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Elsticity of Demand

The document discusses the concept of demand for goods and services, differentiating between individual and market demand, and outlines various factors influencing demand. It explains the demand function, demand schedule, and the law of demand, along with types of elasticity such as price, income, cross, and advertising elasticity. Additionally, it includes problem-solving scenarios related to demand estimation and elasticity calculations.

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sahulkumarmorya628
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20 views25 pages

Elsticity of Demand

The document discusses the concept of demand for goods and services, differentiating between individual and market demand, and outlines various factors influencing demand. It explains the demand function, demand schedule, and the law of demand, along with types of elasticity such as price, income, cross, and advertising elasticity. Additionally, it includes problem-solving scenarios related to demand estimation and elasticity calculations.

Uploaded by

sahulkumarmorya628
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Definition

Demand for a good or a service is defined as


quantities of a good or a service that people
are ready to buy at various prices within
some given time period , other factors
besides price held constant.

Individual demand: Single entity’s demand

Market demand: Sum total of individual


demand function
Factors
Price of the products
Taste and preferences
Income
Prices of related goods
Future expectations
Population
Advertising
Consumer credit facility
Demonstration effect or Bandwagon effect
Age structure and sex ratio of the population
Problem
Identify the major factors to the market
demand for
A) Ice-Cream
B) Sugar
C) Ball pen
D) Designer jeans
E) Gasoline
Demand function
A demand function is a functional relationship
between the demand for the product and its
various determining variables.

Demand schedule: A tabular


statement of price/quantity relationship is
called demand schedule.
Individual demand schedule
Market demand schedule
Demand equation
A linear demand function is called an equation
D=a-bP
Demand curve: A demand curve is a
graphical presentation of a demand schedule.

Equation: D=20-2px, Find the demand


schedule, and the demand curve if we assume
the values of Px as Rs. 10,20,30,40,50
Suppose the demand function for Warana
butter in a town is estimated to be:
Qd=600-5P

A) Estimate at what price demand would be


zero.
B) draw a demand curve at Rs 25, 35,
50,60,80 per kg.
Law of Demand
The demand for a commodity increases when
its price
decreases and falls when falls when its price
rises , other
things remaining constant

Factors behind the law of demand


a)Substitution effect
b)Income effect
Extension and Increase and decrease of
contraction of demand demand

D D D
1
Increase
price a
Decrease
b

D
D1
Demand D
Elasticity of demand
It measures the change in demand due to change
in determinants of demand

Types: 1) Price elasticity of demand

2) Income elasticity of demand

3) Cross elasticity of demand

4) Advertising elasticity of demand


Price elasticity of demand
Responsiveness of demand for a product to
the changes in its price.
e= Q/Q × P / P

Perfectly elastic demand(e=∞)


Relatively elastic demand(e>1)
Unit elastic demand(e=1)
Relatively inelastic demand(e<1)
Perfectly inelastic demand(e=0)
Measurement of elasticity
Total revenue method: price× Quantity
purchased

Ratio method: % Q/% P

Arc elasticity method: Q/ P×


P1+P2/Q1+Q2
Income elasticity
It measures how the quantity changes as the
consumer income changes
E= Q/Q × M/ M
Types 1)High income elasticity(e>1)
2) low income elasticity(e<1)
3) unit income elasticity(e=1)
4) zero income elasticity(e=0)
5) Negative income elasticity(e<0)
Cross elasticity

It measures how the quantity demanded of


one good changes as the price of another
good changes
E= Qx/ Py ×Py/Qx
Substitutes(positive)

Complementary goods(negative)
Advertising elasticity of demand
The degree of responsiveness of demand to
changes in advertising .
Ea = Q/ A×A/Q
Solve
State whether the Cross elasticity is positive
or negative
A)Personal computers and software
B) Electricity and natural gas
C) Apples and Bananas
D) Bread and DVDs
Solve
Discuss the price elasticity of the following
items:
A) Mayonnaise
B) Zen automobiles
C) Washing machines
D) Air travel
E) Beer
F) Diamond rings
Solve
What would you expect to happen to
spending on food at home and spending on
food in restaurants during a decline in
economic activity. How would income
elasticity of demand help explain these
changes.
Solve
Explain income elasticity of demand for
public transport and Health clubs
Solve
If the income elasticity of tomatoes is
estimated to be .25. What would you expect
to happen to the consumption of tomatoes as
personal income rises.
Solve
It is estimated that the price elasticity of
demand for Pepsi is -1.2 and the cross
elasticity of demand for Pepsi with respect to
the price of Coke is 2.
Let us assume that Coke and Pepsi are the
only two competitors in the industry. If the
price of Coke falls by 1%,will that affect the
sales of Pepsi? If yes, What should it do?
Solve
The teenager company makes and sells
skateboards at an average price of $ 70 each.
Over the past year they sold 4000 of these
skateboards. The company believes that the
price elasticity for this product is 2.5. If it
decreases the price to $63, what would be the
quantity sold.
Solve
The ABC company manufactures FM clock
radios and sells on average 3000 units monthly
at $25 each to retail unit Its closest competitor
produces a similar type of radio that sells for
$28.
A) If the demand for ABC product has an
elasticity of 3 , how much will it sell per month
if the price is lowered to $22.
B) The competitor decreases its price to $ 24.
If the cross elasticity between them is 0.3.
what will be ABC monthly sales
solve
Investigating the demand for textile in a country
x. researcher observed that the demand for
textiles tend to rise by 1.5 percent with one per
cent decrease in the prices of textiles; with the
rise in one per cent of per capita GDP, the
demand for textiles rise by 0.45 percent and
when food prices increase by one per cent the
demand for textiles contract by 0.93 percent.
A) Identify the type of demand elasticities.
B) Which type of elasticity the textile mills should
consider significant for Business development
C) How much rise in sales is expected ,
during a festival season by offering 20
percent discount by textile mills show room.

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