Postgraduate Diploma in Business Management 2014/15

Dr. M. Ganeshamoorthy,B.A (Hons) PDN, PgDED CMB, M.A CMB, Ph.D The Netherlands

MUx = ΔTU/ ΔQx

Consumer Equilibrium is achieved when MUx = Px

Consumer Equilibrium is achieved when MUx = Px

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:

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

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

Elasticity of Demand

Elasticity of Demand • Determinants of Elasticity of Demand1. Necessities versus Luxuries2. Availability of Substitutes3. Relative Price (Income)4. Time

Elasticity of Demand

Elasticity of Demand

Elasticity of Demand • Income Elasticity of Demand YED: (ΔQD/ΔY)x(Y/QD)

Elasticity of Demand • Income Elasticity of Demand YED: (ΔQD/ΔY)x(Y/QD)

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)

Elasticity of Demand Cross Elasticity of Demand

Elasticity of Demand • Cross Elasticity of Demand YED: (ΔQD/ΔY)x(Y/QD)

Elasticity of Demand • Cross Elasticity of Demand YED: (ΔQD/ΔY)x(Y/QD)

Elasticity of Demand • Cross Elasticity of Demand YED: (ΔQD/ΔY)x(Y/QD)