Elasticity Of Demand Ammended
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1
NATIONAL UNIVERSITY OF MODERN LANGUAGES MANAGEMENT & SCIENCES
2
Presented By:
SUPERIORS Humayun Sabir Zahid Rafique Faisal Maqsood Junaid Qazi Aman Ullah Khan 3
4
A general concept used to quantify the response in one variable when another variable changes
A standardized measure of the sensitivity of one (dependent) variable to changes in another variable
5
Degree of sensitivity or responsiveness of demand to changes in any of the factors affecting it
%∆ Q E = ∆Z
6
1. Unitary elasticity of demand ED = 1 2. Relative inelasticity of demand
ED < 1
3. Relative elasticity of demand ED > 1 4. Perfect elasticity ED = ∞ 5. Perfect inelasticity ED = 0
7
Percentage change in demand is same as percentage change in price
Price D O
Quantity 8
Percentage change in demand is less than percentage change in price
Price
D O
Quantity 9
Percentage change in demand exceeds percentage change in price
Price D
O
Quantity 10
Change in demand but price is constant
Price D
Quantity 11
No change in demand due change in price
Price
D
Quantity 12
Price elasticity of Demand
Income elasticity of Demand
Cross elasticity of Demand
Price elasticity of demand
Arc elasticity of demand
Elasticity of Supply
13
Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.
14
Percentage/ Proportionate method
Graphical method
Total outlay method
15
The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.
P
P e r c c h e q a n und t a age g nme e t r t i i c c d e i et =e y m l a o a s f n d P e r c c h e p a n rn t i a g c g Ed=
Q
p
p
Q 16
P
P e r c e c n h t a ng q ge u e a d in ne t im t y a n r i c te i c e i l t da y es om =f a n d P e r c e c n h t a ng p ge r e i c i e n
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as:
( 1 −0 8 ) ×1 0 0 2 0 % 1 0 = = 2 ( 2 . 2 −0 2 . 0 ) 0 × 1 0 01 0 % 2 .0 0 17
d
%AGE CHANGE %AGE IN PRICE CHANDE IN QD
ELASTICITY OF DEMAND E=% CHANE IN P %CHANGE IN QD
20
20
E=1
unity
20
30
E=1.5
more elastic
20
10
E=0.5
less elastic
20
0
E=0
in elastic
NO CHANGE
20
INFINITY
in finite elastic
18
Elasticity differs along a linear demand curve
19
lower portion of the demand curve Elasticity = Upper portion of the demand curve
20
PRICE of Commodity
Quantity Demanded
Total Expenditure
Ed
↓10 5
50 100↑
500 500
E=1
↓10 5
50 150↑
500 750
E<1
↓10 5
50 75↑
500 375
E>1
21
10
A
Price 5
E=1 B
50
100
Quantity
22
A
10
Price
E<1 B
5
D O
50 75
Quantity
23
E>1
Price
10
A B
5 50
150
Quantity
24
Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income. It is computed as the percentage change in the quantity demanded divided by the percentage change in income.
25
I n
P e r c e c n h t aa i n q yu a d n e t mi c o sm t i e c i e dt yl e a mo = f a n d P e r c e c n h t aa i n i n c o
Ed=
Q
y
y
Q
ng t a ng m
26
%AGE CHANGE%AGE IN INCOME CHANDE IN QD
ELASTICITY OF DEMAND E=% CHANE IN P %CHANGE IN INCOME
20
20
E=1
unity
20
30
E=1.5
more elastic
20
10
E=0.5
less elastic
20
0
E=0
in elastic
NO CHANGE
20
INFINITY elastic
in finite
27
INCOME ELASTICITY OF DIFFERENT CONSUMER GOODS COMMODITIES
COEFFICIENT OF INCOME ELASTICITY OF DEMAND
IMPACT ON EXPENDITURE
Necessities
0<E≤1 (Inelastic demand)
Less than proportionate change in income
Inferior
E<0
Increase in income associated with decline in quantity demanded
Superior/ Luxuries
E>1 (Elastic demand)
More than proportionate change in income
28
A measure of the degree of responsiveness of the demand for one good (X) to a change in the price of another good (Y) Proportionate change in quantity demanded of commodity X Cross Elasticity= Proportionate change in price of commodity Y
+ Substitutes
Complements 29
d
EQ X , PY
% ∆Q X PY = × d % ∆PY Q X
where Qx = Quantity demanded for product “x” ∆ Qx= Change in Qx Py = Price of product “y” ∆ Py = Change in Py
30
Pa
Qa
Qb
Pb
12
90
100
10
12
140
50
20
∆ Qa = 140 – 90 = 50 ∆ Pb = 20 – 10 = 10 Qa = 90 , Pb = 10 Ec = 50/10 x 10/90 = 5/9 > 0
Pa
Qa
Qb
Pb
10
100
100
20
10
50
50
40
∆ Qa = 40 – 20 = 20 ∆ Pb = 50 – 100 = -50 Qa = 100 , Pb = 20 Ec = -50/20 x 20/100
= -1/2 < 0
elasticity at a particular point on demand curve It can measure in two ways:
No.1
Ed=
Q
p
p
Q 33
No.2
lower portion of the demand curve Elasticity = Upper portion of the demand curve
34
At two different point or average elasticity over a segment of demand curve
Q2 − Q1 P2 − P1 Es = ÷ (Q1 + Q2 ) / 2 ( P1 + P2 ) / 2 35
Arc elasticity
A B
Price
D
O
Quantity
36
ELASTICITY OF SUPPLY
37
Percentage change in quantity supplied as a result of the percentage change in price
% ∆Quantity supplied ES = % ∆ Price
38
Es = ∞
Perfectly elastic
1 < Es < ∞
Relatively elastic
Es = 1
Unitary elastic
0 < Es < 1
Relatively inelastic
Es = 0
Perfectly inelastic
39
Y PRICE S
X
O QUANTITY SUPLIED
40
Y S
PRICE
O
X QUANTITY SUPLIED 41
Y S PRICE
O
X QUANTITY SUPLIED 42
Y S PRICE
O
X QUANTITY SUPLIED 43
Y
S
PRICE
O
X QUANTITY SUPLIED 44
Firm XYZ supplies 2000 pens at a price of Rs 8 per pen. When price increases to Rs 10, the supply increases to 3000 pens. Find the elasticity of supply of pens. Answer: 2
45
46
NATIONAL UNIVERSITY OF MODERN LANGUAGES MANAGEMENT & SCIENCES
2
Presented By:
SUPERIORS Humayun Sabir Zahid Rafique Faisal Maqsood Junaid Qazi Aman Ullah Khan 3
4
A general concept used to quantify the response in one variable when another variable changes
A standardized measure of the sensitivity of one (dependent) variable to changes in another variable
5
Degree of sensitivity or responsiveness of demand to changes in any of the factors affecting it
%∆ Q E = ∆Z
6
1. Unitary elasticity of demand ED = 1 2. Relative inelasticity of demand
ED < 1
3. Relative elasticity of demand ED > 1 4. Perfect elasticity ED = ∞ 5. Perfect inelasticity ED = 0
7
Percentage change in demand is same as percentage change in price
Price D O
Quantity 8
Percentage change in demand is less than percentage change in price
Price
D O
Quantity 9
Percentage change in demand exceeds percentage change in price
Price D
O
Quantity 10
Change in demand but price is constant
Price D
Quantity 11
No change in demand due change in price
Price
D
Quantity 12
Price elasticity of Demand
Income elasticity of Demand
Cross elasticity of Demand
Price elasticity of demand
Arc elasticity of demand
Elasticity of Supply
13
Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.
14
Percentage/ Proportionate method
Graphical method
Total outlay method
15
The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.
P
P e r c c h e q a n und t a age g nme e t r t i i c c d e i et =e y m l a o a s f n d P e r c c h e p a n rn t i a g c g Ed=
Q
p
p
Q 16
P
P e r c e c n h t a ng q ge u e a d in ne t im t y a n r i c te i c e i l t da y es om =f a n d P e r c e c n h t a ng p ge r e i c i e n
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as:
( 1 −0 8 ) ×1 0 0 2 0 % 1 0 = = 2 ( 2 . 2 −0 2 . 0 ) 0 × 1 0 01 0 % 2 .0 0 17
d
%AGE CHANGE %AGE IN PRICE CHANDE IN QD
ELASTICITY OF DEMAND E=% CHANE IN P %CHANGE IN QD
20
20
E=1
unity
20
30
E=1.5
more elastic
20
10
E=0.5
less elastic
20
0
E=0
in elastic
NO CHANGE
20
INFINITY
in finite elastic
18
Elasticity differs along a linear demand curve
19
lower portion of the demand curve Elasticity = Upper portion of the demand curve
20
PRICE of Commodity
Quantity Demanded
Total Expenditure
Ed
↓10 5
50 100↑
500 500
E=1
↓10 5
50 150↑
500 750
E<1
↓10 5
50 75↑
500 375
E>1
21
10
A
Price 5
E=1 B
50
100
Quantity
22
A
10
Price
E<1 B
5
D O
50 75
Quantity
23
E>1
Price
10
A B
5 50
150
Quantity
24
Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income. It is computed as the percentage change in the quantity demanded divided by the percentage change in income.
25
I n
P e r c e c n h t aa i n q yu a d n e t mi c o sm t i e c i e dt yl e a mo = f a n d P e r c e c n h t aa i n i n c o
Ed=
Q
y
y
Q
ng t a ng m
26
%AGE CHANGE%AGE IN INCOME CHANDE IN QD
ELASTICITY OF DEMAND E=% CHANE IN P %CHANGE IN INCOME
20
20
E=1
unity
20
30
E=1.5
more elastic
20
10
E=0.5
less elastic
20
0
E=0
in elastic
NO CHANGE
20
INFINITY elastic
in finite
27
INCOME ELASTICITY OF DIFFERENT CONSUMER GOODS COMMODITIES
COEFFICIENT OF INCOME ELASTICITY OF DEMAND
IMPACT ON EXPENDITURE
Necessities
0<E≤1 (Inelastic demand)
Less than proportionate change in income
Inferior
E<0
Increase in income associated with decline in quantity demanded
Superior/ Luxuries
E>1 (Elastic demand)
More than proportionate change in income
28
A measure of the degree of responsiveness of the demand for one good (X) to a change in the price of another good (Y) Proportionate change in quantity demanded of commodity X Cross Elasticity= Proportionate change in price of commodity Y
+ Substitutes
Complements 29
d
EQ X , PY
% ∆Q X PY = × d % ∆PY Q X
where Qx = Quantity demanded for product “x” ∆ Qx= Change in Qx Py = Price of product “y” ∆ Py = Change in Py
30
Pa
Qa
Qb
Pb
12
90
100
10
12
140
50
20
∆ Qa = 140 – 90 = 50 ∆ Pb = 20 – 10 = 10 Qa = 90 , Pb = 10 Ec = 50/10 x 10/90 = 5/9 > 0
Pa
Qa
Qb
Pb
10
100
100
20
10
50
50
40
∆ Qa = 40 – 20 = 20 ∆ Pb = 50 – 100 = -50 Qa = 100 , Pb = 20 Ec = -50/20 x 20/100
= -1/2 < 0
elasticity at a particular point on demand curve It can measure in two ways:
No.1
Ed=
Q
p
p
Q 33
No.2
lower portion of the demand curve Elasticity = Upper portion of the demand curve
34
At two different point or average elasticity over a segment of demand curve
Q2 − Q1 P2 − P1 Es = ÷ (Q1 + Q2 ) / 2 ( P1 + P2 ) / 2 35
Arc elasticity
A B
Price
D
O
Quantity
36
ELASTICITY OF SUPPLY
37
Percentage change in quantity supplied as a result of the percentage change in price
% ∆Quantity supplied ES = % ∆ Price
38
Es = ∞
Perfectly elastic
1 < Es < ∞
Relatively elastic
Es = 1
Unitary elastic
0 < Es < 1
Relatively inelastic
Es = 0
Perfectly inelastic
39
Y PRICE S
X
O QUANTITY SUPLIED
40
Y S
PRICE
O
X QUANTITY SUPLIED 41
Y S PRICE
O
X QUANTITY SUPLIED 42
Y S PRICE
O
X QUANTITY SUPLIED 43
Y
S
PRICE
O
X QUANTITY SUPLIED 44
Firm XYZ supplies 2000 pens at a price of Rs 8 per pen. When price increases to Rs 10, the supply increases to 3000 pens. Find the elasticity of supply of pens. Answer: 2
45
46
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