ECONOMICS (ELASTICITY OF DEMAND INTRODUCTION)

PRICE ELASTICITY OF DEMAND

PRICE ELASTICITY OF DEMAND measures the change in the quantity demanded in response to a change in market price.

PRICE ELASTICITY OF DEMAND = % age change in QTY Demanded/%age change in price

It is determined by three factors:

1)THE RELATIVE ATTRACTIVENESS OF SUBSTITUTES GOODS
2)THE RELATIVE PROPORTION OF INCOME SPENT ON THE GOODS
3)THE TIME THAT HAS BEEN PASSED SINCE THE PRICE CHANGED OCCURRED.

Example:If the price of a product A increases from Rs. 100 to Rs. 150 and the demand is decreased from 2000 units to 1200 units. calculate price elasticity of demand.
Solution
PRICE ELASTICITY OF DEMAND = % age change in QTY Demanded/%age change in price
% age change in QTY Demanded=((1200-2000)/(1200+2000)/2)=-.5i-e -50%
%age change in price=((150-100)/(150+100)/2)=.4 i-e 40%
PRICE ELASTICITY OF DEMAND =-50/40=-1.25 i-e 1.25
In this case price elasticity of demand is elastic

If PRICE ELASTICITY OF DEMAND <1
it is inelastic
If PRICE ELASTICITY OF DEMAND =1 it is unit elastic
If PRICE ELASTICITY OF DEMAND > 1 it is elastic.

CROSS ELASTICITY OF DEMAND

It measures the change in the demand for a good in response to a change in the price of another good.

CROSS ELASTICITY OF DEMAND = % age change in QTY Demanded/%age change in price of substitute or complement

Cross elasticity is positive for substitue and negative for complement.

INCOME ELASTICITY OF DEMAND

It measures the senstivity of the quantity demanded to an icrease or decrease in a consumer income.

INCOME ELASTICITY OF DEMAND = % age change in QTY Demanded/%age change in income

It is negative for inferior goods and positive for normal goods.

PRICE ELASTICITY OF SUPPLY

It is measure of the responsiveness of the quantity supplied to changes in price.

PRICE ELASTICITY OF SUPPLY = % age change in QTY Supplied/%age change in price