This document discusses the concept of elasticity in economics. It defines three types of elasticity - price elasticity of demand, income elasticity of demand, and cross elasticity of demand. Formulas are provided for calculating each type. The degrees of elasticity are also explained, including perfectly elastic demand, unitary elastic demand, perfectly inelastic demand, and relatively elastic/inelastic demand. Finally, several methods for measuring price elasticity are outlined, including the total expenditure method, geometrical/point elasticity method, and arc method.
3. › Elasticity is something which is totally concerned
with compressibility and expandability. But is
ECONOMICS it is an essential thing which
indicates the sensitivity of PRICE movement,
and its effect on DEMAND.
Elasticity In Economics
4. › The concept of elasticity of demand plays a
crucial role in the pricing decisions of the
business firms and the Government when it
regulates prices. The concept of elasticity is also
important in judging the effect of devaluation of a
currency on its export earnings.
Importance of Elasticity:
5. How it is important in International Trade?
How it is important in Taxation Policy?
How it works in decision making?
HOW?
6. o Type 1 : price elasticity of demand
o Type2 : income elasticity of demand
o Type 3 : cross elasticity of demand
7. › The ratio of proportionate change in quantity
demanded of a good caused by a given
proportionate change in a price.
o Price Elasticity of Demand:
Formula for Calculation:
% Change in quantity demanded
% Change in Price
8. › Ratio of a percent change in quantity of a good
purchased per unit of time to a percentage
change in a income of a consumer.
o Income Elasticity of Demand:
Formula for Calculation:
% Change in quantity demanded
% Change in Income
9. › It is defined as the change in a demand of one
good as a result the percentage change in a
price of another good.
o Cross Elasticity of Demand:
Formula for Calculation:
% Change in quantity demanded of a good x
% Change in price of a good y
10. › We have stated demand for a product is
sensitive or responsive to price exchange. The
variation in demand is however not uniform with
a change in price incase of some products a
small change in price leads to a relatively larger
change in quantity demanded .
o Degrees Elasticity of Demand:
11. o Types of elasticity of demand
o Perfectly Elastic Demand
o Unitary Elastic Demand
o Perfectly Inelastic Demand
o Relatively Inelastic Demand
o Relatively Elastic Demand
12. When a small change in price of a product causes a major
change in its demand, it is said to Perfectly elastic
demand. In perfectly elastic demand, an unnoticeable
change in price can lead its demand to zero, whereas a
small fall in price can increase the demand to infinity.
o Perfectly Elastic Demand:
13. When the percentage change in demand for commodity is
more than the percentage change in price, the demand is
said to be Relatively elastic demand. In this case,
demand is inversely proportional to the price, a little
increament in the price can cause a huge decline in
demand. On other hand decreasing the price can cause a
great rise in demand.
o Relatively Elastic Demand:
14. When the proportionate change in price is equal to the
proportionate change in demand, the demand for that
particular commodity is reffered as Unitary Elastic. In such
case the demand is inveresly proportional to the price.
o Unitary Elastic Demand:
15. The quantity demanded or supplied is unaffected by any
change in price or the quantity is essentially fixed. It does
not matter how much price changes, quantity does not
fluctuates.
o Perfectly Inelastic Demand:
16. The percentage change in demand less than the
percentage change in price. Sir Marshal has termed
relatively inelastic demands elasticity is less than unitary.
o Relatively Inelastic Demand:
17. › Elasticity is the measure of variables sensitively
to a change in another variable. In economics,
elasticity refers the degree to which the
individual’s change their demand/amount
supplied in response to price or income
changers.
Supply is the fundamental economic concept that
describes the total amount of a specific good or
service that is available to consumers
o Meaning of Elasticity:
o Meaning of Supply:
18. Supply of a good or service that increases or
decreases as the price of an item goes up or
down
Supply of a good or service makes a little change as
the price of that item increases or decreases.
o Elastic Supply:
o Inelastic Supply:
19. › The price elasticity can be measured by noting
the changes in total expenditure brought about
by changes in price and quantity demanded
Where,
Ed= Elasticity of Demand
∆Exp= Change in expenditure
X= Initial Demand
∆P= Change in price
o Total expenditure method :
20. o There are three Possibilities:
1. More elastic demand
2. unitary elastic demand
3. less elastic demand
24. The price elasticity of demand can also be
measured at any point on the demand curve. If the
demand curve is linear (straight line) it has a unitary
elasticity at the mid point. The total revenue is
maximum at this point.
Geometrical method or point elasticity
method:
Along a Linear Curve:
27. › Normally the elasticity varies along the length of
the demand curve if we are to measure elasticity
between any two point on the demand curve
then the arc elasticity method will be used.
Ed = Q * P1+P2
P Q1+Q2
Arc method :
28. Closeness of substitute
Proportion of income spend on the
goods
Time elapsed since price change
29. For Further Details:
Raza Abdullah Naich
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