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elasticity of demand ,determinants of demand,all curves of demand.
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The concept of elasticity of demand Types of Elasticity of demand- Price Elasticity of Demand- Income Elasticity of Demand
- Cross Elasticity of Demand - Promotional Elasticity of Demand Degrees of Elasticity of Demand Significance of the concept of elasticity of demand in
business decision making Importance of theory of demand in relation to Electronic
commerce
Elasticity of Demand
Elasticity– Responsiveness
Price elasticity of demand– Consumers’ responsiveness to a change in
price Income elasticity of demand
– Consumers’ responsiveness to a change in income
Cross elasticity of demand– Consumers’ responsiveness to a change in
price of the relative commodity Promotional elasticity of demand
– Consumers’ responsiveness to a change in advertisement expenditure
Types Of ELASTICITY OF DEMAND
Price Elasticity of Demand=
Percentage change in quantity demanded/Percentage change in Price
Ep = ∆Q/Q = ∆Q
*P
∆P/P ∆P Q
PRICE ELASTICITY OF DEMAND
Price Elasticity of Demand
p
qED
%
%
Price Elasticity of Demand
The percentage change in the
quantity demanded given. . .
. . . a percentage change in the price.
6
B
A
DemandP
Q
Perfectly Elastic ||= Perfectly Inelastic ||= 0 Relatively Elastic ||>1 Unitary or Unit ||=1 Relatively Inelastic ||<1
7
Ranges of Elasticity . . .
Ranges of price elasticity
8
ED= ∞
Demand is perfectlyElastic
Demand forIce Cream
2.00
Ranges of price elasticity
9
ED= 0
Demand is perfectlyInelastic
Demand forIce Cream
2.00
10
Ranges of price elasticity
Demand is relatively ElasticDemand forIce Cream
3.00
2.00
108
E D >1
Ranges of price elasticity…
11
Demand is Relatively InelasticDemand forIce Cream
4.00
2.00
98
ED <1
Ranges of price elasticity …..
Demand is unitary ElasticDemand forIce Cream
4.00
2.00
108
E D= 1
13
Computing Elasticity Coefficients - Example (point elasticity)
Price Elasticityof Demand
=
Percentage Change in Quantity Demanded
Percentage Change in Price
Computing Elasticity Coefficients
14
Demand forIce Cream
2.20
2.00
108
ED
($2.20 - $2.00) / $2.00
(8 - 10) / 10
=
Computing Elasticity Coefficient…..
15
ED(10%)
(-20%)=
Demand forIce Cream
2.20
2.00
108
Computing Elasticity Coefficient
16
ED= -2
Demand forIce Cream
2.20
2.00
108
Notice thesign
Computing Elasticity Coefficient
17
ED= -2
Demand is ElasticDemand forIce Cream
2.20
2.00
108
Constant-Elasticity Demand Curves
Perfectly elastic D curve
– Horizontal; ED = ∞
– Consumers don’t tolerate P increases Perfectly inelastic D curve
– Vertical; ED = 0
– ‘Price is no object’ Unit-elastic D curve
– %∆p causes an exact opposite %∆q
Constant-Elasticity Demand Curves
0 Quantity per period
Pric
e pe
r un
it
pED = ∞
(a) Perfectly elastic
D
Pric
e pe
r un
itED’’ = 0
(b) Perfectly inelastic
ED ’’ = 1
(c) Unit elastic
D’
0 Quantity
per periodQ
Pric
e pe
r un
it
$10
6
0 Quantity
per period60 100
D’’
a
Consumers demand all quantity offered for sale at p, but demand nothing at a price above p
Consumers demand Q regardless of price
Total revenue is the same for each p-q combination
b
Summary of Price Elasticity of DemandEffects of a 10 Percent Increase in Price
Arc Price elasticity of demand
Price elasticity of demand between two points on the demand curve
Ep = Q2 – Q1 *
P2+P1
P
2 - P1 Q2 + Q1
Factors affecting the price elasticity of demand
Availability of substitutes
Much greater in the long run and smaller in the short run
Elasticity Estimates
Short run– Consumers have little time to adjust
Long run– Consumers can fully adjust to a price change
Demand is more elastic in the long run
Demand Becomes More Elastic over Time
Dw
Pric
e pe
r un
it
$1.25
1.00
Dm
Quantity per day95 10075500
Dy
e
Dy is more elastic than Dm , which is more elastic than Dw
Dw: one week after the price increase
Dm: one month after the price increase
Dy: one year after the price increase
Price Elasticity and the Linear D Curve
Linear D curve– Constant slope– Different elasticity– D becomes less elastic as we move
downward D upper half: elastic D lower half: inelastic D midpoint: unit elastic
Demand, Price Elasticity, and Total
RevenueWhere D is elastic, a lower P increases TR
Where D is inelastic, a lower P decreases TR
TR reaches a maximum at the rate of output where D is unit elastic
D
90
60
10
70
Pric
e pe
r un
it
$100
80
50403020
b
a
de
800500200100 Quantity per period1,000 0 900
Tot
al r
even
ue
$25,000
500 Quantity per period1,000 0
(a) Demand and price elasticity
(b) Total revenue
Total
revenue
Unit elastic, ED =1
Elastic, ED >1
Inelastic, ED <1c
Significance of the concept of elasticity of demand in business decision making – TR & MR
TR raises as long as Ep is positive
Price Quantity
Ep = ∆Q/Q
∆P/P
TR = P*Q MR = ∆TR/∆Q
6 0 0
5 100 5 500 5
4 200 2 800 3
3 300 1 900 1
2 400 0.5 800 -1
1 500 0.2 500 -3
0 600 0 0 -5
Price elasticity, total revenue and Marginal revenue
Elasticity and Total Revenue
TR= p * q As p decreases
If D elastic, TR increases If D inelastic, TR decreases If D unit elastic, TR unchanged
30
Computing Income Elasticity
Income Elasticity
of Demand
=
Percentage Change in Quantity Demanded
Percentage Change in Consumer Income
31
Income Elasticity
Q
I
I
Q
IIQ
Q
i
How demand rises with income
Engel Curves
A1
A2
X1 X2
Engel Curves
The Shape of the Engel Curve - income elasticity
If the Engel Curve is a straight line, the income elasticity is 1.0
A
X
Engel Curves
The Shape of the Engel Curve - income elasticity……
If the Engel Curve has increasing slope the elasticity is greater than 1.0
A
X
Engel Curves
The Shape of the Engel Curve - income elasticity………
If the Engel Curve has decreasing slope the elasticity is less than 1.0
A
X
Engel Curves
The Shape of the Engel Curve - income elasticity……..
This Engel Curve corresponds to a good that is both inferior and superior, depending on income
A
X
Selected Income Elasticities of Demand
Advertising Elasticity of Demand=
Proportionate change in sales/Proportionate change in Advertisement Expenditure
Promotional Elasticity of Demand
Coefficient of cross elasticity of demand of x for y = Percentage change in the quantity demanded of X/ Percentage change in the price of good y
Exy = ∆Qx/Qx = ∆Qx
*Py
∆Py/Py ∆Py Qx
Cross-price Elasticity of Demand
• Pricing Decisions by business firms
- EstimationStep 1. Identify the imp. Variables that affect the demand for the product it sellsStep 2. obtain variable estimates of the marginal effect of a change in each variable
on demand (Regression analysis)Step 3. The firm use this information to estimate the elasticity of demand for the
product it sells with respect to each of the variables in the demand function.
- Forecasting
These are essential for optimal managerial decisions in the short run and in planning for growth in the long run.
Using elasticities in managerial decision making
• Uses in Economic policy Regarding price regulation, especially of farm products
• Use in International Trade• Importance in Fiscal Policy
Using elasticities in managerial decision making…..
in relation to Electronic commerce
International convergence of tastes E commerce-B to B Ex: Wal-Mart suppliers – proprietary net work-B to C – Retail- Frictionless capitalism ( squeeze profit margins from
so many industries- Comparison shopping- New selling methods like auctions (buyers post a
price)- Infomediaries- Computer frauds
Selected Price Elasticities of Demand (Absolute Values)
Case
Stu
dy
Deterring Young Smokers Health hazard
Kills 440,000 Americans a year Lung cancer; Heart disease;
Emphysema; Stroke Cost to society
$7.18 per pack sold Higher health cost Lost worker
productivity Total: $150 billion a year
$3,400 per smoker per year
Case
Stu
dy
Deterring Young Smokers Discouraging smoking
Prohibit the sale of cigarettes to minors Higher cigarette tax
ED is higher for teens
Big share of budget Less peer pressure Not an addiction yet
Reduces teen smoking Change consumer tastes
