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Postgraduate Diploma in Business and Finance 2015/16
Dr. M. Ganeshamoorthy,B.A (Hons) PDN, PgDED CMB, M.A CMB, Ph.D The Netherlands
Elasticity of Demand • Elasticity of demand is a measure of sensitivity
of quantity demand to a change in any one of the determinants of demand.
• There are THREE types of elasticity of demand:1. Price elasticity of demand2. Income elasticity of demand3. Cross elasticity of demand
Elasticity of Demand 1. Price elasticity of demand:Measuring price elasticity of demand:Point formula: PED: (ΔQD/ΔP)x(P/QD)Arc Elasticity formula: PED: (ΔQD/ΔP)x(P1+P2/QD1+QD2)
Elasticity of Demand Point Price Quantity demanded
A 0 120
B 2 100
C 4 80
D 6 60
E 8 40
F 10 20
G 12 0
Elasticity of Demand • Price elasticity coefficient is always a negative
number as price and quantity demanded move in opposite directions.
• The negative sign is ignored and the absolute values are taken in to consideration
1. PED = 0 Perfectly inelastic demand2. PED < 1 Inelastic demand3. PED = 1 Unitary elastic demand 4. PED > 1 Elastic demand5. PED = Perfectly elastic demand
Elasticity of Demand • Price elasticity coefficient is always a negative
number as price and quantity demanded move in opposite directions.
• The negative sign is ignored and the absolute values are taken in to consideration
1. PED = 0 Perfectly inelastic demand2. PED < 1 Inelastic demand3. PED = 1 Unitary elastic demand 4. PED > 1 Elastic demand5. PED = Perfectly elastic demand
Elasticity of Demand • Determinants of Elasticity of Demand1. Necessities versus Luxuries2. Availability of Substitutes3. Relative Price (Income)4. Time
Elasticity of Demand Cross Elasticity of Demand
• Cross elasticity measures the responsiveness of quantity demanded of one commodity to a change in price of another commodity
YED: (ΔQD/ΔY)x(Y/QD)