Elasticity of Demand

• It explains the degree of responsiveness of demand to a given change

in price
• “The elasticity of demand in a market is great or small according as
the amount demanded increases much or little for a given fall in the
price and diminishes much or little for a given rise in price”
-------------- Alfred Marshall

Ed = Proportionate change in quantity demanded

Proportionate change in price
Classification of elasticity of demand

Price elasticity
Income elasticity
Cross elasticity
Promotional elasticity
Arc elasticity
Price elasticity of demand
Ed = Proportionate change in quantity demanded
Proportionate change in price
Degrees of Price Elasticity of Demand
1. Perfectly Elastic Demand: When the demand for a good is perfectly
elastic, any increase in the price will cause the demand to drop to
zero.
2. Perfectly Inelastic Demand: When demand is perfectly inelastic,
quantity demanded for a good does not change in response to a change
in price.
3. Relatively Elastic Demand: Relatively elastic demand refers to
the demand when the proportionate change produced in demand is
greater than the proportionate change in price of a product.
4. Relatively Inelastic Demand: More change in the price of the goods
but less change in demand for the goods.
5. Unitary Elastic Demand: A unitary elasticity means that a given
percentage change in price leads to an equal percentage change in
quantity demanded or supplied.
Income Elasticity of Demand

Ed = Proportionate change in Quantity demanded

Proportionate change in Income
Income Elasticity of Demand
Cross Elasticity of Demand
• Cross elasticity of complementary goods is negative.

• Cross elasticity of Substitute goods is positive. If they are perfect

substitute the Ed is infinite.

• Cross elasticity of unrelated goods is zero.

Arc Elasticity
• Arc elasticity is the elasticity of one variable with respect to another
between two given points. It is used when there is no general
function to define the relationship between the two variables. Arc
elasticity is also defined as the elasticity between two points on a
curve.

• Ed = ∆ Q P1+P2
∆P × Q1+Q2
• Find the income elasticity of demand from the following data:
Rs. Rs.

Income 50,000 80,000

Quantity Demand 1000 1600

• Calculate ARC elasticity of Demand:

Original New

Price (Rs.) 25 15

Quantity Demand 100 150

 Percentage or Ratio method

Measurement
Total Outlay or total Expenditure
of Elasticity method
of Demand
Geometric method or Point
method
 Nature of commodity

Availability of Substitute
Factors Number of uses
determining Habits and customs
elasticity of
Level of income
demand
Range of prices

Possibility of postponement
What is Demand
Forecasting?
 • Passive demand forecasting
• Active demand forecasting
• Firm level demand forecasting
• Industry level demand forecasting
Types of • National level demand forecasting
Demand • Short term demand forecasting
Forecasting • Long term demand forecasting
• Medium term demand forecasting
• Ex-ante forecasting
• Ex-post demand forecasting
 • Determination of objectives
Steps • Nature of the product and market
involved in • Identification of demand determinants
• Selection of the method of demand
demand forecasting
forecasting • Interpretation of data and testing the
accuracy of the forecasting
Methods of demand forecasting
Qualitative Methods
1. Census method and sample
method
2. Expert Opinion/Delphi
Method
3. Executive Opinion Method
4. Salesforce opinion
5. Market Experimentations
Quantitative / Statistical Method
• Time series
1. Trends
2. Seasonal Variations
3. Cyclical Variations
4. Random Fluctuations
• Econometrics method
• Correlation
• Regression Method
 Simplicity

Accuracy
Characteristic
s of Good Economy
Forecasting
Methods Quick Results

Flexible
 • Production Planning
• Sales Policy
Significance • Purchase Policy
of Demand • Pricing Policy
• Financial Planning
Forecasting • Future Investment
• Government to formulate policy