The Importance of Elasticity Demand & Supply

Presented By• Rajiv Joshi (20)• Joylyn Fernandes (12)• Shrinivas Gajengi (13)• Biju Thomas • Shirin Khetani (63)• Sourav Modak• Bernard Fernandes (11)

Types of Elasticity

Elasticity of Demand

Price Income Cross AdvertisingElasticity of

Supply

Price Cross

Types of Elasticity

Elasticity of Demand

Price Income Cross AdvertisingElasticity of

Supply

Price Cross

Types of Elasticity

Elasticity of Demand

Price Income Cross AdvertisingElasticity of

Supply

Price Cross

Price Elasticity of Demand (PED)Price elasticity of demand (PED) shows the

relationship between price and quantity demanded and provides a precise calculation of the effect of a change in price on quantity demanded. The following equation enables PED to be calculated % Change in Quantity Demanded

% Change in Price

Price Elasticity

of Demand of Onions

@ Big Bazaar

Big Bazaar Onion Sale Data

4/1/2014

4/5/2014

4/9/2014

4/13/2

014

4/17/2

014

4/21/2

014

4/25/2

014

4/29/2

014

5/3/2014

5/7/2014

5/11/2014

5/15/2

014

5/19/2014

5/23/2

014

5/27/2014

5/31/2

014

6/4/2014

6/8/2014

6/12/2

014

6/16/2

014

6/20/2

014

6/24/2014

6/28/2

014

7/2/2014

7/6/2014

7/10/2014

7/14/2

014

7/18/2014

7/22/2

014

7/26/2014

7/30/2

014

8/3/2014

8/7/2014

8/11/2

014

8/15/2

014

8/19/2

014

8/23/2

0140

10000

20000

30000

40000

50000

60000

70000

80000

Sum of Sales Onion QtyQnty in Kilos

Daywiseqnty

Types of Elasticity

Elasticity of Demand

Price Income Cross AdvertisingElasticity of

Supply

Price Cross

Income Elasticity of Demand• Income elasticity of demand measures the

responsiveness of the demand for a good to a change in the income of the people demanding the good, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the percentage change in income.

% Change in Quantity Demanded % Change in Income

India GDP Vs No Flight Passengers

1996 1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012 20130

500

1000

1500

2000

2500

119.07 116.43 118.6 122.3 133.21 128.1 145.42 181.73 223.07 267.7 321.2 369.4 424.8 488.6 523.7 561.5 601.9

393411 427 425 455 457 466 487

565650

740830

1069 1042

1147

14171540 1503

1499

Per Capita Income($)Domestic Passengers Carried in Lakhs

Types of Elasticity

Elasticity of Demand

Price Income Cross AdvertisingElasticity of

Supply

Price Cross

Cross Elasticity Of Demand (CED)• Cross elasticity of demand or cross-price elasticity of

demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good.

% Change in Quantity Demanded of Product A % Change in Price of Product B

CED: Diesel & Cars• With the price of diesel being higher

than petrol people are opting for petrol cars.

Source- Economic timesSource- The Hindu

Types of Elasticity

Elasticity of Demand

Price Income Cross AdvertisingElasticity of

Supply

Price Cross

Advertisement Elasticity of Demand (AED)

• Advertising elasticity of demand (or simply advertising elasticity, often shortened to AED) is an elasticity measuring the effect of an increase or decrease in advertising on a market.

% Change in Quantity Demanded % Change in advertising spends

AED: Email Marketing• Open rates of mass mailers are 6%• Click through rates are• Hence increasing spends would increase the

number of leads/sales. • Decreasing spends would mean losing out to another retailer who has spent on advertising.

Practical Application

s of Elasticity of

Demand

Practical applications of Elasticity of Demand

Sales forecasting• A firm can forecast the impact of a change in price on its

sales volume, and sales revenue.

Pricing policy• Knowing PED helps the firm decide whether to raise or

lower price, or whether to price discriminate.

Non-pricing policy • When PED is highly elastic, the firm can use advertising

and other promotional techniques to reduce elasticity.

Advertisement Elasticity of Demand:• It helps the manager to decide the advertisement

expense

Practical applications of Elasticity of Demand

Pricing public utilities• The concept of elasticity of demand helps the government to rationalize

prices for these important utilities.

Currency Devaluation• The application of elasticity of demand can be extended to the analysis

of CURRENCY devaluation. • Devaluation helps to increase exports.

Taxation• Government takes decisions on which products to tax. • Product seller has to decide if he would pass on the tax burden to the

consumer

Trade• The government takes decisions on feasibility of import or export of

commodities.

Factors Affecting Demand

Demand

Nature of goods

Availability of

substitutes

Alternative use

Possibility of postponing

consumption

Proportion of income spent

Price-level

Force of habit

Durability of Commodities

Income level

Types of Elasticity

Elasticity of Demand

Price Income Cross AdvertisingElasticity of

Supply

Price Cross

Types of Elasticity

Elasticity of Demand

Price Income Cross AdvertisingElasticity of

Supply

Price Cross

Price Elasticity of Supply• Price elasticity of supply (PES or Es) is a measure

used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.

• The elasticity is represented in numerical form, and is defined as the percentage change in the quantity supplied divided by the percentage change in price.% Change in Quantity Supplied

% Change in Price

Growth of Dominos in India

• As the price of pizza increased over the years the number of Domino’s outlets increased.

• Domino’s has grown from 411 stores in 2011 to 749 stores in 2014

Source: Hindustan Times

Cross Price Elasticity of Supply

• Cross elasticity is the proportional percentage change in supply of product A divided by the proportional percentage change in the price of product B

% Change in Quantity Supplied of Product A % Change in Price of Product B

Practical Application

s of Elasticity of

Supply

Practical applications of Elasticity of Supply

Determining the extent of taxation.

Determining as to how much of its price will alter when there is a change in the conditions of demand

Factors Affecting Supply

Supply

TimeMobility of

Factors

Technique of production

Nature of Commodities

Number of Markets & Number of Products Produced

Scale of Production

Price

Cost of Production

Goal of producer

Natural Factors

Expected changes in

weather/govt policies

• http://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html

• http://articles.economictimes.indiatimes.com/2014-05-26/news/50098917_1_petrol-and-diesel-diesel-prices-diesel-cars

• http://www.thehindu.com/business/Industry/positive-sentiment-continues-to-boost-car-sales-in-august/article6370142.ece

• https://www.classle.net/book/different-types-elasticity-demand

• http://www.fiaindia.in/issues.htm • www.worldbank.org• http://www.preservearticles.com/201105307213/9-factors-

that-determines-the-elasticity-of-demand.html

References

• http://capitalmind.in/2011/01/marketvision-chronicle-2-is-out-fii/

• http://www.livemint.com/Opinion/PMHwKffmSw9ZaBnSpm01oN/The-great-Indian-onion-paradox.html

• http://sfacindia.com/Docs/Onion%20&%20Potato%20Baseline%20Report.pdf

Questions?