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Presented by Group IV :Sanchari Dasgupta

Satyabrata Dhal

Sayam Roy

Satyajit Panda

Seba Surabhi Nayak

Sameer Ranjan Padhy

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Elasticity of Demand

Income Elasticity of Demand Types of income elasticity of demand Applications of income elasticity of demand

Cross elasticity of demand Types of cross elasticity of demand Importance of cross elasticity of demand in business Applications of cross elasticity of demand

Conclusion

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Refers to the degree of responsiveness to change in the demand of a

product or services and its price.

It helps firms model the potential change in demand due to changes in

price of the good

A firm grasp of demand elasticity helps to guide firms toward more

optimal competitive behaviour.

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Definition :

Ratio percentage or proportionate change in thequantity demanded to the percentage or proportionatechange in income.

Income Elasticity =% change in quantity demanded (

% change in income

Em = = =% Q

% M

% Q )

(% M)

Q

Q

M

M

Q

Q

M

M

Q=Initial demandQ=change in demand

M=Initial incomeM=change in income

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Unitary income elasticity of demand ( Em = 1)

Income elasticity of demand greater than unity (Em > 1)

Income elasticity of demand less than unity (Em < 1)

Zero Income elasticity of demand (Em = 0)

Negative Income elasticity of demand (Em < 0)

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D2

D1

D3D4D5

Em=0

X

Y

Demand

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When Em is +ve, commodity is of normal type.

When Em is -ve, commodity is of inferior type. Ex. Cereals like jowar, bajr

etc.

When Em is +ve and >1, commodity is a luxury. Ex. TV sets, Cars etc.

When Em is +ve and

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Long term business planning

Market Strategy

Housing Development Strategy

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Definition :

It refers to the degree of responsiveness of demand for acommodity to a given change in the price of some relatedcommodity.

Cross Elasticity of Demand =% change in demand for X

% change in price of Y

Exy = =Qx

QxPy

Py

Qx

Qx Py

Py

Qx= initial demand for X

Qx= change in quantity demanded for commodity XPy=Initial price of commodity Y

Py= change in price of commodity Y

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Positive Cross elasticity of demand : Substitute goods (Exy > 0)

Negative Cross elasticity of demand : Complimentary goods (Exy < 0)

Zero Cross elasticity of demand : Unrelated goods(Exy = 0)

Demand for Commodity X

PriceofY

X

Y Substitutes Complimentary Unrelated

X

Y

X

Y

Exy

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Firms can use Cross elasticity of demand estimates to predict:

The impact of a rivals pricing strategies on demand for their own products:

Pricing strategies for complementary goods:

Popcorn and cinema tickets are strong complements. Popcorn has a very high

mark up i.e. pop corn costs pennies to make but sells for more than a pound.

If firms have a reliable estimate for Cross elasticity of demand they can estimate

the effect, say, of a two for one cinema ticket offer on the demand for popcorn.

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Useful in inter commodity relation

Classification of market structure

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Hence Elasticity tells us how much quantity demanded or supplied changes

when there is a change in price.

The more the quantity changes, the more elastic the good or service.

Products whose quantity supplied or demanded does not change much with a

change in price are considered inelastic.

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