ASSIGNMENT ON ELASTICITY OF DEMAND

Submitted as per requirement of college assignment for BBS 1st year

ASSIGNMENT

(MICRO ECONOMICS)

SUBMITTED BY SUBMITTED TO

DEEPA THAPA TAK BADHADUR THAPA

DIPA K.CLETURER, ECONOMICS

KABITA RANA

DATE: 15TH Jan 201

TABLE OF CONTENTS Page

Introduction…………………………………………………… 1

Types of Elasticity of demand……………………………………. 1

Price elasticity of demand ....................................................………………1

Types of Elasticity of demand……………………………………………...3

Perfectly Elasticity of demand……………………………………………...4

Perfectly in Elasticity of demand…………………………………………...4

Relatively Elastic demand………………………………………………….5

Relatively inelastic demand………………………………………………...5

Unitary Elastic demand……………………………………………………..6

Income elasticity of demand………………………………………………...6

Types of Income elasticity of demand………………………………………7

Positive income elasticity of demand………………………………………..7

Negative income elasticity of demand………………………………………7

Zero elasticity of demand…………………………………………………...8

Cross elasticity of demand…………………………………………………..9

Positive cross elasticity of demand………………………………………….10

Negative cross elasticity of demand…………………………………………10

Conclusion……………………………………………………………………11

References…………………………………………………………………….11

Table

Price elasticity of demand…………………………………………………….2

Negative income elasticity of demand………………………………………..7

Zero income elasticity of demand………………………………………….…8

Positive cross elasticity of demand………………………………………..….9

Negative cross elasticity of demand………………………………………….10

Figure

Price elasticity of demand…………………………………………………….2

Negative income elasticity of demand………………………………………..7

Zero income elasticity of demand…………………………………………….8

Positive cross elasticity of demand…………………………………………...9

Negative cross elasticity of demand………………………………………….10

INTRODUCTION Demand is a desire for a goods which consumers want to pay or ability to pay a price for a specific

quantity of a goods or service. If refers to quantity of product or services. It refers quantity of a product

or service desired by buyers of various price law of demand state that the inverse relationship between

price and quantity demand of a product or goods.

The elasticity of demand is the measure of responsiveness of demand for a commodity due to change in

any of its determinants. The price of the same commodity, price of the related commodity, consumer

expectations regarding future price etc are the determinants of elasticity of demand.

The concept of elasticity of demand is used to identify the actual measure of the change in quantity

demanded due to the change in price of the commodity. In other word, it is the ratio percentage change

in quantity demanded with the percentage change in any one determinant of demand.

Types of Elasticity of Demand

A Price Elasticity of Demand

B Income Elasticity of Demand

C Cross Elasticity of Demand

A. Price Elasticity of Demand

Price elasticity of demand is defined as the responsiveness of change in quantity demand due to change

in its price. It is the ratio of percentage change in quantity demand for a commodity to the percentage

change in its price, other things remains the same price and quantity demand are inversely related, so the

coefficient of price elasticity of demand is negative.

Mathematically,

Ep= - Percentage change in quantity Demand / Percentage change in price

Ep = -(∆Q/QX100)/(∆P/P X 100)

Ep = - ∆Q/∆P X P/Q

Table 1:- Price elasticity of demand

Table 1 shows that, when the price is Rs 20, the quantity demand is 30kg. Similarly, when price

is Rs 10 the quantity demand is 40kg. When price decrease with Rs10,the quantity demand

increases with 10 kg.

Fig 1: Price Elasticity of Demand

Price in(Rs) quantity demand(kg)

20 30

10 40

In figure1: DD is the demand curve. Initial price of a commodity is p and initial quantity demand is Q

price falls to P(1,2,3) and quantity demand increase to Q(1,2,3).

Types of price Elasticity of demand

1. Perfectly Elasticity Demand

2. Perfectly inelasticity demand

3. Relatively elastic demand

4. Relatively Inelastic Demand

5. Unitary Elastic Demand

1. Perfectly Elastic demand (Ep= ∞)

Demand is said to be perfectly elastic if negligible change in price leads to infinite change in quantity

demand. Quantity demanded for commodity increases infinitely or demand tends to zero, When there is

no change in the price of commodity. It is real practice. In this case, demand curve is a horizontal

straight line.

Mathematically

Ep= - Percentage change in quantity demand / Percentage change in price

Ep = -(∆Q/QX100)/(∆P/P X 100)

Ep = - ∆Q/∆P X P/Q

Ep= 0/∞

Ep=0

𝟐. 𝐏𝐞𝐫𝐟𝐞𝐜𝐭𝐥𝐲 𝐈𝐧𝐞𝐥𝐚𝐬𝐭𝐢𝐜 𝐝𝐞𝐦𝐚𝐧𝐝 (𝐄𝐩 = 𝐨)

Demand is said to be perfectly inelastic, when the demand for a commodity does not with the change in

its price. In this case demand curve is a vertical straight line.

Mathematically,

Ep=- Percentage change in quantity demand / Percentage change in price

Ep= 0/Price

Ep= 0

2. Relatively Elastic Demand (Ep>1)

If the percentage change in quantity demanded for a commodity is more than percentage change in its

price, it is called relatively elastic demand for e.g if the price of commodity decrease by 20% quantity

demanded for the commodity increases by 40%.In this kind of elasticity of demand is found in case of

luxury goods. In such case demand curve is flatter.

Mathematically

Ep= % change in Quantity demand/ % change in price

Ep= 40% / 20%

Ep= 2>1

4. Relatively Inelastic Demand (Ep<1)

If the percentage change in the quantity demanded for a commodity is less than the percentage change in

its price it said be relatively inelastic demand for e.g .If the price of the commodity decreases by 40%

quantity demanded for the commodity increases by 20%. In such case demand curve is steeper.

Mathematically.

Ep= % change in Quantity demand/ % change in price

Ep= 20% / 40%

Ep= 0.5<1

5. Unitary Elastic Demand

When percentage change in the quantity demanded is equal to the percentagechange in price, it is said to

be a unitary elastic demand for e.g 20% change in price causes 20% change in demand.

Mathematically,

Ep= % change in Quantity demand/ % change in price

Ep= 20% / 20%

Ep= 1

6. Income Elasticity of demand (Ey)

It is demand as the responsiveness of demand for a commodity to the change in the income of the

consumer. In other words, in come elasticity of demand is the ratio of the percentage change in demand

for a commodity to the percentage change in income.

Mathematically,

Ep= % change in Quantity demand/ % change in price

Ep=(∆𝑄

𝑄𝑋100)/ (∆𝑌/𝑦𝑋100)

Ep=∆𝑄

∆𝑦𝑋 𝑌/𝑄

Types of Income Elasticity of demand

A. Positive Income Elasticity of demand

B. Negative Income Elasticity of demand

C. Zero Income Elasticity of demand

A. Positive Income Elasticity of demand (Ey=>o)

If quantity demanded varies positively with income elasticity will be positive. The commodity which has

positive income elasticity, is called normal goods. The positive income elasticity is further classified:-

1. Income elasticity of demand greater than unity.

2. Income elasticity of demand less than unity.

3. Income elasticity of demand equal to unity.

B.Negative Income Elasticity of demand (Ey<o)

If demand for a commodity decreases with an increase in income of the consumer is called negative

income elasticity of demand. This is found in case of inferior goods which are consumed by low income

people. Income demand curve is downward sloping as shown in the table and figure below.

Table 2: Negative income elasticity of demand

Price (in RS.) Quantity demand

5 10

10 5

Fig 2. Negative income Elasticity of Demand

C. Zero Income Elasticity of demand

If demand for a commodity does not with change in income of the consumer the income elasticity as

zero. In this case, income demand curve becomes vertical straight line as shown in the table and figure

below.

Table 3: zero income elasticity of demand

Price (in Rs) Quantity demand(in kg)

5 10

10 5

Fig. 3 Zero Income Elasticity of Demand

C. Cross elasticity of demand

Cross elasticity of demand measure the responsiveness of demand for one commodity to change in price

of another commodity. It is defined as the percentage change in the quantity demanded of good-X

resulting from a percentage change in the price of good Y.

Mathematically,

Exy= % change in Quantity demand of good X / % change in price of good Y

Exy=(∆𝑄𝑥

𝑄𝑥𝑋100)/ (

∆𝑃𝑌

𝑃𝑦𝑋100)

Exy=∆𝑄𝑥

∆𝑃𝑦𝑋 𝑃𝑌/𝑄𝑥

Types of cross elasticity of demand

1. Positive cross elasticity of demand

2. Negative cross elasticity of demand

1. Positive cross elasticity of demand

If quantity demanded for one commodity X varies positively with the price of another commodity Y.

The cross elasticity of demand will be positive. It is concerned with substitutes goods. This situation is

shown in the following table and figure.

Table 4: Positive cross elasticity of demand

Price of Y (In RS) Quantity demand for X (in kg)

5

100

10

150

Figure 4: positive cross elasticity of demand

2. Negative cross elasticity of demand

If quantity demand for one commodity X varies inversely with the price of another commodity Y. Cross

elasticity will be negative. When price of Y increases quantity demand for X also decreases and vice-

versa. This situation is shown in the following table and figure.

Table 5: Negative cross elasticity of demand

Price of Y (In RS)

Quantity demand for X

5 100

10 150

Figure 5: Negative cross elasticity of demand

Conclusion

Demand is effect by different determinant of its. So we have to take other factors constant. The elasticity

of demand is important in pricing decision or price determination. It is of great importance in business

decision making for several reasons

Reference

Business Economics-I,KEC publication

Business Economics,Asmita publication

www.2knomics.com

www.wikipedia.com