resentat|on Cn

L451lcl1Y
Ol
uM4Nu
repared 8y
Vyas narsha|
Def|n|t|on Cf r|ce L|ast|c|ty Cf Demand
1he change ln Lhe quanLlLy demanded of a
producL due Lo a change ln lLs prlce ls known
as rlce elasLlclLy of demand 1hus Lhe
senslLlveness or responslveness of demand Lo
change ln prlce ls as called elasLlclLy of
demand
k|nds Cf r|ce L|ast|c|ty Cf Demand
1) erfecLly elasLlc demand
2) 8elaLlvely elasLlc demand
3) LlasLlclLy of demand equal Lo uLlllLy
4) 8elaLlvely lnelasLlc demand
3) erfecLly lnelasLlc demand
LeL us See Some vlews Cn 1hem
erfect|y e|ast|c demand
P
R

C
E
y
0 x
Perfectly elastic
demand curve
D
D
Jhen Lhe
demand for a
producL changes
lncreases or
decreases even
when Lhere ls no
change ln prlce
lL ls known as
perfecL elasLlc
demand
8elaLlvely elasLlc demand
Relatively elastic
demand curve
P
R

C
E
demand
0 x
y
D
D
Jhen Lhe
proporLlonaLe
change ln
demand ls more
Lhan Lhe
proporLlonaLe
changes ln
prlce lL ls
known as
relaLlvely elasLlc
demand
L|ast|c|ty of demand equa| to ut|||ty
Elasticity of
demand equal
to utility curve
y
x
0
demand
P
R

C
E
D
D
Jhen Lhe
proporLlonaLe
change ln
demand ls equal
Lo proporLlonaLe
changes ln prlce
lL ls known as
unlLary elasLlc
demand
8elaLlvely lnelasLlc demand
Relatively inelastic
demand curve
X
O
Y
demand
D
D
P
R

C
E
Jhen Lhe
proporLlonaLe
change ln demand
ls less Lhan Lhe
proporLlonaLe
changes ln prlce lL
ls known as
relaLlvely lnelasLlc
demand
erfecLly lnelasLlc demand
demand
D
D
Perfectly inelastic
demand curve
0
Y
X
P
R

C
E
Jhen a change ln
prlce howsover
large change no
changes ln quallLy
demand lL ls known
as perfecLly lnelasLlc
demand
ALL kINDS CI DLMAND CAN 8L SnCWN
IN CNL DIAGkAM AS ICLLCW

1
2
3
4
3
?
x 0
LMAn

8
l
C
L
JL8L
1) erfecLly elasLlc
demand
2)8elaLlvely elasLlc
demand
3)LlasLlclLy of demand
equal Lo uLlllLy
4)8elaLlvely lnelasLlc
demand
3)erfecLly lnelasLlc
demand
Measurement Cf r|ce L|ast|c|ty Cf
Demand
1here are maln meLhods llke
1 ercenLage meLhod or proporLlonaLe
meLhod
2 1oLal ouLlay meLhod or LoLal revenue
meLhod
3 CeomeLrlc meLhod or polnL meLhod
4 Arc elasLlclLy of demand
1 ercenLage meLhod or proporLlonaLe meLhod
%% Iactors Affect|ng r|ce L|ast|c|ty Cf
Demand
Iactors Affect|ng r|ce L|ast|c|ty Cf
Demand
naLure of Lhe CommodlLy
AvallablllLy of SubsLlLuLes
varleLy of uses of commodlLy
osLponemenL
lnfluence of hablLs
roporLlon of lncome spenL on a commodlLy
8ange of prlces
Iactors Affect|ng r|ce L|ast|c|ty Cf
Demand
lncome Croups
LlemenLs of Llme
aLLern of lncome dlsLrlbuLlon
%% ract|ca| Importance of the
Concept of r|ce L|ast|c|ty Cf
Demand
racLlcal lmporLance of Lhe ConcepL of
rlce LlasLlclLy Cf emand
1he concepL ls helpful ln Laklng 8uslness
eclslons
lmporLance of Lhe concepL ln formaLLlng 1ax
ollcy of Lhe governmenL
lor deLermlnlng Lhe rewards of Lhe lacLors of
roducLlon
1o deLermlne Lhe 1erms of 1rades 8eLween
Lhe 1wo CounLrles
racLlcal lmporLance of Lhe ConcepL of
rlce LlasLlclLy Cf emand
eLermlnaLlon of 8aLes of lorelgn Lxchange
lor naLlonallzaLlon of CerLaln lndusLrles
ln economlc Analysls Lhe concepL of prlce
elasLlclLy of demand helps ln explalnlng Lhe
lrony of poverLy ln Lhe mldsL of plenLy
%) lncome LlasLlclLy Cf emand
@ypes Cf Income L|ast|c|ty Cf Demand
oslLlve lncome elasLlclLy of demand
negaLlve lncome elasLlclLy of demand
Zero lncome elasLlclLy of demand
os|t|ve Income e|ast|c|ty of demand

8 S
C x CuanLlLy emanded
l
n
c
o
m
e
os|t|ve Income e|ast|c|ty of demand
lncome LlasLlclLy Lqual Lo unlLy or Cne
lncome LlasLlclLy CreaLer 1han unlLy Cr
Cne
lncome LlasLlclLy Less 1han unlLy or Cne
Negat|ve Income e|ast|c|ty of demand
P
r
i
c
e
P
B
A
S
Total Revenue
Quantity Demanded (000s)
ero Income e|ast|c|ty of demand
Y

Quantity Demanded
I
n
c
o
m
e
A|| Income Graphs kepresentat|on
C

I
n
c
o
m
e
A
8
C
D
L
I
k
uant|ty Demanded
Measurement Cf Income L|ast|c|ty Cf
Demand
Income L|ast|c|ty Cf Demand
roport|onate change |n Demand
roport|onate change |n Income
|e
Income L|ast|c|ty Cf Demand
q

y
+
Measurement Cf Income L|ast|c|ty Cf
Demand
ere q Change ln Lhe quanLlLy demanded
C Crlglnal quanLlLy demanded
y Change ln lncome
? Crlglnal lncome
lor eg when lncome of Lhe consumer
2300/ he purchases 20 unlLs of x when
lncome 3000/ he purchases 23 unlLs of x
Measurement Cf Income L|ast|c|ty Cf
Demand
1hus
lncome LlasLlclLy of emand

%3/20) + %300/2300)
13
Lherefore here Lhe lL ls 13 whlch ls more
Lhan one
q

y
+
Iactors Affect|ng Income Cf Demand
lncome lLself Cnly
rlce Cf Lhe CommodlLy
Importance Cf the Concept of Income
L|ast|c|ty Cf Demand
ln producLlon plannlng and managemenL
ln forecasLlng demand when change ln
consumers lncome ls expecLed
ln classlfylng goods as normal and lnferlor
ln expanslon and conLracLlon of Lhe flrm by
Lhe flgure of lncome elasLlclLy of demand
MarkeLs slLuaLlons could be sLudled wlLh Lhe
help of lL
%% L|ast|c|ty Cf Subst|tut|on
1he selecLlon beLween Lwo producL or Lhlng ls
called subsLlLuLlon
So LlasLlclLy of SubsLlLuLlon measures Lhe raLe
aL whlch Lhe parLlcular producL ls subsLlLuLed
1hus LCS ls Lhe degree Lo whlch one producL
could be subsLlLuLed ln conLexL of prlce and
proporLlon
L|ast|c|ty Cf Subst|tut|on
LlasLlclLy of SubsLlLuLlon
roporLlonaLe change ln Lhe quanLlLy raLlos
of goods x y lvlL 8? roporLlonaLe
change ln Lhe prlce raLlos of goods x y
@ypes of L|ast|c|ty Cf Subst|tutlon
Zero LlasLlclLy of SubsLlLuLlon
lnflnlLe LlasLlclLy Cf SubsLlLuLlon
LlasLlclLy of SubsLlLuLlon greaLer Lhan unlLyor1
LlasLlclLy of SubsLlLuLlon ls equal Lo one
LlasLlclLy of SubsLlLuLlon ls less Lhan one
@ypes of L|ast|c|ty Cf Subst|tut|on on
Graph
C
h
a
n
g
e

|
n

U
A
N
@
I
@
I

r
a
t
|
o

o
f

g
o
o
d

x

y
Change |n kICL rat|o of good x y
C
k

L4
L1
L2
L3
L
ke|at|onsh|p 8etween r|ce L|ast|c|ty
Income L|ast|c|ty and Subst|tut|on
L|ast|c|ty
As rlce ls depended on lncome and
subsLlLuLlon effecL slmllarly rlce LlasLlclLy ls
depended on lncome LlasLlclLy an SubsLlLuLlon
LlasLlclLy
1hese relaLlonshlp can be represenLed by
Lp kx L1 + % 1 kx ) es
r|ce e|ast|c|ty of demand depends on
roporLlon of lncome spenL on parLlcular good
say x
lncome elasLlclLy of demand
LlasLlclLy of subsLlLuLlon
roporLlon of lncome spenL on producL oLher
Lhan x
Cross L|ast|c|ty of Demand
Cross e|ast|c|ty of demand express a
re|at|onsh|p between the change |n the
demand for a g|ven product |n response to a
change |n the pr|ce of some other product
Lg lf Lhe x Lea demand reduces
Lremendously Lhan lL effecL could be seen ln
demand of sugar and mllk
@ypes of Cross L|ast|c|ty of Demand
Cross LlasLlclLy of emand Lqual Lo unlLy or
Cne
Cross LlasLlclLy of emand CreaLer Lhan unlLy
or one
Cross LlasLlclLy of demand less Lhan unlLy or
one
Measurement Cross L|ast|c|ty of
Demand
roport|onate change |n Demand
for product k
roport|onate change |n r|ce of
product
|e
qx
x y
p y
+
Cross L|ast|c|ty of Demand
Cross L|ast|c|ty of Demand
Cross L|ast|c|ty of Demand Ior
Subst|tutes

r
|
c
e

o
f

Demand for
C

k
D
D
Cross L|ast|c|ty of Demand Ior
Comp|ementary roducts

r
|
c
e

o
f

k
D
D
Demand for
Cross L|ast|c|ty of Demand Ior Neutra|
roducts

r
|
c
e

o
f

k
D
Demand for
Importance of Cross L|ast|c|ty Cf
Demand
1he concepL ls of very greaL lmporLance ln
changlng Lhe prlce of Lhe producLs havlng
subsLlLuLes and complemenLary goods
ln demand forecasLlng
elps ln measurlng lnLerdependence of prlce
of commodlLy
MulLlproducL flrms use Lhese concepL Lo
measure Lhe effecL of change ln prlce of one
producL on Lhe demand of Lhelr oLher producL
Advert|s|ng L|ast|c|ty of Demand
Advert|s|ng e|ast|c|ty of demand |s the
measure of the rate of change |n demand
due to change |n advert|s|ng expend|ture
1he amounL of change ln demand of goods
due Lo adverLlsemenL ls known as
AdverLlsemenL LlasLlclLy of emand
Advert|s|ng L|ast|c|ty of Demand
roport|onate change |n Demand
for product
roport|onate change |n Advert|s|ng
expend|ture
|e
qx
A
a

Advert|s|ng L|ast|c|ty of Demand

Advert|s|ng L|ast|c|ty of Demand
ke|at|onsh|p 8etween Advert|s|ng
Lxpend|ture and Sa|es
C
k

S
S
S
a
|
e
s
Advert|s|ng Lxpend|ture
Iactors Affect|ng Advert|s|ng L|ast|c|ty
Cf Demand
1he sLage of Lhe roducL's MarkeL
evelopmenL
8eacLlon of markeL 8lval llrms
CumulaLlve LffecL of asL AdverLlsemenL
lnfluence of CLher lacLors
Importance of the Advert|s|ng
L|ast|c|ty Cf Demand |n 8us|ness
Dec|s|ons
lL ls useful ln compeLlLlve lndusLrles
1hough adverLlsemenL shlfLs Lhe demand
curve Lo rlghL paLh buL lL also lncreases Lhe
flxed cosL of Lhe flrm
L|m|tat|on of Advert|s|ng L|ast|c|ty of
the Demand
1he lmpacL of adverLlslng on sales ls dlfferenL
under dlfferenL condlLlons even lf oLher
demand deLermlnanLs are consLanL
Llke wlse lL ls dlfflculL Lo esLabllsh any co
relaLlonshlp beLween adverLlslng expendlLure
and volume of sales when Lhere counLer
adverLlsemenLs by rlval flrm ln Lhe markeL
1he effecL on sales depend on whaL Lhe rlvals
are dolng
..,.. . ~..
%