Prepared By: Anamika Datta Elasticity of Demand • Michael Parker • H.L. Ahuja • Mohammad Saiful Islam
Elasticity refers to the degree of responsiveness of one variable to another. Law of demand explains the inverse relationship between price and quantity, ot her things remaining constant. But this is not enough to say. Thus, need to kno w how much quantity changes in response to price. • The information as to how much or to what extent the quantity demanded of a good will change as a results of a change in its price is provided by the concept of elasticity of demand. It is the price elasticity of demand which is usually r eferred to as elasticity of demand. Price elasticity of demand Income elasticity of demand Cross elasticity of demand Elasticity of Demand
The price elasticity of demand (sometimes simply called price elasticity) measures how much the quantity demanded of a good changes when its price changes. Price elasticity of demand (using Percentage Method) , e p = = = = = e p = ─( Δq / q )÷ ( Δp / p ) = ─ ( dq / dp ). p / q Here, Q= Original quantity P= Original price = a small change Note that the price elasticity of demand is usually negative Price Elasticity of De- mand
Five Types of Price Elasticity of Demand 1. Unit elasticity: If % change in quantity of demand is equal to % change in price, demand is unit elastics. e p = 1
Five Types of Price Elasticity of Demand 2. Elastic Demand: If % change in quantity of demand is larger than % change in price, demand would be elastics. e p >1
Five Types of Price Elasticity of Demand 3. Inelastic Demand: If % change in quantity of demand is smaller than % change in price, demand would be inelastic s. e p < 1
Five Types of Price Elasticity of Demand 4. Perfect Elastic Demand: If quantity of demand changes without any change in price, demand is perfectly elastic.
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- Spring '15