Elasticity - Demand and Supply Analysis Elasticity of Demand and Supply Elasticity of Demand Elasticity of Demand measures the responsiveness of the

Elasticity - Demand and Supply Analysis Elasticity of...

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Demand and Supply Analysis: Elasticity of Demand and Supply
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Elasticity of Demand Elasticity of Demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and changes in consumer’s income.
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Types: Elasticity of Demand Price Elasticity of Demand Cross Elasticity of Demand Income Elasticity of Demand
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Price Elasticity of Demand A measure of the responsiveness of quantity demanded to changes in price. % Δ P % Δ Q
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Factors Determining Price Elasticity of Demand - Availability of close substitute - Consumer’s loyalty - Necessities versus luxuries - Proportion of income spent on the product - Postponement of the Use -Time
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Elastic Vs. Inelastic - Elastic when change in price has greater effect on demand Inelastic when change in price has lesser effect on demand
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Availability of Close Substitutes The demand for a good is price elastic which have substitutes like tea and coffee, orange juice and lime juice. It is because when the price of a commodity falls in relation to its substitutes, the consumers will go on for it and demand increases. Goods having no substitutes like Cigarettes, liquor etc. have inelastic demand.
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Consumer’s Loyalty The demand for a good is price inelastic if consumers are habituated in buying that good and are unwilling to use substitutes eg. Cigarettes, tobacco, coffee, liquor etc. and vice versa if the good is price elastic
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Necessities vs. Luxuries Generally, the more that a good is considered a luxury (a good that we can do without) rather than a necessity (a good that we can’t do without), the higher the price elasticity of demand .
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Proportion of Income Spent The demand for a good is price inelastic if the good takes only small proportion of income and the consumers will not react significantly eg. Boot-polish, needles, newspapers etc. - and vice versa if the good is price elastic.
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Postponement of the Use The demand for a good is price inelastic if the goods whose demand cannot be postponed eg. Education, health services - and vice versa (constructing a house).
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Time The longer the time period the more elastic is the demand and vice versa. It is because in the long run a consumer can change his habits more conveniently than in short period.
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Measurement of Demand Elasticity Percentage / Proportionate Method Total Expenditure Method Point Method Arc Method
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Percentage/Proportionate Method Percentage / Proportionate Method : It refers to the price elasticity as the ratio of percentage change in quantity demanded to the percentage change in price.
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Percentage/Proportionate Method Symbolically, e D = - Percentage Change in quantity demanded Percentage in price Δ Q P e D = - ---------- X ---------- Δ P Q The absolute value of the coefficient of elasticity of demand ranges from zero to infinity ( 0≤ e D ≤ ∞)
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- ” sign in the Formula for ed Since there is inverse relationship between price and quantity demanded, elasticity of demand is ought to be negative like -1, -2, -3 etc. However,
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