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Wednesday, January 16, 2008

Explain different types of Elasticity of Demand

Different types of Elasticity of Demand:-

After knowing what is demand and what is law of demand, we can now come to elasticity of demand. Law of demand will tell you the direction i.e. it tells you which way the demand goes when the price changes. But the elasticity of demand tells you how much the demand will change with the change in price to demand to the change in any factor.

Different types of Elasticity of Demand:

1. Price Elasticity of Demand

2. Income Elasticity of Demand

3. Cross Elasticity of Demand

4. Advertisement Elasticity of Demand

1. Price Elasticity of Demand:

We will discuss how sensitive the change in demand is to the change in price. The measurement of this sensitivity in terms of percentage is called price Elasticity of Demand. According to Marshall, Price Elasticity of Demand is the degree of responsiveness of demand to the change in price of that commodity.

Types of Price Elasticity of Demands:

a) Perfectly Elastic

b) Perfectly Inelastic

c) Relatively Elastic

d) Relatively Inelastic

e) Unit Elasticity

Factors influencing Price Elasticity of Demand:

a) Nature of Commodity

b) Availability of Substitutes

c) Number of Uses

d) Durability of commodity

e) Consumer’s income

Practical significance of Price Elasticity of Demand:

a) Importance to the business

b) Important to Government

2. Income elasticity of demand:

In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income. For example, if, in response to a 10% increase in income, the quantity of a good demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2.

3. Cross elasticity of demand:

In economics, the cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demand of a good to a change in the price of another good.

It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2.

The formula used to calculate the coefficient cross elasticity

4. Advertisement Elasticity of Demand:

The degree of responsiveness of quantity demanded to the change in the advertisement expense of expenditure.

Ea= Change in quantity demanded x original advertisement expenses

Chang in advertisement expenses original quantity demanded

Important factors influencing Advertisement:

1. Promotional elasticity of demand will be affected, depending on whether it is a new product or the product with a growing market.

2. The amount a competitor reacts to the firm’s advertisement.

3. The time interval between the advertisement expensed or expenditure and the unresponsiveness of the sales.

4. The influence of non-advertisement determinants of demands such as trends, price, income etc.

Uses of Advertisement Elasticity of Demands:

1. It helps the manager to decide the advertisement expense. If the advertisement is more than one, which means incremental revenue exceeds incremental expenses, then increased expenditure on advertisement can be justified.

2. The fire should observe the saturation point, where advertisement pays nothing or does not help in increasing sales revenue.

2 comments:

Suraiya said...

thanks.. its was hard to get info on promotional elasticity of demand...

Amrit Pal Singh said...

it is very helpful to me ........................ Thanks Sir