14-01-2011, 04:12 PM
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Group Members
Sonali Gupta
Subhra Prova Roy
Saikat Mondal
ELASTICITIES OF DEMAND
Managerial point of view, however, the knowledge of nature of relationship alone is not sufficient. What is more important is the extent of relationship or the degree of responsiveness of demand to the changes in its determinants. The degree of responsiveness of demand to the change in it determinants is called elasticity of demand.
CONCEPT OF ELASTICITY
Elasticity is the percentage change in one variable in response to a one percent change in another variable.
WHY WE USE ELASTICITY
The demand of a good depends not only on its price, but also on consumer income and on the prices of other goods.
For example, if the price of tea increases, the quantity demanded will fall.
Often, however, we want to know how the quantity demand will rise or fall. How sensitive is the demand or tea to its price?
If price increases by 10%, how much the will the quantity demanded change?
How much will it change if the income rises by 10%?
WE USE ELASTICITIES TO ANSWER QUESTION LIKE THESE.
TYPES OF ELASTICITY
Price elasticity of demand
Income elasticity of demand
Cross price elasticity of demand
Promotional or advertising elasticity of
demand
Price elasticity of demand
Price elasticity of demand measures the percentage change in quantity demanded due to one percent change in price of the good ,other variables remaining constant
Measurement of price elasticity
Percentage method
Total outlay method
Point method
Arc method
Percentage method
According to this method elasticity of demand is the ratio of percentage (or proportionate) change in quantity demanded to percentage (or proportionate) change in price
Total outlay method
This method helps to know whether elasticity of demand is equal to one, greater than one,or less than one
Elasticity one: if the rise or fall in price keeps the total outlay unaffected
Elasticity is more than one: if fall in price leads to increase in total outlay, while rise in price reduces total outlay
Elasticity is less than one: if fall in price reduces total outlay, while rise in
price increases total outlay
