elasticity of demand ,determinants of demand,all curves of demand.

1. contents
 The concept of elasticity of demand
 Types of Elasticity of demand
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Elasticity of Demand
- Promotional Elasticity of Demand
 Degrees of Elasticity of Demand
 Significance of the concept of elasticity of demand in
business decision making
 Importance of theory of demand in relation to
Electronic commerce

2. Elasticity of Demand
 Elasticity
– Responsiveness

3.  Price elasticity of demand
– Consumers’ responsiveness to a change in
price
 Income elasticity of demand
– Consumers’ responsiveness to a change in
income
 Cross elasticity of demand
– Consumers’ responsiveness to a change in
price of the relative commodity
 Promotional elasticity of demand
– Consumers’ responsiveness to a change in
advertisement expenditure
Types Of ELASTICITY OF DEMAND

4.  Price Elasticity of Demand=
Percentage change in quantity
demanded/Percentage change in Price
Ep = ∆Q/Q =
∆Q
*
P
∆P/P ∆P Q
PRICE ELASTICITY OF DEMAND

5. Price Elasticity of Demand
p
q
ED
∆
∆
=
%
%

6. Price Elasticity of Demand
The percentage
change in the
quantity demanded
given. . .
. . . a percentage
change in the price.
6
B
A
Demand
P
Q

7.  Perfectly Elastic ||=∞
 Perfectly Inelastic ||= 0
 Relatively Elastic ||>1
 Unitary or Unit ||=1
 Relatively Inelastic ||<1
7
Ranges of Elasticity . . .

8. Ranges of price elasticity
8
ED
= ∞
Demand is perfectly
Elastic
Demand for
Ice Cream
2.00

9. Ranges of price elasticity
9
ED
= 0
Demand is perfectly
Inelastic
Demand for
Ice Cream
2.00
10

10. Ranges of price elasticity
Demand is relatively Elastic
Demand for
Ice Cream
3.00
2.00
108
E D >1

11. Ranges of price elasticity…
11
Demand is Relatively Inelastic
Demand for
Ice Cream
4.00
2.00
98
ED
<1

12. Ranges of price elasticity …..
Demand is unitary Elastic
Demand for
Ice Cream
4.00
2.00
108
E D= 1

13. 13
Computing Elasticity Coefficients - Example
(point elasticity)
Price Elasticity
of Demand
=
Percentage Change in
Quantity Demanded
Percentage Change
in Price

14. Computing Elasticity Coefficients
14
Demand for
Ice Cream
2.20
2.00
108
ED
($2.20 - $2.00) / $2.00
(8 - 10) / 10
=

15. Computing Elasticity Coefficient…..
15
ED
(10%)
(-20%)
=
Demand for
Ice Cream
2.20
2.00
108

16. Computing Elasticity Coefficient
16
ED
= -2
Demand for
Ice Cream
2.20
2.00
108
Notice the
sign

17. Computing Elasticity Coefficient
17
ED
= -2
Demand is Elastic
Demand for
Ice Cream
2.20
2.00
108

18. Constant-Elasticity
Demand Curves
 Perfectly elastic D curve
– Horizontal; ED = ∞
– Consumers don’t tolerate P increases
 Perfectly inelastic D curve
– Vertical; ED = 0
– ‘Price is no object’
 Unit-elastic D curve
– %∆p causes an exact opposite %∆q

19. Constant-Elasticity Demand Curves
0 Quantity per period
Priceperunit
p
ED = ∞
(a) Perfectly elastic
D
Priceperunit ED’’ = 0
(b) Perfectly inelastic
ED ’’ = 1
(c) Unit elastic
D’
0 Quantity
per period
Q
Priceperunit
$10
6
0 Quantity
per period
60 100
D’’
a
Consumers demand all quantity
offered for sale at p, but demand
nothing at a price above p
Consumers demand Q
regardless of price
Total revenue is the same
for each p-q combination
b

20. Summary of Price Elasticity of Demand
Effects of a 10 Percent Increase in Price

21. Arc Price elasticity of demand
 Price elasticity of demand between two points on
the demand curve
Ep =
Q2 – Q1
*
P2+P1
P2
- P1
Q2 + Q1

22. Factors affecting the price elasticity of
demand
 Availability of substitutes
 Much greater in the long run and smaller in the
short run

23. Elasticity Estimates
 Short run
– Consumers have little time to adjust
 Long run
– Consumers can fully adjust to a price change
 Demand is more elastic in the long run

24. Demand Becomes More Elastic over Time
Dw
Priceperunit
$1.25
1.00
Dm
Quantity per day95 10075500
Dy
e
Dy is more elastic than Dm , which is more elastic than Dw
Dw: one week after the price increase
Dm: one month after the price increase
Dy: one year after the price increase

25. Price Elasticity and the
Linear D Curve
 Linear D curve
– Constant slope
– Different elasticity
– D becomes less elastic as we move
downward
 D upper half: elastic
 D lower half: inelastic
 D midpoint: unit elastic

26. Demand, Price
Elasticity, and
Total Revenue
Where D is elastic, a
lower P increases TR
Where D is inelastic, a
lower P decreases TR
TR reaches a
maximum at the rate
of output where D is
unit elastic
D
90
60
10
70
Priceperunit
$100
80
50
40
30
20
b
a
d
e
800500200100 Quantity per period1,0000 900
Totalrevenue
25,000
500 Quantity per period1,0000
(a) Demand and price elasticity
(b) Total revenue
Total
revenue
Unit elastic, ED =1
Elastic, ED >1
Inelastic, ED <1c

27. Significance of the concept of elasticity of demand in
business decision making – TR & MR
TR raises as
long as Ep is
positive
Price Quantity
Ep = ∆Q/Q
∆P/P
TR = P*Q MR = ∆TR/∆Q
6 0 0
5 100 5 500 5
4 200 2 800 3
3 300 1 900 1
2 400 0.5 800 -1
1 500 0.2 500 -3
0 600 0 0 -5

28. Price elasticity, total revenue and Marginal
revenue

29. Elasticity and Total Revenue
 TR= p * q
 As p decreases
 If D elastic, TR increases
 If D inelastic, TR decreases
 If D unit elastic, TR unchanged

30. 30
Computing Income Elasticity
Income
Elasticity
of Demand
=
Percentage Change in
Quantity Demanded
Percentage Change
in Consumer Income

31. 31
Income Elasticity
Q
I
I
Q
I
I
Q
Q
i ×
∆
∆
=
∆
∆
=ε

32. How demand rises with income
Engel
A1
A2
X1 X2

33. Engel
The Shape of the Engel Curve - income
elasticity
 If the Engel Curve
is a straight line,
the income
elasticity is 1.0
A
X

34. Engel
The Shape of the Engel Curve - income
elasticity……
 If the Engel Curve
has increasing
slope the elasticity
is greater than 1.0
A
X

35. Engel
The Shape of the Engel Curve - income
elasticity………
 If the Engel Curve
has decreasing
slope the elasticity
is less than 1.0
A
X

36. Engel
The Shape of the Engel Curve - income
elasticity……..
 This Engel Curve
corresponds to a
good that is both
inferior and
superior,
depending on
income
A
X

37. Selected Income Elasticities of Demand

38.  Advertising Elasticity of Demand=
Proportionate change in
sales/Proportionate change in Advertisement
Expenditure
Promotional Elasticity of Demand

39.  Coefficient of cross elasticity of demand of x for y
= Percentage change in the quantity demanded of
X/ Percentage change in the price of good y
Exy= ∆Qx/Qx =
∆Qx
*
Py
∆Py/Py ∆Py Qx
Cross-price Elasticity of Demand

40. • Pricing Decisions by business firms
- Estimation
Step 1. Identify the imp. Variables that affect the demand for the product it sells
Step 2. obtain variable estimates of the marginal effect of a change in each
variable on demand (Regression analysis)
Step 3. The firm use this information to estimate the elasticity of demand for the
product it sells with respect to each of the variables in the demand function.
- Forecasting
These are essential for optimal managerial decisions in the short run and in
planning for growth in the long run.
Using elasticities in managerial
decision making

41. • Uses in Economic policy Regarding price
regulation, especially of farm products
• Use in International Trade
• Importance in Fiscal Policy
Using elasticities in managerial
decision making…..

42. in relation to Electronic commerce
 International convergence of tastes
 E commerce
-B to B Ex: Wal-Mart suppliers – proprietary net work
-B to C – Retail
- Frictionless capitalism ( squeeze profit margins from
so many industries
- Comparison shopping
- New selling methods like auctions (buyers post a
price)
- Infomediaries
- Computer frauds

43. Selected Price Elasticities of
Demand (Absolute Values)

44. CaseStudy Deterring Young Smokers
 Health hazard
 Kills 440,000 Americans a year
 Lung cancer; Heart disease;
Emphysema; Stroke
 Cost to society
 $7.18 per pack sold
 Higher health cost
 Lost worker
productivity
 Total: $150 billion a year
 $3,400 per smoker
per year

45. CaseStudy Deterring Young Smokers
 Discouraging smoking
 Prohibit the sale of cigarettes to minors
 Higher cigarette tax
 ED is higher for teens
 Big share of budget
 Less peer pressure
 Not an addiction yet
 Reduces teen smoking
 Change consumer tastes