ELASTICITY OF DEMAND INTRODUCED BY ALFRED MARSHALL ELASTICITY

ELASTICITY OF DEMAND • INTRODUCED BY ALFRED MARSHALL • ELASTICITY OR RESPONSIVENESS OF DEMAND IN A MARKET IS GREAT OR SMALL ACCORDING AS THE AMOUNT DEMANDED INCREASES MUCH OR LITTLE FOR A GIVEN FALL IN PRICE AND DIMINISHES MUCH OR LITTLE FOR A GIVEN RISE IN PRICE.

TYPES OF ELASTICITY OF DEMAND • PRICE ELASTICITY OF DEMAND • INCOME ELASTICITY OF DEMAND • CROSS-ELASTICITY OF DEMAND

PRICE ELASTICITY OF DEMAND • DEGREE OF RESPONSIVENESS OF QUANTITY DEMANDED TO A CHANGE IN PRICE IS CALLED PRICE ELASTICITY PERCENTAGE CHANGE IN QUANTITY OF DEMAND. = DEMANDED PERCENTAGE CHANGE IN PRICE SYMBOLICAL LY e. P = Q/ Q P/P CHANGE P PRICE Q QUANTIT Y

MEASUREMENT OF PRICE ELASTICITY OF DEMAND • PERCENTAGE METHOD • POINT METHOD OR SLOPE METHOD • TOTAL OUTLAY METHOD • ARC METHOD

PERCENTAGE METHOD • RELATIVE CHANGE IN DEMAND DIVIDED BY RELATIVE CHANGE IN PRICE OR PERCENTAGE CHANGE IN DEMAND DIVIDED BY PERCENTAGE CHANGE IN PRICE. e. P = % Q % P FOR EXAMPLE IF PRICE OF RICE INCREASES BY 10% AND DEMAND FOR RICE FALLS BY 10% e. P = 15/10 = 0. 5 THIS MEANS THAT DEMAND FOR RICE IS INELASTIC

MEASURES OF ELASTICITY • REALTIVELY ELASTIC IF e>1 • REALTIVELY INELASTIC IF e<1 • UNITARY ELASTIC DEMAND IF e=1 • PERFECTLY INELASTIC DEMAND IF e=0 • PERFECTLY ELASTIC

P P 1 PRICE D O Q Q 1 QUANTITY

D PRICE P P 1 D O Q Q 1 QUANTITY

PRICE P D P 1 O Q Q 1 QUANTITY

D P PRICE P 1 O Q QUANTITY

D PRICE P O Q Q QUANTITY

POINT METHOD • WE CAN CALCULATE PRICE ELASTICITY OF DEMAND AT A POINT ON THE LINEAR DEMAND CURVE. LOWER SEGMENT OF DEMAND e. P = CURVE UPPER SEGMENT OF DEMAND CURVE

POINT METHOD A AE – UPPER SEGMENT EB – LOWER SEGMENT C. E PRICE . D B O QUANTITY

For example in fig. the length of the demand curve AB is 4 cm. • Ep at point E , ep = EB/EA = 2/2 = 1 • Ep at point D = (middle point of EB portion of demand curve) DB/DA = 1/3 = 0. 3 ep<1 • Ep at point c(middle point of EA portion of demand curve) = CB/CA = 3/1 = 3 ep >1 • Ep at point B = 0/AB = 0/4 = 0 • Ep at point A = AB/0 = 4/0 = infinity

TOTAL OUTLAY METHOD We can measure elasticity through a change in expenditure on commodities due to a change in price • Demand is elastic if total outlay or expenditure increases for a fall in price(ep>1) • Demand is inelastic if total outlay or expenditure falls for a fall in price(ep<1) • Demand is unitary if total expenditure does not change for fall in price(ep=1)

TYPES OF ELASTICITY OF DEMAND CHANGES Ep = 1 IN PRICE Ep<1 Ep>1 FALL IN PRICE TOTAL OUTLAY FALLS TOTAL OUTLAY RISES TOTAL OUTLAY FALLS RISE IN PRICE TOTAL OUTLAY REMAINS CONSTANT

ARC METHOD • SEGMENT OF DEMAND CURVE BETWEEN TWO POINTS IS CALLED AN ARC. Q = change in qty Ep = q 1 – q 2 / P 1 -P 2 demanded Q 1+q 2 P 1+P 2 P = change in price of the commodity P 1 = original price = q P P 2 = New price Q 1+q 2 P 1+P 2 / Q 1 = original qty Q 2 = new qty

P A PRICE P 1 B P 1 O Q 1 Q 2 Q QUANTITY DEMANDED

INCOME ELASTICITY OF DEMAND • DEGREE OF RESPONSIVENESS OF DEMAND TO CHANGE IN INCOME. Ey = Percentage change in qty demanded Percentage change in income Q- quantity Ey = q/q x y/ y demanded Y - income

Cross elasticity of demand • Responsiveness of demand to change in price of realted goods. Ec = Percentage change in qty demanded of commodity X Percentage change in price of commodity Y Ec= qx/ py x py/qx

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