BBA I Semester Managerial Economics Elasticity Demand Study Material Notes
Table of Contents
BBA I Semester Managerial Economics Elasticity Demand Study Material Notes: Introduction Price Elasticity of Demand Meaning Types of Price Elasticity Methods of Measuring Price Elasticity of Demand Elasticities along with a linear Straight Line Demand Curve Total Outlay Method Factors Affecting Price Elasticity of Demand Complementary Goods Unrelated Gods Substitute Goods Some Conclusion s Application of Cross Elasticity in Management Income Elasticity of Demand Determinants of income Elasticity od Demand :
MCom I Semester Statistical Analysis Simulation Study Material Notes
THE ELASTICITY OF DEMAND
INTRODUCTION
This chapter studies in detail the concepts of elasticity of demand. Generally, elasticity! of demand refers to price elasticity of demand which is often called own price elasticity of demand, though the notion of elasticity of demand also relates to income, cross and substitution elasticities of demand. We discuss in detrail each type of demand elasticity. PRICE
ELASTICITY OF DEMAND
Meaning
The elasticity of demand is the degree of responsiveness of demand to change in price. In the words of Prof. Lipsey: “Elasticity of demand may be defined as the ratio of the percentage change in demand to the percentage change in price.” Mrs. Robinson’s definition is more clear: “The elasticity of demand at any price…. is the proportional change of amount purchased in response to a small change in price, divided by the proportional change of price.” Thus, price elasticity of demand is the ratio of percentage change in amount demanded to a percentage change in price. It may be written as
If we use A (delta) for a change, q for the amount demanded and p for the price, the algebraic equation is
Ep, the coefficient of price elasticity of demand is always negative because when price changes demand moves in the opposite direction. It is, however, customary to disregard the negative sign. If the percentages for quantity and prices are known the value of the coefficient E, can be calculated. Types of Price Elasticity
Price elasticity of demand may be unity, greater than unity, less than unity, zero or infinite. These five cases are explained with the aid of the following figures.
Price elasticity of demand is unity when the change in demand is exactly proportionate to the change in price. For example, a 20% change in price causes 20% change in demand, E 0/20%=1. In the diagrams of Figure 1, 4p represents change in price, Ag change in demand, and DD the demand curve. Price elasticity on the first demand curve in Panel (A) is unity, for Aq/4p = 1.
When the change in demand is more than proportionate to the change in price, price elasticity of demand is greater than unity. If the change in demand is 40% when price changes by 20% then E = 40%/20% = 2, in Panel (B), i.e. Aq/Ap> 1. It is also known as relatively elastic demand.
If, however, the change in demand is less than proportionate to the change in price, price elasticity of demand is less than unity. When a 20% change in price causes 10% change in demand, then E = 10% 20%= 1/2 =<1, in Panel (C), i.e. Ag/Ap<1. It is also known as relatively inelastic demand.
Zero elasticity of demand is one when whatever the change in price, there is absolutely no change in demand. Price elasticity of demand is perfectly inelastic in this case. A 20% rise or fall in price leads to no change in the amount demanded, E =0/20%= 0, in Panel (D), i.e.0/ Ap=0. It is perfectly inelastic demand.
Lastly, price elasticity of demand is infinity when as infinitesimal small change in price leads to an infinitely large change in the amount demanded. Visibly, no change in price causes an infinite change in demand, E = 0/0 = 0, in Panel (E), at OD price, the quantity demanded continues to increase from 0 to O……n. It is perfectly elastic demand.
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Methods of Measuring Price Elasticity of Demand
There are four methods of measuring elasticity of demand. they are the percentage method, point method, arc method and expenditure method.
(1) The Percentage Method. The price elasticity of demand is measured by its coefficient (Ep). This coefficient (EP) measures the percentage change in the quantity of a commodity demanded resulting from a given percentage change in its price. Thus
Elasticity Demand Study Material
Factors Affecting Price Elasticity of Demand
Elasticity of demand for any commodity is determined or influenced by a number of factors which are discussed as under.
(1) Nature of the Commodity. The elasticity of demand for any commodity depends upon the category to which it belongs, i.e., whether it is a necessity, comfort, or luxury. The demand for necessaries of life or conventional necessaries is generally less elastic. For example, the demand for necessaries like food, salt, matches, etc. does not change much with rise or fall in their prices. Similar is the case with commodities which are required at the time of marriage, death ceremonies, etc.
The demand for necessaries of efficiency (such as milk, eggs, butter, etc.), and for comforts is moderately elastic because with the rise or fall in their prices, the demand for them decreases or increases moderately. On the other hand, the demand for luxuries is more elastic because with a small change in their prices there is a large change in their demand.
But the demand for prestige goods, like jewels, rare coins, rare stamps, paintings by Tagore or Picasso, etc. is inelastic because they possess unique utility for the buyers who are prepared to buy them at all costs.
(2) Substitutes. Commodities having substitutes have more elastic demand because with the change in the price of one commodity, the demand for its substitute is immediately affected. For example, if the price of coffee rises, the demand for coffee will decrease and that for tea will increase, and vice versa. But the demand for commodities having no good substitutes is inelastic.
(3) Variety of Uses. The demand for a commodity having composite demand or variety of uses is more elastic. Such commodities are coal, milk, steel, electricity, etc. For example, coal is used for cooking and heating, for power generation, in factories in locomotives, etc. If there is a slight fall in the price of coal, its demand will increase from all quarters On the other hand, a rise in its price will bring a considerable decrease in demand in less important uses (domestic) and in more important uses efforts will also be made to economies its use, as in railways and factories. Thus the overall effect will be a reduction in demand. A commodity which cannot be put to more than one use, has less elastic demand.
(4) Joint Demand. There are certain commodities which are jointly demanded, such as car and petrol, pen and ink, bread and jam, etc. The elasticity of demand of the second commodity depends upon the elasticity of demand of the major commodity. If the demand for cars is less elastic, the demand for petrol will also be less elastic. On the other hand, if the demand for, say, bread is elastic, the demand for jam will also be elastic.
(5) Deferred Consumption. Commodities whose consumption can be deferred have an elastic demand. This is the case with durable consumer goods, like cloth, bicycle, fan, etc. If the price of any of these articles rises, people will postpone their consumption. As a result, their demand will decrease, and vice versa.
(6) Habits. People who are habituated to the consumption of a particular commodity, like coffee, tea or cigarette of a particular brand, the demand for it will be inelastic. We find that the prices of coffee, tea and cigarettes increase almost every year but there has been little effect on their demand because people are in the habit of consuming them.
(7) Income Groups. The elasticity of demand also depends on the income group to which a person belongs. Persons who belong to the higher income group, their demand for commodities is less elastic. It is immaterial to a rich man whether the price of a commodity has fallen or risen, and hence his demand for the commodity will be unaffected. On the other hand, the demand of persons in lower income groups is generally elastic. A rise or fall in the prices of commodities will reduce or increase the demand on their part. But this does not apply in the case of necessities, the demand for which on the part of the poor is less elastic.
(8) Proportion of Income Spent. If the consumer spends a small proportion of his income on a commodity at a time, the demand for that commodity is less elastic because he does not bother much about small expenditure. Such commodities are shoe polish, pen, pencil, thread, needle, etc. But commodities which entail a large proportion of the income of the consumer, the demand of them is elastic, such as bicycle, watch, etc.
(9) Level of Prices. The level of prices also influences the elasticity of demand for commodities when the price level is high, the demand for commodities is elastic, and when the price level is low, the demand is less elastic.
(10) Time Factor. Time factor plays an important role in influencing the elasticity of demand for commodities. The shorter the time in which the consumer buys a commodity, the lesser will be the elasticity of demand for that product. On the other hand, the longer the time which the consumer takes in buying a commodity, the higher will be the elasticity of demand for that product. Prof. Stigler mentions three possible reasons for the long-period elasticity being higher than the short period elasticity. In the long run, the consumer has a better knowledge of the price changes, takes time to readjust his budget, and might change his consumption pattern due to possible technological changes.
(11) Brand. The price of demand for a given brand of product may be elastic. If its price increases, people turn towards the other brands easily. This is substitution effect For example, if the price of the Hero bicycle increases, the consumer will buy the Atlas bicycle.
(12) Recurring Demand. Goods which have recurring demand, their prices are more elastic than the goods which are not demanded time and again.
(13) Distribution of Income. If a country has equal distribution of income and wealth, the demand for majority of goods is elastic because there are more middle class people whose purchasing power is almost equal.
CROSS ELASTICITY OF DEMAND
The cross elasticity of demand is the relation between percentage change in the quantity emended of a good to the percentage change in the price of a related good. The cross elasticity of demand between good X and Y
Where, Q = Quantity of good X, P, = Price of good Y and A = change.
Given the price of X, this formula measures the change in the quantity demanded of x as a result of change in the price of Y.
The cross elasticity of demand for good X may be positive, negative or zero which depends on the nature of relation between the goods X and Y. This relation may be as substitutes, complementary or unrelated goods.
If X and Y are substitute goods, a fall in the price of good Y will reduce the quantity demanded of good X. Similarly, an increase in the price of good Y will raise the demand for good X. Their cross elasticity is positive because, given the price of X, a change in the price of Y will lead to a change in the quantity demanded of X in the same direction as in the price of Y. The cross elasticity of substitute goods is explained in Table 5.
Table 5: Cross Elasticity of Substitutes
It is clear from the above that the coefficient of cross elasticity of substitute goods such as tea (X) and coffee (Y) is positive (+0.75) when with the rise in price of coffee, the price of tea being constant, the demand for tea also increases.
This is shown in Fig. 6 where the quantity of good X (tea) is taken on X-axis and the quantity of good Y is plotted on Y-axis. When the price of Y increases from OY to OY, the quantity demanded of Xrises from OX to Ox. The slope of the demand curve downwards to the right shows positive elasticity of both the goods. 2. Complementary Goods
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Some Conclusions
We may draw certain inferences from this analysis of the cross elastcity of demand.
(a) The cross elasticity between two goods, whether substitutes or complementaries, is only a one-way traffic. The cross elasticity between butter and jam may not be the same as the cross elasticity of jam to butter. A 10% fall in the price of butter may cause a fall in the demand for jam by 5%. But a 10% fall in the price of jam may lower the demand for butter by 2%. It shows that in the first case the coefficient is 0.5 and in the second case 0.2. The superior the substitute whose price changes, the higher is the cross elasticity of demand.
This rule also applies in the case of complementary goods.If the price of car falls by 5%, the demand for petrol may go up by 15%, giving a high coefficient of 3. But a fall in the price of petrol by 5% may lead to a rise in the demand for cars by 1%, giving a low coefficient of 0.2.
(b) Cross elasticities for both substitutes and complementaries vary between zero and infinity. Generally, cross elasticity for substitutes is positive, but in exceptional circummstances it may also be negative.
(C) Commodities which are close substitutes have high cross elasticity and commodities with low cross elasticities are poor substitutes for each other. This distinction helps to define an industry. If some goods have high cross elasticity, it means that they are close substitutes. Firms producing them can be regarded as one industry. A good having a low cross elasticity in relation to other goods may be regarded a monopoly product and its manufacturing firm becomes an industry by determining the boundary of an industry. Thus cross elasticity’s are simply guidelines.
Application of Cross Elasticity in Management
The cross elasticity of demand has much practical importance in the solution of various business problems.
1 In Production. A firm wants to know the cross elasticity of demand for its goods while considering the effect of change in the price of its competitor’s goods on the demand for its own goods. It is important for a firm to have a knowledge of it while making its production plan.
2. In Demand Forecasting and Pricing. Its knowledge helps the firm in estimating the potential impact of the pricing decisions of its competitors and associates on its sales so that it prepares its pricing strategies.
3. In International Trade and Balance of Payments. The utility of this concept is significant in the area of international trade and balance of payments. The government wants to know how the change in domestic prices affects the demand for imports.
Domestically produced goods being close substitutes if the cross elasticity of demand for imports is high and if the prices of domestic goods increase due to inflation, the demand for imports will increase substantially which will deteriorate the balance of payments position.
INCOME ELASTICITY OF DEMAND
The concept of income elasticity of demand (E) expresses the responsiveness of a consumer’s demand (or expenditure or consumption) for any good to the change in his income. It may be defined as the ratio of percentage change in the quantity demanded of a commodity to the percentage change in income. Thus
Elasticity Demand Study Material
where A is change, quantity demanded and Y is income.
The coefficient Emay be positive, negative or zero depending upon the nature of a commodity. If an increase in income leads to an increased demand for a commodity, the income elasticity coefficient (E) is positive. A commodity whose income elasticity is positive is a normal good because more of it is purchased as the cousumer’s income increases. On the other hand, if an increase in income leads to a fall in the demand for a commodity, its income elasticity coefficient (E) is negative. Such a commodity is called inferior good because less of it is purchased as income increases. If the quantity of a commodity purchased remains unchanged regardless of the change in income, the income elasticity of demand is zero (E =0).
Elasticity Demand Study Material
Determinants of Income Elasticity of Demand
There are certain factors which determine the income elasticity of demand.
1 The Nature of Commodity. Commodities are generally grouped into necessities, comforts and luxuries. We have seen above that in the case of necessities, E <1, in the case of comforts, E = 1, and in the case of luxuries, E > 1.
2. Income Level. This grouping of commodities depends upon the income level of a country. A car may be a necessity in a high-income country and a luxury in a poor low-income country.
3. Time Period. The income elasticity of demand depends on the time period. Over the long run, the consumption patterns of the people may change with changes in income with the result that a luxury today may become a necessity after the lapse of a few years.
4. Demonstration Effect. The demonstration effect also plays an important role in changing the tastes, preferences and choices of the people and hence the income elasticity of demand for different types of goods.
5. Frequency. The frequency of increase in income also determines income elasticity of demand for goods. If the frequency is greater, income elasticity will be high because there will be a general tendency to buy comforts and luxuries.
Use of Income Elasticity in Business Decisions
The income elasticity of a product has great significance in long-term planning and in the solution of strategic problems, particularly during trade cycles.
1 Planning of the Firm’s Growth. The knowledge of income elasticity of dem very important for both the firms and the government. Firms whose demand
ne elastic, the scope of their growth is generally wide in an expanding economy but they are very insecure during recession. So such firms must consider their all economic activities and their potential growth rate in future. On the contrary, firms whose products are less mcome elastic, they will neither obtain more profit with the expansion of the economy nor will they incur specific loss during recession in the economy. Such firms consider it necessary to bring variety in different products or in a different industry. For example, agricultural products are less income elastic while industrial products are income elastic. Moreover, since the coefficient of income elasticity of inferior goods is negative, the sale of such products will decline with economic growth.
2. In Formulation of Farm Policy. Farmers’ products are less income elastic because they can not generally bring variety in their products like income elastic products. Hence, in the coming years the danger of such agricultural problems is likely to remain particularly in developing countries. Therefore, the Government of India has considered it necessary to continue and increase various agricultural subsidies.
3. In Forecasting Demands. The concept of income elasticity can be used in forecasting future demand provided the firm knows the growth rate of income and income elasticity of demand for the good. It is often believed that the demand for goods and services increases with the rise in GNP that depends on the marginal propensity to consume. But it may be proved true in the context of aggregate national demand while it is not necessary to be true for a particular good. For this, the income of the related income class should be used. It is also useful for avoiding the problem of over-production or under-production.
4. In Formulating Marketing Strategies. The income elasticity of demand of potential buyer class for products affects the number, nature and location of sales centres, nature and level of advertising and the policies related to other sales promotion activities. For instance, the sales centers ofice-creams will be located in the prosperous town areas where the people have sufficient income and their incomes are likely to increase sufficiently in future. Here, the expected rise in demand in the context of increased income has been discussed. But this rise will be compensated in more or less quantity by the expected fall in demand with the increase in price.
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ADVERTISING OR PROMOTIONAL ELASTICITY OF DEMAND
In the modern competitive or partial competitive market economy, advertising has a great significance. Under advertising, various visible or verbal activities are done by the firm for the purpose of creating or increasing demand for its goods or services. Informative advertising is very helpful for the consumer in making rational purchase decisions. But the extension of demand through advertising can be measured by advertising or promotional elasticity of demand (E) which measures the expected changes in demand as a result of change in other promotional expenses. The demand for some goods is affected more by advertising such as the demand for cosmetics. Following is the formula for advertising elasticity,
Where, Q =quantity sold of good X; A = units of advertising expenses on good X;
49- change in quantity sold of good X; and 44 – change in advertising expenses on good X.
The elasticity of demand for a good should be positive because there is the possibility of extension of demand and market for the good with advertising expenditure. The higher the value of this elasticity, the greater will be the inducement of the firm to advertise that product. It is on the basis of advertising elasticity that a firm decides how much to spend on advertising a product.
Factors Influencing Advertising Elasticity of Demand
The main factors influencing advertising elasticity are as follows:
1 Stage of Product Development. The advertising elasticity of demand for a product may vary with different levels of sales of the same product. It is different for new and established products.
2. Degree of Competition. The advertising effect in a competitive market is also determined by the relative effect of advertising by competing firms.
3. Effects of Advertising in Terms of Time. The advertising elasticity of demand depends upon the time interval between advertising expenditure and its effect on sales. This depends on general economic environment, selected media and type of the product. This time interval is large for durable goods than for non-durable goods.
4. Effect of Advertising by Rival Firms. The advertising elasticity also depends as to how other rival firms advertise in comparison to the advertisement of the firm. This, in turn, depends on the levels of advertisement and advertisements done in the past and present by rival firms.
The elasticity of Price Expectations
A new concept of elasticity known as elasticity of price expectation was developed by Prof. J.R. Hicks. The demand for a commodity is effected not only by the current price but also by the expected future price. If a consumer believes that the price of a particular commodity is going to rise in future, he will try to buy more of it now. Thus, the expectation of a higher price in future increases the demand for that commodity now. The extent to which demand is effected by price expectations of a higher price in future increases the demand for that commodity now depends, in general, upon the elasticity of price expectations. Consumers’ price expectations are influenced by several factors like political changes, current and recent economic developments, general opinion and past experiences about the changes in prices.
The elasticity of price expectations may be defined as the ratio of relative change in expected future prices to the relative change in current prices. Symbolically,
where, Pe refers to expected price and Pc to current price, and APC to change in current price, and APe the change in expected price.
If elasticity of price expectations is unity, a change in the current price of the commodity will have no effect on the current demand. If it is zero or negative elasticity, the current demand for the commodity will decrease because people will wait for prices to come down in sure, If elasticity of price expectations is high, the current demand will increase because people want to buy more at the current price as they expect the price to rise in the future.
Thus, the concept of elasticity of price expectations is very important in speculative buying and selling activities of commodities and shares.
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IMPORTANCE OF ELASTICITY OF DEMAND IN MANAGEMENT
The elasticity of demand is of great importance in managerial decision making. It is more significant in the following areas:
1 In the Determination of Output Level. For making production profitable, it is essential that the quantity of goods and services should be produced corresponding to the demand for that product. Since the changes in demand is due to the change in price, the knowledge of elasticity of demand is necessary for determining the output level.
2. In the Determination of Price. The elasticity of demand for a product is the basis of its price determination. The ratio in which the demand for a product will fall with the rise in its price and vice versa can be known with the knowledge of elasticity of demand. If the demand for a product is inelastic, the producer can charge high price for it, whereas for an elastic demand product he will charge low price. Thus, the knowledge of elasticity of demand is essential for management in order to earn maximum profit.
3. In Price Discrimination by Monopolist. Under monopoly discrimination the problem of pricing the same commodity in two different markets also depends on the elasticity of demand in each market. In the market with elastic demand for his commodity, the discriminating monopolist fixes a low price and in the market with less elastic demand, he charges a high price.
4. In Price Determination of Factors of Production. The concept of elasticity fof demand is of great importance for determining prices of various factors of porduction. Factors of production are paid according to their elasticity of demand. In other words, if the demand of a factor is inelastic, its price will be high and if it is elastic, its price will be low.
5. In Demand Forecasting. The elasticity of demand is the basis of demand forecasting. The knowledge of income elasticity is essential for demand forecasting of producible goods in future. Long-term production planning and management depend more on the income elasticity because management can know the effect of changing income levels on the demand for his product.
6. In Dumping. A firm enters foreign markets for dumping his product on the basis of elasticity of demand to face foreign competition.
7. In the Determination of Prices of Joint Products. The concept of the elasticity of demand is of much use in the pricing of joint products, like wool and mutton, wheat and straw, cotton and cotton seeds, etc. In such cases, separate cost of production of each product is not known. Therefore, the price of each is fixed on the basis of its elasticity of demand. That is why products like wool, wheat and cotton having an inelastic demand are priced very high as compared to their byproducts like mutton, straw and cotton seeds which have an elastic demand.
8. In the Determination of Government Policies. The knowledge of elasticity of demand is also helpful for the government in determining its policies. Before imposing statutory price control on a product, the government must consider the elasticity of demand for that product. The government decision to declare public utilities those industries whose products have inelastic demand and are in danger of being controlled by monopolist interests depends upon the elasticity of demand for their products.
9. Helpful in Adopting the Policy of Protection. The government considers the elasticity of demand of the products of those industries which apply for the grant of a subsidy or protection. Subsidy or protection is given to only those industries whose products have an elastic demand. As a consequence, they are unable to face foreign competition unless their prices are lowered through subsidy or by raising the prices of imported goods by imposing heavy duties on them.
10. In the Determination of Gains from International Trade. The gains from international trade depend, among others, on the elasticity of demand. A country will gain from international trade if it exports goods with less elasticity of demand and import those goods for which its demand is elastic. In the first case, it will be in a position to charge a high price for its products and in the latter case it will be paying less for the goods obtained from the other country. Thus, it gains both ways and shall be able to increase the volume of its exports and imports.
APPLICATION OF ELASTICITY IN MANAGERIAL DECISIONS
Now we shall consider the application of concepts of elasticity. Economists measure how responsive or sensitive consumers are to change in the price or income or a change in the price of some other product Managerial economists measure the degree of elasticity by the elasticity co-efficient. Managerial decisions aim at the best alternative. Managerial decisions are of two types: programmed decisions and non-programmed decisions. But the decision making process may be required in four areas of work: location decision, growth decision, financial decision and operating decision. The price-quantity relationship comes under operating decision.
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Managerial Decision and Income Elasticity
Income elasticity measures the ratio of percentage change in quantity demanded to the percentage change in income. A positive income elasticity suggests a more than proportionate increase in expenditure with an increase in income. If income elasticity is negative it implies that the commodity is inferior. Among the several income concepts, the most commonly used term is the personal disposable income per head. The other income concepts important for durable goods are that of transitory income i.e., fluctuation in the short run income and discretionary income i.e., that part of the income which is left over after deductions.
Economic development will be closely associated with increase in the sales of quality goods. An efficient businessman is really interested in knowing whether the sale of his goods will lead to economic development. The relationship between demand and income changes is not always positive. It depends on the permanent change in income. If the income elasticity is greater than one, the sales of his goods will increase more quickly than general economic development. If the income elasticity is greater than zero but less than one, sales of the goods will increase but at a lower rate than economic development.
Managerial Decision and Industry Elasticity
From the managerial point of view, it is thought useful to explain industry elasticity. We know from the law of demand that when the price of a commodity falls, the quantity demanded increases and vice versa. The relation of price to sales is known in economics as the demand. The relation of price to demand or sales has been a major interest for a long time. If we like to have a good knowledge of their or sales has been a major interest of economist we like to have a good knowledge of their relations, it gives better results Sement. The industry elasticity means that there is a change in complete industry in a change in the general level of prices for the industry. The industry demand has elasticity due to competition from other industries.
Managerial Decision And Expectation Elasticity
Expectation elasticity indicates the responsiveness of sales to buyers guesses about the future values of demand determinants. In most companies, a knowledge of condition in le immediate future is essential for evolving a suitable production policy. Formulating production policy is necessary to avoid the problem of over production or the problem of short supply. Once the demand potential is assessed it will be easier for the company to engage in long term planning. Like the future price of a commodity or of its substitute, future income of buyers, prospects of easy availability or otherwise in the future or future outlays, price and income expectations are the most important among them.
Managerial Decision and Market Share Elasticity
As regards a particular firm, the market share elasticity is most important. This is influenced by rival’s changes in prices and promotional efforts both qualitative and quantitative. Thorough knowledge of market share elasticity will help the managerial economist to the profitable results of the concern. The market share elasticity indicates that there has been a change in the company’s wide sales to the price differential between the company’s price and the industry-wide price level.
Managerial Decision and Promotional Elasticity
Many of the firms spend huge amounts every year on advertising their products to boost up sales. There is a direct relationship between the extent of advertisement and volume of sales. The promotional elasticity of demand is also called the advertising elasticity of demand. It measures the responsiveness of demand to change in advertising. The reason for finding out the advertisement elasticity of demand by the company manager is to determine the effects of advertisement on sales.
EXERCISES
1 Explain the concept of price elasticity of demand and examine the various methods of its measurements.
2. What is the income elasticity of demand? How do we measure it?
3. Define price elasticity of demand. Show with the help of a diagram the difference between elasticity and slope of a demand curve on a given point of the demand curve.
4. Define cross elasticity of demand. How do we measure it? Show the nature of cross elasticity of demand for
(i) substitute goods
(ii) complementary goods, and
(iii) independent goods.
5. Differentiate between the ‘point’ and ‘arc methods of measuring price elasticity of demand.
6. What is the promotional or advertising elasticity of demand? What are its effects on the demand curve? What are the determinants of advertising elasticity?
7. Write a note on the Price Elasticity of expectations.
8. Explain the use of elasticity in managerial decisions.
