Presented by Group IV :

Sanchari Dasgupta Satyabrata Dhal Sayam Roy Satyajit Panda Seba Surabhi Nayak Sameer Ranjan Padhy

 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

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.

Definition : Ratio percentage or proportionate change in the quantity demanded to the percentage or proportionate change in income. Income Elasticity = % change in quantity demanded ( % % change in income Q Em = % % Q M = Q M M = Q Q M M (% M) Q)

Q=Initial demand Q=change in demand M=Initial income M=change in income

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)

D5

D4

D3 D1

Em=0

D2

Demand

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

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

When Em is +ve and >1, commodity is a luxury. Ex. TV sets, Cars etc. When Em is +ve and <1, commodity is an essential one. Ex. Foodgrains. When Em is 0, commodity is neutral. Ex. Salt, match-box etc.

Long term business planning Market Strategy Housing Development Strategy

Definition : It refers to the degree of responsiveness of demand for a commodity to a given change in the price of some related commodity. % change in demand for X Cross Elasticity of Demand = % change in price of Y

Exy =

Qx Qx

Py Py

Qx Qx

Py Py

Qx= initial demand for X Qx= change in quantity demanded for commodity X Py=Initial price of commodity Y Py= change in price of commodity Y

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)
Y Substitutes Y Complimentary

Unrelated

Price of Y

Price of Y

Price of Y

Exy <0 X

Exy =0

Demand for Commodity X

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.

Useful in inter commodity relation

Classification of market structure

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.