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ELASTICITY OF DEMAND
Prepared By
Azeem Aslam Yaser Ali Khan Priyanka Kaul Pooja Shah
C
E
When the demand for a product changes increases or decreases even when there is no change in price, it is known as perfect elastic x demand.
demand
When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.
D
0 x
demand
D
P R
I
C E
When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand
D
O X demand
P R
I
C E
When a change in price, howsover Perfectly inelastic large, change no demand curve changes in quality demand, it is known as perfectly inelastic demand
D demand
P R D
I
C E D4 0 D5 DEMAND X D3
D1
D2
WHERE D1) Perfectly elastic demand D2)Relatively elastic demand D3)Elasticity of demand equal to utility D4)Relatively inelastic demand D5)Perfectly inelastic demand
Under this method we calculate Ed by the formula as Ed =% change in Quantity demanded % change in Price
=Q2 Q1 X P1 P2 P1 Q1
8 7 6 5 4 3
3 4 5 6 7 8
This method for computing the price elasticity is also known as the "midpoints formula", because the average price and average quantity are the coordinates of the midpoint of the straight line between the two given points
y Y
= (5/20) + (500/2500) = 1.5 therefore here the IED is 1.5 which is more than one.
P A Income D
B S Quantity Demanded
Total Revenue
B S
Income
O
D Quantity Demanded
Elasticity Of Substitution
The selection between two product or thing is called substitution So Elasticity of Substitution measures the rate at which the particular product is substituted . Thus EOS is the degree to which one product could be substituted in context of price and proportion
Elasticity Of Substitution
Elasticity of Substitution = Proportionate change in the quantity ratios of goods x & y DIVIDED BY Proportionate change in the price ratios of goods x & y.
E3
E5
i.e.
Py
Price of Y
D O X
Demand for Y
Price of Y
D O Demand for Y X
Demand for Y
i.e.
qx
Advertising Expenditure
Examples
A commercial for a fairly inexpensive good, such as a hamburger, may result in a quick bump in sales. On the other hand, advertising a piece of jewelry may not see a pay back for a period of time because the good is expensive and is less likely to be purchased hastily.
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