dd utility elasticity
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Be Nice to the Ones who SMOKE..
Every Cigarette might be their last..
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Demand Determinants
Price of the product demanded.Income of the consumer.
Prices of related goods.Advertising expenditure.
Future Expectations of the
Consumer about the Price of
the product.
Habits.
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Demand Determinants
Growth of Population, Age structure, Sexratio etc
Direct Taxes
Fashion, Tastes, Trends etc
Climatic Conditions
Credit FacilitiesBrand Name
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Individual Demand Schedule
of Pizza
Price (Rs) Quantity Demanded
by Gautam
(In units)
1 6
2 5
3 44 3
5 2
6 1
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Individual Demand Curve of
Pizza
Quantity Demanded
X
Y
DD
P
P
P
Q Q QO
PRICE
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Demand Curve
Why does a demand curve slope
downwards?
Price Quantity relationship
Law of Diminishing Marginal
Utility
Income EffectSubstitution Effect
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Price
(Rs.)
QD by
Gautam
QD by
Gayatri
QD by
Jay
Marketdemand
4 1 3 3 7
3 2 4 5 11
2 3 5 7 15
1 5 9 10 24
Market Demand Schedule of
Pizza
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Market Demand
is a horizontal
summation of individual
demand.
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Law of Demand states that
Other things remaining the same
(Ceterius Paribus) the higher theprice the lower will be the demand
and vice versa.
QDx = f {Px}
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Other things remaining the
same
No change in consumers income
No change in prices of related
goodsNo change in advertisingexpenditure
No change in fashion, tastes,preferences
No expectations about future
change in price
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Other things remaining the
same
No change in age-composition and
sex ratio of the population
No change in government policyNo change in climatic conditions
No change in credit facilities, brand
name, habits etc
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Exceptions or Limitations to
the Law of Demand
1. Giffen Paradox2. Prestigious goods or conspicuous
consumption or status symbol goods
3. Speculation
4. Consumers bias, ignorance, illusion etc
5. Future Expectations
6. Credit Facilities
7. Brand Name8. Taste, Fashions, Habits
9. Emergency
(Note: first 5 points are important)
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Changes In Quantity Demanded
Expansion in quantity
demanded
Contraction in quantity
demanded.
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Changes In Quantity DemandedChanges In Quantity Demanded
QUANTITY DEMANDED
X
Y
DD
P
R
I
C
E
P
P
P
Q Q Q
b
c
o
a
Contract
ion
Expan
sion
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Changes in Demand
Increase in demandDecrease in demand
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QUANTITY DEMANDED
X
Y
DD
P
R
I
C
E
P
Q
Increase in DemandIncrease in Demand
DD
Qo
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Increase in Income of Consumer
Taste, Fashion in favor of The Products
Increase in Price of Substitute
Decrease in price of Complementary
Consumers Ignorance
Emergency
Future Expectations About Rise in Price
Increase in population
Increase in Demand Can be
Due to ------
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QUANTITY DEMANDED
X
Y
DD
P
R
I
C
E
P
Q
Decrease in DemandDecrease in Demand
DD
Qo
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Decrease in Demand Can be
Due to ------
Decrease in Income of Consumer
Taste, Fashion Against The Products
Decrease in Price of Substitute
Increase in price of Complementary
Future Expectations About Fall in Price
Decrease in Population
etc etc..
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MISTAKES ARE NEW LESSONS FOR
SUCCESS
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Price elasticity
The degree of responsiveness of
quantity demanded due to change in
price.
Percentage change in quantity
demanded
Ep= -------------------------------------------------
Percentage change in price
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Types of Price Elasticity
1. Perfectly elastic (ep = )
2. Perfectly inelastic (ep = 0 )
3. Relatively elastic demand (ep > 1)4. Relatively inelastic demand
(ep< 1)
5. Unitary elastic demand (ep = 1)
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3 R l ti l l ti d d
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3. Relatively elastic demand
(ep > 1) Luxury goods
XX
YY
QUANTITY DEMANDEDQUANTITY DEMANDED
PPRR
II
CC
EE
DDDD
QQQQ
PP
PP
Q
Q
>>P
PP
Q
P
oo
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4. Relatively inelastic demand
(Ep < 1)Necessary Goods
XX
YY
QUANTITY DEMANDEDQUANTITY DEMANDED
PPRR
II
CC
EE
DDDD
QQQQ
PP
PP
Q
Q
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5. Unitary elastic demand
(ep = 1)
XX
YY
QUANTITY DEMANDEDQUANTITY DEMANDED
PPRR
II
CC
EE
Q
Q
==P
PP
DDDD
QQQQ
PP
PP
00
Q
P
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Method of Price Elasticity
eP =Q
P
P
Q
.
. .
Q2 - Q1
P2 - P1
P1
Q1
Ratio or Percentage Method
X
XeP =
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Ratio or Percentage Method
Where, P1 = Initial Price
P2 = New Price
Q1 = Initial Quantity
Q2 = New Quantity
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Method of Price ElasticityY
X
A
B
Price
0
Quantity Demanded
ep=
ep>1
ep=1
ep
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Method of Price Elasticity
ep =
Q2 Q1
P
P2 + P1
Q2 + Q1
ARC Method
X
Q
Q2 + Q1 2
2
P2 P1
P2 + P1
ep =
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Method of Price Elasticity
X
Y
DD
a
b
Arc
Quantity Demanded
Price
0
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Total Revenue/Total Expenditure/
Total Outlay Method-More elastic
o
DD
P
P
Q Q
a
b
P TRPrice
Quantity Demanded
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Total Revenue/Total Expenditure/
Total Outlay Method- More elastic
o
DD
P
P
Q Q
a
b
Quantity Demanded
Price
P TR
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Total Revenue/Total Expenditure/
Total Outlay Method-less elastic
o
P
P
QQ
a
b
P TRPrice
Quantity Demanded
DD
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Total Revenue/Total Expenditure/
Total Outlay Method-less elastic
o
P
P
Q Q
a
b
P TRPrice
Quantity Demanded
DD
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Total Revenue/Total Expenditure/
Total Outlay Method-Unitaryelastic
P
P
Q Q
DD
a
b
Quantity Demanded
Price
0
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Total Revenue Method
Price Total Revenue(TR) Type ofElasticity
(Ep)
IncreaseDecrease
ConstantConstant
E = 1(Unitary)
Increase
Decrease
Decrease
Increase
E > 1
(More elastic)
Increase
Decrease
Increase
Decrease
E < 1
(Less elastic)
Factors influencing elasticity of
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Factors influencing elasticity of
demand-
(1) Nature of the commodity :
Necessaries Inelastic
Comforts and Luxuries Elastic
(2) Availability of substitutes :
No substitutes Inelastic
Close substitutes Elastic
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F t i fl i l ti it f
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Factors influencing elasticity of
demand-
(7) Possibility of Postponement :
Can be Postpone -- ElasticCannot be Postpone Inelastic
(8)Influence by Habits & Customs
Inelastic
Practical Applications of Price
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Practical Applications of Price
elasticity
1. To a Businessman By knowing the type of elasticity of
demand it is easy to know whether a price
cut is better or a price rise for increasing
the sales, total revenue and the profits.
If the demand is more elastic, a price cut
would lead to an increase in total
revenue. It the demand is inelastic, by raising a
price, no significant decrease in sales will
be effected so the total revenue and the
profit would rise.
P ti l A li ti f P i
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Practical Applications of Price
elasticity
2. To the Finance Minister
Finance minister has to consider the
elasticity of demand while selecting
commodities for tax. Tax imposition oncommodities for getting substantial
revenue becomes worthwhile only if the
taxed goods have an inelastic demand.
Taxes are levied on commodities whichhas inelastic demand like cigarettes,
wine, sugar etc.
P ti l A li ti f P i
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Practical Applications of Price
elasticity
3. In International Trade
Elasticity is important in
formulating export and import
policies of a country. The relative
elasticities of demand for
commodities in the two countries
are very important. Export thosecommodities which are inelastic in
the international market.
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Income Elasticity
the degree of
responsiveness of the
quantity demanded due tothe change in income of the
consumer.
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Measurement of Income
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Measurement of Income
Elasticity Ratio Method
ei=Q
Y
Y
Q
ei =Q2 - Q1
Y2 - Y1
Y1
Q1
X
X
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Measurement of Income
Elasticity
Where, Y1 = Initial Income
Y2 = New Income
Q1 = Initial Quantity
Q2 = New Quantity
Mesurement of Income
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Mesurement of Income
Elasticity
ei =
Q2 Q1
Y
Y2 + Y1
Q2 + Q1
ARC Method
X
Q
Q2 + Q1 2
2
Y2 Y1
Y2 + Y1
ei =
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Positive Income Elasticity
XX
YY
QUANTITY DEMANDEDQUANTITY DEMANDED
II
NN
CC
OO
MMEE
DDDD
ei < 1ei < 1 (necessary goods)(necessary goods)
00 QQQQ
YY
YY
Y
Q
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Positive Income Elasticity
XX
YY
QUANTITY DEMANDEDQUANTITY DEMANDED
II
NN
CC
OO
MMEE
DDDD
ei > 1ei > 1 (Luxury goods)(Luxury goods)
00
YY
YY
QQ QQ
Y
Q
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Negative Income Elasticity
XX
YY
QUANTITY DEMANDEDQUANTITY DEMANDED
II
NN
CCOO
MM
EE
DDDD
00
ei < 0 (Inferior goods)
Y
Q
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Practical Applications of
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Practical Applications of
Income elasticity
4. To the Businessman
Income elasticity is important to certain
producers in their demand and sales
forecasting and planning businessexpansion. For instance, the demand for
TV sets is highly income elastic, so when
per capital income or income levels of a
class of consumers is found to be rising,TV manufacturers can expect a greater
sale even at slightly higher prices.
C El i i
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Cross Elasticity
..is the degree of responsiveness of
quantity demanded of good X due to
the change in Price of good Y( where
good X and Y are either substitutes orcomplementary)
Percentage change in Quantity demandedPercentage change in Quantity demandedof good Xof good X
Percentage change in price of good YPercentage change in price of good Y
Exy =Exy =
Measurement of Cross
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Measurement of Cross
Elasticity
ey =QX
PY
PY
QX
ey =QX2 - QX1
PY2 - PY1
PY1
QX1
X
X
Ratio Method
Mesurement of Cross
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Mesurement of Cross
Elasticity
ey =
QX2 QX1
PY
PY2 + PY1
QX2 + QX1
ARC Method
X
QX
QX2 + QX1 2
2
PY2 PY1
PY2 + PY1
ey =
Cross elasticity in case of
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Cross elasticity in case of
Substitutes
Priceo
fcoffee
Priceo
fcoffe e
Demand for teaDemand for tea
PP
PP
QQ QQ
DDDD
Exy > 0
XX
YY
00
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Genius does what it must, and Talent does what it
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can
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Demand Forecasting
Short Run Forecasting
Survey Method
Long Run Forecasting
Statistical Method
Survey Method
Opinion Polling Method
Collective opinion Method
Panel of Experts
Correlation & Regression
Time Series MethodBarometric Method
Methods of Demand
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Methods of Demand
Forecasting
For a Established product :
(1) Interview and Survey Approach
(2)Opinion Polling Method
(3)Collective Opinion Method
(4) Panel of Experts Or Delphi method.
(5) Projection Approach (for Long Period)
Projection Approach (Long
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Projection Approach (Long
Period)
SALES
0
Lineof
bestfit
YEAR
Y
X
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