# Elasticity of Demand

**Topics:**Supply and demand, Consumer theory, Price elasticity of demand

**Pages:**10 (2882 words)

**Published:**January 24, 2013

FIRST SEM MBA

MANAGERIAL ECONOMICS

“Kinds Of Elasticity Of Demand”

“Factors Influencing Elasticity Of Demand”

GROUP 2

ROLL NO| NAME|

7| PRAVEEN KUMAR K L|

8| PRAVEEN R|

9| PRITHVI LINGH HONNESH|

10| PRITHVI P M|

11| PRIYA DARSHINI B A|

12| PRIYANKA JAHAGIRDAR|

-------------------------------------------------

ABSTRACT

From the managerial point of view, the knowledge of nature of relationship between demand and its determinants alone is not sufficient. What is more important is the extent of relationship or the degree of responsiveness of demand to the changes in its determinants. The degree of responsiveness of demand to the change in its determinants is called elasticity of demand.

The concept of elasticity of demand plays a crucial role in business-decisions regarding maneuvering of prices with a view to making larger profits. Almost most businessmen are intuitively aware of the elasticity of demand of the goods they make, however, the use of precise estimates of elasticity of demand will add precision to their business decisions.

In this paper we will discuss

* The various kinds of elasticity of demand

* The nature of change and how it affects the decision taking. * How demand decisions in response to price changes vary for different types of goods? * Factors influencing the elasticity of demand

INTRODUCTION

Governments, business firms, supermarkets, consumers, and law courts need a way to measure how responsive demand is to price changes—for example, will a 10 percent cut in the price of commodity X increase quantity of X demanded a little or a lot? Economists measure the responsiveness of quantity demanded to price changes via a concept called elasticity. Marketers sometimes use estimates of elasticity to decide how to price their products or whether to add new product models.

We define elasticity of demand as the degree of responsiveness of the demand for a commodity to a change in the variables confined to its demand. It is expressed as the ratio of the percentage change in quantity demanded to the percentage change in some factor (such as price or income) that stimulates the change in quantity.

Elasticity ofDemand=Percentage change in quantity demandedPercentage change in determinant of demand

If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic. There are as many kinds of elasticity of demand as its determinants. In view of its major determinants, however, economists usually consider four important kinds of elasticities of demand: * Price elasticity of demand

* Income elasticity of demand

* Cross elasticity of demand

* Advertising/Promotional elasticity of demand

PRICE ELASTICITY OF DEMAND

Price elasticity of demand is a way of measuring the extent of change in quantity demanded for a commodity with the change in price of that commodity, being certain factors remain constant, for example consumer income, tastes and preferences, competitor’s price remains constant. It is generally defined as the responsive or sensitiveness of demand to a given change in price of a commodity. As the law of demand says that other things remaining constant, the price of a commodity is inversely proportional to the quantity demanded of that commodity. The elasticity of demand can be calculated by the formula

Price Elasticity of Demand=% Change in quantity demanded% Change in price

It can be positive or negative, the nature of elasticity of demand or the degrees of price elasticity of demand can range from 0 to infinity, depending on the proportion of the change in prices to the change in quantity demanded. Although PED being 0 or infinity is highly impractical in real world, it is studied to understand the degrees of variation between these factors. Degrees of Elasticity of Demand

1....

Please join StudyMode to read the full document