dd utility elasticity

8/14/2019 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


PPRR

II

CC

EE

DDDD

QQQQ

PP

PP

Q

Q


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5. Unitary elastic demand

(ep = 1)

XX

YY


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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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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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 Outlay Method- More elastic

o

DD

P

P

Q Q

a

b

Quantity Demanded

Price

P TR


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Total Outlay Method-less elastic

o

P

P

QQ

a

b

P TRPrice

Quantity Demanded

DD


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Total Outlay Method-less elastic

o

P

P

Q Q

a

b

P TRPrice

Quantity Demanded

DD


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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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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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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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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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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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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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Elasticity Ratio Method

ei=Q

Y

Y

Q

ei =Q2 - Q1

Y2 - Y1

Y1

Q1

X

X


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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


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


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


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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dd utility elasticity

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