Uses of elasticities of demand

In a capitalist economy, the entire volume of output is directed and controlled by consumer demand. If production is to be profitable the volume of output of goods and services produced must be adjusted in terms of the available demand for them.  Consumer demand exercises a major influence upon producers demand for factors of production, […]

Cross Elasticity of Demand

Cross elasticity of demand refers to a change in the quantity demanded of product A as s result of a change in the product B. When demand for a product changes due to a change in the price of another related commodity we have cross elasticity of demand. The formula for cross elasticity is, EAB […]

Income Elasticity of Demand

When demand for a product changes due to a change in the incomes of consumers we have income elasticity of demand. The degree of responsiveness of demand to a change in incomes of the consumers is known as income elasticity of demand. The formula for income elasticity of demand is, Ey = Or, The income […]

Mathematical Method – Measures of Price elasticity of Demand

The point elasticity can also be calculated mathematically. We know that the slope of demand curve at any point is Expressed by the differential, . But in case in case we take the reciprocal of the Slope to get, and multiply it by the ratio of original price to original quantity p/q, we get  , […]

Arc Elasticity of Demand – Measures of Price elasticity of Demand

The point method of measuring price elasticity of demand is not very realistic since demand schedules with minute changes in prices and quantities demanded are rarely available. In reality we nay come across demand schedules that have gaps in prices as well as in quantities. The most satisfactory solution is the use of the mid […]

Point Method – Measures of price elasticity of demand

Point method is used when the demand curve is a straight line. In this method we measure elasticity at a particular point on the demand curve. This method has now become the most common method of measuring elasticity of demand. We draw a demand curve DD and draw line AB tangent to the demand curve […]

Total Outlay Method – Measures of price elasticity of Demand

One method of measuring price elasticity of demand, according to Marshall is to consider the change in the price and the consequent change in the demand for the product in relation to the total amount of money spent by the consumers on the product (or the total revenue received by the sellers). If the fall […]

The main determinants of income elasticity of demand

1 Nature of the need the good covers: It is seen that the percentage of income spent on food declines as the level of income increases. This is known Engel’s law. It is noticed that for a normal good, increase in income, other things remaining the same, is associated with increase in the quantity of […]

The Determinants of Elasticity of Demand

THE PRICE ELASTICITY OF DEMAND DEPENDS ON FOUR MAIN FACTORS The closeness of substitutes The proportion of income spent on the goods The time elapsed since a price change Nature of the good The closeness of substitutes: The closer the substitute for a good or service, the more elastic is the demand for it. For […]

Types of Price Elasticity of Demand

Alfred Marshall was the first economist to give a clear formulation of price elasticity. It is the ratio of proportionate changes in the quantity demand of a commodity to a given proportionate change on its price. It is the ratio of a relative change in quantity to a relative change in price. A small […]