VIVEKANAND COLLEGE

CLASS
:- F.Y.B.B.A.(1st Sem.)
DIVISION :- B
SUBJECT :- ELEMENTS OF ECONOMICS
TOPIC :- ELASTICITY OF DEMAND

SUBMITED
TO :PROF.
RAKESH LARA

No.

Name

Roll No.

1
2

SWEETY PATEL (Leader)

DIPIKA

MANISH

VAGHELA

132

TWINCY

PATEL

100

AKASH

THAKKAR

129

HETAL PATEL

KINJAL

PARTH

RADHIKA

PATEL

88

10

JATIN

PATEL

73

11
12

KISHAN SOLANKI
URVASHI PATEL

PATEL

97
69

72
PATEL

SAKARIYA

76
116

122
101

 INTRODUCTION:The law of demand indicates only the

direction of change in demand but not the
rate of change in demand.
DEFINITION OF PRICE ELASTICITY OF DEMAND:-

The change in the quantity demanded of

a product due to change in its price is
known

as

demand.Thus,

price
the

elasticity
sensitiveness

of
or

responsiveness of demand to a change in

price is called as elasticity of demand.

TYPES OF PRICE ELASTICITY

OF DEMAND:i.
I.
II.
III.
IV.

Perfectly elastic demand

Relatively elastic demand
Elasticity of demand equal to unity
Relatively inelastic demand
Perfectly inelastic demand

 MEASUREMENT OF PRICE
ELASTICITY OF DEMAND:-
I.Percentage (Proportionate)
Method
II.Total Outlay Method (Total
Revenue Method)
III.Geometrical Method (Point
Method)
IV.Arc Elasticity Of Demand

DETERMINANTS
OF
PRICE
ELASTICITY
OF
DEMAND
1. Nature of commodity
2. Availability of substitutes
3. Variety of uses of a commodity
4. Postponement
5. Influence of habits
6. Proportion of income spent on a
commodity
7. Range of prices
8. Income groups
9. Element of Time
10.Pattern of Income Distribution

Relationship between Price

Elasticity of Demand, Total
Revenue & Marginal Revenue:
T.R. = P.*Q. ..(1)
M.R. = T.R. / Q.
(Putting value of T.R.)
M.R. = (P.*Q.) / Q. = P+Q P / Q
= P (1+ Q/P *P/Q)
MR = P (1+1/e)
e/1 = q/Q / P/P
q/Q * P/P
=1 / [q/Q * p/P] =1 / e

IMPORTANCE OF PRICE
ELASTICITY OF
FOR
BUSINESS
The concept
is helpful
in taking:business
decisions:
Importance of the concept in formulating
Tax policy of the government:
For Determining the Rewards of the Factors
of Production
To Determine t-he Terms of Trade Between
the Two countries
Determination of Rates of Foreign
Exchange
For Nationalization of Certain Industries
In economic analysis, the concept of price
elasticity of demand helps in explaining the
irony of poverty in the midst of plent

Income elasticity of
demand
The sensitiveness or responsiveness of demand to a
change in consumers income is called as income elasticity
of demand.
The types of income elasticity of demand:1.Positive income elasticity of demand
A.Income elasticity equal to unity or one.
B.Income elasticity greater than unity or one
C.Income elasticity less than unity or one

2. Negative income elasticity of demand

3. Zero income elasticity if demand.

Zero income elasticity may be of five types:1. Income elasticity more than unity.
2. Income elasticity equal to unity.
3. Income elasticity less than unity.
4. Zero income elasticity.
5. Negative income elasticity

Relation between income

elasticity of goods:-

Importance of income
elasticity for business firm:

Importance of income elasticity for

business firm:-

1. The concept of income elasticity of demand is

of great significance in production planning
and management in the long run.
2. The concept helps in classifying goods in to
various categories. For example, goods
whose income elasticity is positive for all
levels of income are termed as normal goods.
3. Again, the numerical values of income
elasticity of demand are very helpful to
individual firms in taking

4.

5.

6.

7.

decisions relating to expansion or

contraction of their productive capacities.
Similarly, the concept of income elasticity of
demand is of great use to the economics
planners as well.
The concept of income elasticity of demand
also plays an important role in designing
marketing strategies of the firms.
The concept of income elasticity of demand
also offers an explanation as to why farmers
income do not rise equal to that of urban
people engaged in manufacturing industries.
Again, the extent of influence of economic
growth on the sale of a particular product can
be known with the help of the co-efficient of

CROSS ELASTICITY OF
DEMAND: Cross elasticity of demand expresses a
relationship between change in the demand for
a given product in a response to change in the
price of same other product ,that other
product may be substitute or complementary.
Cross elasticity of demand: substitutes
Cross elasticity of demand for
complements

Importance of cross elasticity

of demand for business
decision making:-

1. changing the price of the products

having substitutes and complementary
goods.
2. enables the firm to forecast
3. measuring the interdependence of
demand for a product and the price .
4. significance in managerial decision
making and for formulating an
appropriate price strategy.

Promotional or advertising
elasticity of demand:-

Advertising elasticity of demand =

Proportionate change in the demand of the product /
Proportionate change in advertising expenditure
OR
Advertising elasticity of demand =[ qx/Q]/[ a/A]
Where,
qx = change in the quantity of demanded product
x
Q = original demand
a = change in advertising expenditure
A = original advertising expenditure

Elasticity of
substitution: Relation between price elasticity
,income elasticity & substitution
elasticity:-

Ep = Kx Ei + (1-Kx)es
Where,
Ep = price elasticity of demand
Ei = income elasticity of demand
es = elasticity of substitution,
kx = represents the proportion of consumers
income spent on product x.

Elasticity of price
expectation:-

A new concept of elasticity of price

expectations was developed by J.R. Hicks.
The demand for a commodity is affected
not only by the current price but also by the
expected future price.
FORMULA:Epe = [ Ep/ Cp]*[Cp/Ep]
Where,
Epe refers to the expected price,
Cp refers to current price,
Ep & Cp refers to the changes in them.