07-12-2012, 02:05 PM
Elasticity of demand
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Demand can be classified as elastic, inelastic or unitary.
Elasticity of demand is an important variation on the concept of demand.
Elasticity is a measure of the responsiveness of one variable to changes in some other variable.
Price elasticity of demand
the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.
Mathematically, the PED is the ratio of the relative (or percent) change in quantity demanded to the relative change in price.
Implication of Price Elasticity of Demand for Businesses and Government
Price elasticity of demand is crucial for businesses because it has an impact on total revenue of the firm.
for the government in imposing indirect taxes (IT) it must consider price elasticity of demand because the imposition of taxes increase the prices.
because IT affect the supply of products and if they are elastic the consumers will reduce their purchases more the price increases due to the tax imposition and there fore less tax will be paid if the price elasticity of demand is inelastic.
Income elasticity of demand
Income elasticity of demand (IED) measures the relationship between a change in quantity demanded and a change in income.
The basic formula for calculating the income elasticity is:
Percentage change in quantity demanded of good X divided by the percentage change in real consumers' income
Cross-Price Elasticity of Demand
The Cross-Price Elasticity of Demand measures the rate of response of quantity demanded of one good, due to a price change of another good.
If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases.
Similarly if the two goods are complements, we should see a price rise in one good cause the demand for both goods to fall.
The common formula for the Cross-Price Elasticity of Demand (CPEoD) is
CPEoD = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)