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B u s i n e s S, , CU, , t c U, , ww, , 4, E L A S T I C I T Y, , OF, DEMAND, , SYNOPSIS, 1., , Concept of Elasticity of Demand, , 2., , Price Elasticity of Demand, , 3., , Income Elasticity of Demand, , 4, , Cross Elasticity of Demand, , 5., , Promotional Elasticity of Demand, , 6., , Measurement of Elasticity of Demand, , 7., 8., , Factors Determining Elasticity of Demand, Significance of Elasticity of Demand, , 9., , Relationship between Elasticity of Demand and, , Revenue, , Concepts., , 10. Empirical Measurement of Elasticity, , CONCEPT OF ELASTICITY OF DEMAND, , The law of demand explained the inverse relationship between the price of a goodand, its quantity demanded i.e. when the price of a good decreases, consumers buy more of the, , good. But how much more? The law of demand fails to explain the extent of changes in the, quantity of a commodity demanded after its price changes. The term "elasticity" is used b, , the economists to measure this responsiveness or the extent of variation. Thus, the extent o, variation in demand is expressed as elasticity of demand., , Elasticity of demand refers to the degree of responsiveness of quantity demanded of, commodity to a change in any one of the factor affecting demand by keeping other, , constant. Factors such as price of a commodity, income, taste, etc., , tacto, , Percentage change in quantity demanded, EdPercentagechange in any factors, affecting demanded, Alfred Marshal was the first to introduce the, The impotant types of elasticity of demand, a) Price elasticity of demand., , b) Income elasticity of demand., c)Cross elasticity of demand., , d) Promotional elasticity of demand., , concept of elasticity in economic theory, are

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Elasticity of Demand, , 2., , A7, , PRICE ELASTICITY OF DEMAND, , Price elasticity of demand is the degree of responsiveness of quantity demanded of a, commodity to a change in its price other demand determinants remaining constant., , Price elasticity of demand is defined as, "the ratio of percentage change in quantity, , demanded of a commodity to a percentage change in price", Hence price elasticity of demand is:, , erCentage change in quantity demand, , En, , Percentage change in price, , The formula can be re written as, , AQ, , EpAP, p, , AQ, , Ep AP, , P, x, , Q, , In this equation,, Ep, , AQ, AP, , P, , Price elasticity of demand, , change in quantity demanded, change in price, Original price, , Q =Original quantity demanded, The above formula, in fact, relates to point-price elasticity of demand, that is, the, coefficient signifies very small or marginal changes only. It measure elasticity at a point on a, demand curve., , Degree of Price Elasticity of Demand, i) Perfectly elastic demand (Ep, , =, , o, , i) Perfectly inelastic demand (Ep = o), , ii) Relatively elastic demand (Ep > 1), iv) Relatively inelastic demand (Ep < 1), v), , Unitary elastic demand (Ep = 1), , i)PerfectlyElastic Demand, An endless demand at the given price is the case of perfectly elastic demand. When at a, , 8iven price; an infinite amount of quantity is demanded, , YA, , Perfectly elastic, Ep, , then demand is said to be perfectly elastic. Here elasticity, of demanded is infinite i.e., Ep a (It is a situation where, the slightest rise in price causes the, quantity demanded of, the commodity to fall to zero) In the, Fig. 4.1, the demand, Curve is a horizontal straight line parallel to X-axis., =, , The above, , change, , in, , price, , Fig. 4.1,, , D, , D, , shows that when there is, , i.e. almost, , negligible., , But the, , slight, quantity, , demanded increases from OQ to OQ1, then demand, Curve is perfectly elastic i.e. demand curve is a horizontal, , Q, Quantity Demanded, Fig. 4.1, , x

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48, , Business, , Economics, , (Sem., , (F.Y.B.Com.), , -, , -, , 1), 1), , (Pan, , (Paper -1), , straight line parallel to X-axis., Cectiy, practice, ii), , elastic demand is, , a, , of theoretical, , case, , extremity., , It is haraiy, , Perfectly Inelastic Demand, When, , a, , change, , in, , price has, , no, , esfect, , on, , encountered, , ID Perfectly inelastic, , quantity, , p-0, , i.e. demand remains constant it is called, demanded, pertectly inelastic demand. Here elasticity of demand is, zero i.e. Ep = 0., , The above, , in, , P, , Fig., , 4.2, shows that when price of, , P, , Commodity rises from OP to OP1, or fall from OPi to, , D, , OP, the total quantity demanded remains constant i.e., , X, , Q, , OQ. Here demand curve is a vertical straight line, , Quantity Demanded, , parallel to Y-axis., Perfect inelasticity, , Fig. 4.2, , theoretical, is, again a, consideration rather than a very practical phenomenon. However, a commodity of absolute, , necessity like salt seems to have perfectly inelastic demand for most consumers., , ii), , Relatively Elastic Demand, Y, , When a small change in price brings about more, than proportionate change in quantity demanded, then, , Relatively elastic, , D, , demand is said to be relatively elastic. Here elasticity of, demand is greater than 1 i.e. Ep >1., , Ep1, , The above Fig. 4.3, shows that when price of a, commodity falls from OP to OP1 the demand rises from, , D, , OQ to OQ1 which is relatively larger in proportion to, O, , price. Here the demand curve is flatter, i.e. it slopes, , Q Q1, Quantity Demanded, , gradually towards the X-axis., It is, , realistic concept, have such higher elastic demand., , Fig. 4.3, , iv), , a, , more, , as, , many commodities, , Relatively Inelastic Demand, , When a greater change in price, brings about less, than proportionate change in quantity demanded, then, demand is said to be relatively inelastic. Here, , Relatively inelastic, , Ep <1, , elasticity, , of demand is less than 1 i.e. Ep <1., , The above Fig, 4.4, shows that when price of a, commodity falls from OP to OP1, the demand rises from, OQ to OQ1 which is relatively smaller in proportion to, price. Here the demand curve is steeper, i.e. it, , slopes, , sharply towards the X-axis., This is also a very realistic concept., Y, , D, , P, , D, , x, , Q Q, , Quantity Demanded, Fig. 4.4, , Unitary Elastic Demand, a, change in price brings about exactly the, same, proportionate, in quantity, demanded, then, demand is said to be change, elastic., unitary, Here elasticity of, demand is exactly 1 i.e., Ep ., The above, Fig. 4.5, shows that when, price o, commodity falls from OP to OP the demand, tor, expands, , v), D, , When, , Unitary Elastic, , F1, Ep, , 1, , =, , D, X, , O, Quantity Demanded, , Fig. 4.5, , exactly proportionately from OQ to OQ1., Here, the demand curve, downward uniformly., demand curve is calledslopes, a, , rectangular hyperbola.

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4, , Elastcity of Demand, , This is a theoretical norm, whic h helps to distinguish between elastic and inelatic, demand in general., , Numerical Example:1, Calculate price elasti ity of demand, if priee falle from50 to, , An and eonerpently, , demand increases from 100 to 110 unit, , Solution, , AQP, , tpAP, , Q, , P (Old Price) - 50, P, , (New Price) - R 48, , AP New Price Old Price, 48, , Q Old Oty.) - 100 units, , O (New Oty)-110 units, AQ- New Oty - Old Oty, , 110 100, , 50, , 10 units, , 50, 100, -2.5, , Here price elasticity of demand is negative Minus sign before the value of elasticity only, , shows that price and quantity areinversely related., 3., , INCOME ELASTICITY OF DEMAND, Income is an important variable affecting the demand for a commodity. Income and, , demand hold a direct relationship, such that income and demand rise or fall together. Hence, when there is a change in the level of income of a consumer, there is change in the quantity, demanded of a commodity, other factors remaining the same., The degree of responsiveness of quantity demanded of a commodity to a change in the, , income of a consumer is called income elasticity of demand., Income elasticity of demand is defined as: "The ratio of percentage change in the, , quantity demanded of a commodity to a percentage change in the income of a consumer., Hence income elasticity of demand is:, , Percentage, changein quantity demand, Percentage change in income, , Ey, , Theformula can be written as:, , Ey, , AY, , In this equation,, , y, , Income, , elasticity of demand, , AQ Change in quantity, AY = Change in income, Q = Original quantity demanded, Y = Original incomne, , Alternatively, Ey, , % AY, , where, % AQ signifies the percentage change in demand, and % AY the percentage change, in income.

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fconomics, , 50, , Business, , (F.Y.B.Com.), , (Sem,, , ), , (Paper, , Degree of Income Elasticity of Demand, )Unitary income elasticity (Ey= 1), , 1)Incomeelasticity greater than unity (y, i) Inconme elasticity less than unity (y < ), iv) Zero income elasticity (Ey = 0), , v Negative income elasticity (Ey <0), i)Unitary, Income Elasticity, erers to a situation, when, equal to the percentage change in, , Ey, , the percentage change in quantity demanded, is unitary, is exa.i, income, income. Hence, , i), , xact, , a dema, , Eg. if income rise by 10%, emand too willrise by making 45° angel at the origin, D in the Fig. 4.6. The demand curve has positive slope, , 1., , curve, , demand i, elasticity of, shown h, is, by, 10%. This, , Income Elasticity greater than Unity, , demanded is greater than, , quantity, situation, when percentage change, more than unity i.e, F, of demand is, in income. Here income elasticity, change, a demand curven, PECentage, 20% this is shown by, .E8. If income rises by 10%, demand will rise by, which is flatter in the Fig. 4.6., t, , ii), , reters, , in, , to a, , Ds, , Income elasticity less than Unity, , D4, , D3, , It refers to a situation, when percentage change, , Di, , in quantity demanded is lesser than the percentage, , change, , elasticity, , in income. Here income, , of demand, , is less than unity i.e. Ey < 1. E.g. 10% increase inn, , Ey1, , incomewill result in a 5% increase, in demand. Ihis, which is, is Shown, , by, , a, , demand, , curve, , steeper, , D3, , D, , as, , E, , y, , >, , 1, , shown in Fig 4.6., , iv), , Zero Income Elasticity, It refers to a situation, when the percentage change, , in income has no effect on demandi.e. demand remains, constant. Here income elasticity of demand is zero i.e., 0. This is shown by a demand curve, vertical straight line as shown in fig. 4.6, , Ey, a, , =, , D4 which, , is, , O, , Quantity Demand, , Fig. 4.6: Income-elasticity of Demand, , vNegativeIncome Elasticity, , decreases with the increase in, It refers to a situation when demand for a commodity, curve D, of demand Ey <0. This is shown by a demand, income Here income elasticity, , which is a backward sloping curve in fig 4.6., , by differently sloping, in, Demand helps us Classifying the Goods:, , Different income elasticities, Income, , Elasticity, , of, , are, , indicated, , Income elasticity of demand is positive, Income elasticity, jowar, bajra etc., , of demand, , is, , negative, , income, , demand cures, , Normal goods., , Inferior goods, , for, , eg., , Cereals I, , Income elasticity of demand is positive and more than one, , Luxury goods, , demand for T.V. sets, cars etc. is highly income elastic., Income elasticity of demand is positive and less than one, , Necessary gO, , the, , s, , demand for food grain., , tncome, , elasticity, , Medicine etc., , of demand, , is, , zero, , Neutral, , goods, , like salt, matcn, , box

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Elasticity of Demand, , 51, , Applications of Income Elasticity, , K.K. Seo points out that income elasticity of demand is applicable to many planning and, strategy problems, such as;, , 1., , Long-term Business Planning, , long-run,, comforts and luxury goods may tend to be highly, incomeelastic. Hence, prospects for long-run growth in sales for these goods are very bright. The, In the, , demand for, , firm can plan out its business accordingly., , Further, firms dealing in goods having high income elasticities tend to be more, vulnerable to recession. Indeed, firms producing goods having low income elasticities are, , recession proof., 2., , Market strategy, , elasticity of demand is helpful in developing market strategies., 3. Housing development strategies, On the basis of income elasticity, housing development, requirement, Income, , and construction work, , be, , can, , be, , effectively, CASELET 4.1: DEMAND FOR WASHING MACHINE, can, , launched upon., , predicted, , Regarding demand for washing machines in India Eurominitar (2003)y's market researchers have, observed that since the average income of the Indian households is very low (less than USD 1000 a, , year), the normal cost of washing machine appears to the relatively much higher than what they can, afford to pay., To improve the sales ofwashing machines in India, thus, it has been suggested, thus, Low, , price washing machines be produced/marketed., , Indian cities and towns have the problem of water shortage. Therefore, produced the washing, machines models effect., Demand for electronic applicables such as washing machines is income electric. As such, with the increasing rate of growth of the Indian economy, the demand for washing machines, may he expected to rise in the years to follow., , llustration :1, , Find income elasticity of demand if a consumer income rises from, quantity purchased by him increases from 25 units to 30 units., , 100 to, , Solution, , QOld Qty.) =25 units, , Y (Old Income) = 100, Y (New Income) =, , 200, , Q1 (New Qty.) = 30 units, , AY = New income - Old income, , 200 100, =, , = 30 2 5, , 100, , 5, , AQ, , Ey AY*Q, 5, , AQ = New Qty. - Old Qty., , 100, , ty 1 0 0 * 2 5, Ey = 0.2, , Here income elasticity of demand, , = 0.2, , 200. The

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(Sem, (1YW om), , lconomi, , Papera, , Bniness, , 4., , CROSS ELASTICITY OF DEMAND, In, , fake into, , (r, , in, , The, , of demand,, , the prie of the, , change, account the hange, , Omodity \, , whih, , price elasticity, , due to a, , na, We, , at the, , ariving, , the, , in, , con ept of, , commodity., , same, , In, , elastic, , Tea, , ity, , imnportant, , is, , elastir, , its, , etfects, case, , in the, , substitutes, , and coffee, , responsiveness, the degree of, , change, do, , ity of, , on, , of, , the, , d mang, , Jeman, , omm, , other,vditpieg, , for eachr, , are, , substitutes and omplementary., and ink car and petrol are complementary goo0s., are, , tho, , acount, , ros, , Y ancd, of commodity, , price, , cross, , taks into, , one, , in the demand, , for, , elasticity of demand is, another commodily., Ommodith to the change in the price of, change in the quans, it, ratio of percentage, "the, as, of demand is defined, other (Y) commodity", of, elasticity, in price, oss, , ross, , manded, , of (X) commodity to the, , percentage, , change, , Hence cross elasticity of demand is:, , for CommodityVX, , Demanded, ercentage Change in Quantity, Commodity Y, , E, , Percentage Change, , in Price of, , AQ, , Q, , E, , Py QAPy, ,, , AQx, APy, , Q, , Py, Ex= Cross elasticity of demand, AQ, , APy, , =, , =, , Change in quantity demand for commodity, Change in price of commodity Y, , X, , Py= Initial price of commodity Y, , Q, , Cross, , i), , = Initial demand forX, , lasticity of Demand may be either Positive or Negative, , Positive Cross Elasticity of Demand, , or, , Zero, , Y, , It two goods are substitutes to each other, , then it said to be positive cross elasticity, demand, , i.e. with the rise in, , price, , of, , D, , of, , one, , Exy0, , commodity, demand for other commodity, increases and vice- versa e.g., tea and coffee,, , of coffee, rises the demand for tea rises. The demand, , ball pen and ink pen. If the price, curve, , is, , D, , upward sloping, , Q, Demnan, , Q, tea, , Fig. 4.7, , D, , A), , Exy0, , Negative Cross Elasticity of Demand, If two, , goods, , are, , complementary goods, then t, , is said to be negative cross elasticity of demand, , 1.e with the rise in price of one commodity, , P, , demand for the other commodity decrease an, D, , Q, , Demand for car, Fig. 4.8, , X, , vice, , versa, , and, , ., , petrol, ink and tountau, If, the, of, pens., price petrol rises, the demand tor cu, declines. The demand curve is downward, sloping, e.g., , car

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Elastvcity o! Demand, , ii) Zero Cross Elasticity, If two, is, , said, , goods, , are, , be, , zero, , to, , unrelated to each other, then, cross, , it, , elasticity, , of demand, e&, sugar and car, salt and pen. If the, price of, risesor fall it will have no effect on demand forsugar, car., Thedemand curve is a vertical straight line parallel, , Exy0, , to Y-axis., , D, , X, , Q, Demand for car, Fig. 4.9, Numerical Example: 1, Calculate cross elasticity of demand, if the, price of coffee rises from 7 100 per kg, 200 per kg and consequently demand for tea increases from 10, kg to 30 kg., , to, , Solution, , AQ, , ExyAPy, AQ, , Qx, , New, , Quantity, 30 10, 20 units, =, , Q, , -, , Old, , Quantity, , APy, , 200, Py, , - 100, , 100, , =, , = Old Quantity = 10, , 20, , New Price Old Price, , Old price = 7 100, , 100, , Exy 100 10, Exy, , 2, , llustration, To illustrate the, , of the formula,, , use, , let, , us, , take the data from Table 4.1., , Table 4.1:, , Monthly Demand of a Household, Original, , Commodity, Price (Paise), , Quantity (Units), , Changed, , Price (Paise), , 30, , Coffee, Bread, , 50, , 30, , 40, 20, 75, , 0, , 30, 80, , 50, 20, , 0, , 30, , 60, , Butter, , 90, , 40, , (Butter cubes), 1., , From Table 4.1,, , we, , may take data for tea and coffee, , price cross-elasticity as under:, Let X tea, Y Coffee,, =, , =, , Qx=50,, , Py, , 40,, , exy, ., , Quantity (Units), , Tea, , AQx, , 10 x 40, , Q, =, , =, , 80,, , 60 - 50, , APy 50 40, , Now, let X bread,, Qx, , =, , 10 x 50, Y, , AQx, , =, , butter, then:, =, , 0, , =, , 10., , 10., , 0.8, , and, , measure, , the coefficient of

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Economics, , Business, , (F. Y.B.Com.), , P, (Sem. -1), ) ((Paper, , -, , 54, , Py=, , 75,, , APy, , AQx, APy Q, , exy, , -15, , 10 75, -15, , x, , numerical coefficient, , e, , 80, , of, , -0.6, , 8, , cross, , be, demand may, elasticity of, , positive price-elasticity, , of demand. Jointly, , gve.Substitute goods have, cross-elasticity, Complementary products have negative price, of cross-elasticity, complementarity betweed two, , coefficient, , A higher or, , Substitutability, , 5., , rROMOTIONAL, DEMAND, , ELASTICITY, , OF, , of demar, , obviously, , demdi, , means, , a, , goods X and Y., , DEMAND, , /, , positive, demanded, , either, , ADVERTISING, , of, , higher, , degree, , ELASTICITY, , O, , quantity demand th, , the degree of responsiveness, romotional elasticity of demand is, of a firm., change in advertising or other promotional expenses, "the ratio of the percentage, Promotional elasticity of demand is defined as, advertisement expenditure., demanded to percentage change in the, ,, , change in, , quantity, , Percentage Change in Demand/ Sales, *aPercentage Change in Advertisement Expenditure, In symbolicterms, , %AQ, AA, , Ea, Alternatively,, Ea, where,, Ea, , Advertisement or promotional elasticity, , Quantity of sales, Advertising expenditure, , Q, A, , Advertisement elasticity of demand is always positive., , Illustration:1, , The quantity demanded of a commodity increases from 8,000 units to 10,000 units due, to increase in advertisement expenditure from, , 6,000 to, , 12,000. Find out promotional, , elasticity of demand., , Solution, , AQx, , EA, A, Qx, , Old advertisement expenditure = R6,000, = Old quantity = 8,000 units, , AQx = New Quantity- Old Quantity, , AA, , =, , 10,000-8,000, , =, , 2,000, , = New advertisement expenditure Old advertisement expenditure, , = 12,000-6,000, = 6,0000, , 2,000, EA, , 6.000, , *, , 6,000, 8,000, , =, , 0.255

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6., , MEASUREMENT OF ELASTICITY OF DEMANND, , of demand, of, Elasticity of demand refers to the degree responsiveness, constant., in price, other things remaining, demand, There are four methods of measuring elasticity of, 1., , 22., 3., , Percentage or, Total, , Geometrical Method or Point, , 1., , Percentage or, , or, , given change, , Ratio Method, , Outlay Method, , 4. Arc Method, , to a, , Arc, , Price, , Elasticity Method, , Elasticity of Demand, , Ratio Method, , This method was, or Flux method., method, as Proportionate, This method is also known, change, of demand is measured as percentage, elasticity, method,, this, In, Flux., given by Prof., in price., to a percentage change, demanded of a commodity, in, , quantity, , Price elasticity, , =, , Demanded, Percentage Change in Quantity, in price, Percentage Change, , AQ, , -.AP, , AP, P, , P, A, AP

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Economics, , ), (F. Y.B.Com.), , (Sem., , (s, , Paper, , 1) (Pa, , -, , Business, , 56, , llustration: 1, , demand, , available, , Suppose the following informations, Price of Apples, , are, , schedule, , from a, , Quantity demanded, , (Kgs.), 100 (Q), , 20 (P), , 96 (Q1), , 21 (P1), P, , AQ, Q, , Ep, AQ, , =, , AP, , =, , AP, , New, , Qty. (O), , New Price (P1), , Ep, , Old, , -, , Price (P), , =, , =, , 96- 100=, , 21, , -4, , -20=1, , ie.A, 20, , This, , Old Qty. (Q), , -, , 100, , -o.8, , -, , demand is less than one,, means, the elasticity of, , for the sake of, , convenie., , negative (minus) sign is ignored., , the numerical value ofs, into account only, ignore the negative sign and take, of demand for it is grea, elastic if the elasticity, elasticity Demand for a good is said to b, be inelastic if elasticity of demand fu, than one. Similarly the demand for a good is said to, unit elasticitv, one then it is said to be, is less than one. But if elasticity of demand equal to, Here we, , demand., The above illustration shows a small change in price. But for a big change in pricet, method is not, Demand., , 2., , applicable., , Then, , we, , have to follow the method known, , as, , Arc, , elasticity a, , Total Outlay Method, , This method is also called the total expenditure method. This method was given t, , Prof. Alfred Marshall. Here the total outlay (or total revenue) refers to the product of pi, and the quantity demanded. i.e. Total revenue =, , According, , Price x, , Quantity., , to this method, , a) When a fall in price, raises the quantity demanded in such a way that total out, remains unchange, then the demand is said to be unitary (Ed = 1)., For e.8, Price, , Quantity demanded, , Total outlay (P x Q), , 7 10, , 30 units, , 300, , 60 units, , 300, , 5, b), , When with a fall in price, the quantity demanded increases in such a way tn, total outlay goes on increasing, then the demand is said to be elastic (Ed> )., , For e.8, , Price, , Quantity demanded, , 20, , 10 units, , 10, , 30 units, , Total outlay (Px Q), 200, 300

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Elasticity of Demand, , c)When a fall in price, raises the, demanded in such, outlay goes on decreasing, then thequantity, demand is said to he, , $7, , way that the total, inelastic i.e. (a< 1)., , For e-g., , Price, , a, , Quantity demanded, , Total outlay (Px Q), , 60 units, , 300, , 100 units, , 7 200, , 5, 2, , 3 Geometric Method / Point Elasticity Method, , This method was, given by Prof. Alfred Marshall. This method help to measure price, elasticity at any point on the demand curve. The, method can be explain by, considering a linear (straight line) demand curve. Let point, the, line demand curve be, extended further to meet the two axis i.e. X-axis and Y-axis asstraight in, shown Fig. 4.10 below:, , Upper, , Segment, , Mid-point, Lower, , Segment, B, , X, , Quantity, Fig. 4.10, , When a point is taken on the straight-line demand curve like point P it divides the, , straight-line demand curve into two segments (parts) viz. AP and BP. Here AP is called the, upper segment of the demand curve and PB is called the lower segment of demand curve., Now elasticity of demand at point P can be measured by dividing the lower segment of the, demand curve by the upper segment of the demand curve., , segment ofthe demand curve, Therefore, Point elasticity= lower, Upper segment of the demand curve, A, , PB, , a, C, , E1, D, , E0, B, , Quantity, , X, , Fig. 4.11, , 1., , Elasticity of demand at mid-point P =1, , 2., , Any point above the midpoint i.e. point C has an elasticity greater than 1 (Ed> 1), , i.e., , unity., , i.e. relatively elastic demand., 3., , Any point below the midpoint i.e. point D has an elasticity less than 1 (Ed < 1), , i.e. relatively inelastic demand., 4., , At point A, where demand curve intersects Y-axis elasticity of demand is infinitee, i.e. Ed = a., , SIE.Y.B.Com-Business Economics (Sem.-1) (Paper-1)

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Irommr, , Bueinn, , At point B,, , where demand, , interse ts, , urvr, , is, , Xaxis, , different, , (Sem, , Y#Com), , elasticity, , at each, , Summing up the elastic itv ot demand, is, prices, it, une. At high pricrs, demand is elastic, At low, , 1, , demand is, , o, , point along, , inelastic, , a n d af, , ) (Paper, , a, , linear de, , midpoint, it, , the midprie, , unit elastic., I, , Y, , the demand curve is non-linear, the, , elasticity of demand can be measured by drawing, a, , tangent, , the Fig, , line at, 4.12, , the particular point, , below., , i.e., , point, , Let this tangent, , D, , intersect, , A, , -axis at point A and X-axis at point B., , Now the elasticity of demand is measured by, , &, , D, , dividing the lower segment by the upper segmem., , E, , OWer segment ofthe tangentline, line, Upper segment of the tangent, , BC, , B, , AC, 4., , X, , Quantity Demanded, Fig. 4.12, , Arc method or Arc Price Elasticity of Demand, we want to measure elasticity between any two points on the demand curve, then A, , elasticity method is used. Arc elasticity is measure of average elasticity between any two, points on the demand curve. It is the elasticity at the mid-point of the chord that connecg, the initial and new point on the demand curve (Fig, 4.13). In the figure the end points of thte, arc are, , (P1, Q1) and (P2, Q2)., Y, , A, , P, , Arc Method, , B, , P, , D, , Q, , X, , Quantity Demanded, Fig. 4.13, Arc, , elasticity, , is, , calculated by using, the following formula:, , P P2, Arc Ed AQ, AP Q1+Q2, =, , Here,, , AQ = change, AP, , change, , in, , quantity., , in, , price., , Q1, , = initial quantity., , Q2, , new quantity., , P1, , for initial price.

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flastic ty of Demand, , P=new price,, For all theoretic al, purpose,, Con, onsideration of deOsion, change is more than 5%., , point elastic ity, making, it is better to, , is, , rommonly used. Howrver, in practica, ar olastic ity measure, when the price, , use, , llustration:, , Suppose, initially price, , is, , 100 and 1000 units, , 800 units are demanded., , Thus,, , arc, , elasticity, , Arc Ed, , is measure, , are, , demanded., , New price is ? 120 and, , as, , P2, , =, , APQ1 +Q2, - 200, , 100 + 120, , 20, , 1,000+ 800, , 1 0 x 0.1222, =, , -, , suggests that, , It, , 1.222, , the, , elasticity of demand is greater than unity., , 7. FACTORS DETERMINING ELASTICITY OF DEMAND, Elasticity of demand for a product depends upon a number, asfollows, , Nature of, , 1., , By nature,, , of factors. These factors, , are, , Commodity, goods, , may be classified into necessary, , goods, , and, , luxury, , People, greater amount of their income on the purchase of necessaries of lifegoods., such as food, grain, milk, cloth etc. They have to purchase these commodities whatever be their, price., Therefore demand for such necessities is inelastic. On the other hand, the demand for luxury, goods is elastic e.g. diamond, jewellery etc., , spend, , 2., , a, , Availability of Substitutes, The elasticity of demand, depends, , upon number of substitutes available. If the, commodity has greater number substitutes available in the market, the demand will be, elastic for e.g. tea, coffee or, beverages such as Pepsi, Coca Cola etc. have more elastic, demand. But if the commodity has no substitute, the demand will, be inelastic for e.g., common salt., 3. Proportion of the Income, If the, , spent on Commodity, , proportion of income spent on the purchase of a, is very small, the, demand for such commodity will be inelastic and vice- versa. commodity, if, the, E.g., price of salt rises by, 50%, it will not effect the consumers demand for the, The demand for salt, commodity., therefore will be inelastic. On the other hand, if, the price of car rises from 5 lakh too, 10 lakh it will take a, of, the, income, of the consumer, its demand will fall., greater position, Therefore the demand for car is elastic., 4., f, , Consumer's Habits, a, , Consumer's habits, tastes, preferences, , commodity, , is habit, , forming, , etc: also affect the, elasticity of demand., then demand for such, commodity is inelastic. For, , eg.Cigarette to smoker has inelastic demand., 5., , Number of uses of a Commodity, If a, commodity has number of uses, its demand is elastic. For eg. if the price of a coal, talls, its quantity demanded will rise because there will be demand, from households,, , Industries, railway etc. On the other hand, it a commodity has only one use, its demand is, inelastic.

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60, , fconomics, , (f. Y.B,, , Com.), , (5em,, , ) (Panor, , -, , -), , Business, , 6., , Time, inelastic on, , the, , other, , hand, , in, , a, , long, , price ofelectr, , rise in, ctricity, short run, demand for a commodity, if the, in, For eg., run if pri, elastic., in the long, run, demand for a commodity will be, Ce, But, short run., that they use lee, in the, 50, consumption, bulb etc,, 80es up, it is very difficult to cut its, fluorescent, as, such, will, substitutes, for, plan, Ses, people, , will be, , the, , more, , electricity., 7., , Postponement of demand, , demand, , then, , dates,, demand to future, then, his demand,, , h e consumer postpone, cannot postponed, the, , of essential commodities which cannot, his, , current, , consumer, , be postponed,, , tnen, , is, , elastic, , inelastic, the, demand, , demand, , is, , purchase, , will be elastic., 8., , Range of prices, , Ndnge, , ot, , prices is, , an, , determining, important factor, , or, , of demand, the elasticity, very low price (very cheap, demand tends to he, , price (very expensive), of, ommodities, which have very high, at middle range, relatively inelastic demand. However,, , prices,, , vea, , elastic., 9. Joint demand, , demanded. The goods, are jointly, those goods which, affect, demand, of, elasticity, goods such as, demand. For e.g. complementary, which are demanded jointly have inelastic, demand for petrol depends upon the, etc. The elasticity of, for petrol will, car and petrol, pen and ink, less elastic, the demand, of demand for car. If the demand for car is, , The, , elasticity, , also be less elastic and vice versa., , 10. Consumer's income, tends to be, the income, the demand for the commodities, lower the income, the demand tend to be relatively elastic., , Larger, , Similarly, , relatively inelastic., , 11. Durable goods, , In case of durable goods, the demand tends to be inelastic in the short run, e.g., furniture, bicycle, radio etc. In the case of perishable commodities, demand is relatively, elastic e.g., milk, vegetables, etc., 8., , SIGNIFICANCE OF ELASTICITY OF DEMAND, The concept of elasticity of demand is useful in explaining several theoretical issues as, , well as it has a wide range of practical application in economics and business., , The importance of elasticity of demand can be realized as follows:, 1., , Classification of Markets, The concept of elasticity of demand is useful in determining the classification ot, markets. If the cross elasticity is infinite, it means perfect substitutability or homogeneity of, goods and hence there is perfect competition in the market. If the cross-elasticity is lesser, it, , means some degree of substitutability between goods but there is no homogeneity i.e. the, , products are diferentiated and hence it means there is monopolistic competition. If crosselasticity is zero, it means lack of substitution between products and hence it means, existence of monopoly., 2. Classification of goods, Classification of goods i.e., whether the goods are complementary or substitutes can be, done on the basis of cross elasticity of demand., Two goods are considered as substitutes if cross elasticity is positive. Two goods are, , considered, 3., as, , as, , complements when elasticity is negative., , Public Utilities, , Elasticity of demand helps the government to decide which industry should be declared, public utility and consequently owned and controlled by the government.

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61, , Elasticity of Demand, , Public utilities like railways, water supply etc. have inelastic demand. Public utilities are, , taken, , over, , by, , the government to avoid, , high prices, , and consumer's, , exploitation by, , the, , monopolist., , 4., , Government and Finance Minister, A knowledge of the elasticity of demand helps the government and economic planners, , in formulating its economic policies. The concept of elasticity of demand is very important to, , the government in determining fiscal policy. It is also very important to finance minister, , while selecting commodities for taxation. For e.g. generally taxes are levied on commodities, , like kerosene, matches, cigarettes, sugar, etc. which have been an inelastic demand., Elasticities of demand and supply help us in tracing the incidence of a commodity tax., When demand is inelastic in comparison to the elasticity of supply of the given commodity,, a large part of the tax burden will be shifted on the buyer., , 5., , Business Decisions, , In business decision-making, the concept of elasticity of demand is of utmost important., Change in price brings about a change in the quantity demanded. This change in quantity, demanded will affect the total expenditure of the consumer and will therefore, affects the, profits of the business., By knowing the type of elasticity of demand it is easy to know whether a price cut is, , better or a price rise is better for increasing sales, total revenue and profit. In case of elastic, demand, a businessman would be better off by charging a low price and in case of inelastic, , demand, by putting a high price for the commodity, the business would be profitable., , Thus the concept of elasticity of demand serve as the link between the pricing theory, and the pricing practice., 6., , Trade Unions, , Elasticity of demand helps in the determination of wages., The concept of price elasticity is useful to trade unions in wage bargaining. The union, leaders will demand for a higher wage to the workers when they find that demand for their, industry's product is fairly elastic. The government can determine minimum wage policy on, the basis of elasticity of demand of labour input., 7., , Advertisement Decision, , Promotional elasticity of demand helps the business firms to decide their advertising, , budget. The business firm would decide in favour of increasing the advertising budget when, promotional elasticity of demand is elastic. But if it is higher inelastic than there is no point, in, 8., , spending more on promotional budget., Economic Policies of the Government, , The concept of elasticity of demand is useful in solving the mystery of how farmers may, , remain poor despite a bumper crop. Agricultural products, particularly foodgrains, have an, elastic demand. But if there is a bumper crop it can be sold only by cutting prices (i.e. if, there is a bumper crop, supply increases but supply being more than demand its price fall1.), , Hence, the total income of the farmers will be lower inspite of bumper crop. Thus, for, government, it implies that higher farm incomes depends upon restriction of the supply of, , Toodgrains and other agricultural commodities., 9., , International Trade, , The concept of elasticity of demand is useful in formulating export and, import policies, country. In international trade, a country earns more profits by importing the, Commodities, which have elastic demand and exporting those commodities which have, , of, , a, , inelastic demand. If the exports have inelastic demand and imports have elastic demand,, devaluation will be successful.