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ELASTICITY OF DEMAND Degree of responsiveness of demand to change in any of its determinants is called elasticity of demand
We have three different concepts of elasticity of demand • Price elasticity of demand • Cross elasticity of demand • Income elasticity of demand
Price elasticity of demand • Price elasticity of demand or elasticity of demand, is the degree of responsiveness of the demand for commodity to a change in its price. Ed= • Ed=Percentage change in quantity demanded • Percentage change in price
Value of Elasticity Coefficients and their Description Value of Elasticity coefficie nt Type of elasticity Ed=0 Perfectly Inelastic Quantity demanded does not change with price at all Inelastic or less % change in demand is than unit elastic less than % change in price Ed<1 Description
Ed=1 Unit elastic % change in demand is equal to % change in price Ed>1 Elastic or more than unit elastic Perfectly elastic % change in demand is more than % change in price Ed=∞ Purchasers are prepared to buy all they can obtain at some price and none at all at an even slightly higher price.
Perfectly Inelastic price Q
Perfectly Elastic Price quantity
Inelastic Price quantity
Elastic price quantity
Flat and steep curve • More generally we can say that elasticity of demand at a common point will be more on a flatter curve than on a steeper curve.
d d, price R A C B d quantity D,
Methods of Measurement of Price Elasticity of Demand • Total Outlay Method or Total Expenditure Method • Point Method and • Arc Method
Total out lay Method Sug ar Clot h P Q TQ 18 10 15 12 P Che ese Q TQ 180 18 10 11 165 15 12 144 12 P Q TQ 180 18 10 180 12 180 15 14 210 15 180 12 20 240
Point Method • Measurement of elasticity on demand curve at a point is known as point elasticity of demand. • Ed= Lower segment of the demand curve – Lower segment of the demand curve
Point Method Ed=1 Ed= ∞ Ed>1 price Ed=1 Ed<1 Ed=0 Quantity