elasticity

Think of the goods which have positivecross elasticity.

Why?

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Think out of the Box

Is zero cross elasticity possible???

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Promotional Elasticity of demand

When ea >1, a firm should go for heavy expenditure on

advertisement

When ea