PROJECT ON

MANAGERIAL ECONOMICS

TOPIC: ELASTICITY OF DEMAND

GROUP MEMBERS ROLL NO

KAMAL AILANI 3

MAHESH BHERWANI 7

Karan khabrani 19

KAPIL VIRWANI 59

JITESH SALDUR 69

MRUNMAYEE BHAVE 70

INTRODUCTION

As we have already seen there are many factors that influence the
demand for a business. We have seen how a change in the price of a
product will cause a movement along the demand curve. Similarly, we
noted that changes in other factors can cause the demand curve to shift
either to the left or to the right. The owners of a business often want to
know how great the effect of any change will be on the demand for their
product. The degree to which a demand curve reacts to a change in price
is the curve's elasticity. This concept is called elasticity.
Elasticity of demand is the economists way of talking about how
responsive consumers are to price changes. Elasticity varies among
products because some products may be more essential to the consumer.
Products that are necessities are more insensitive to price changes because
consumers would continue buying these products despite price increases.
Conversely, a price increase of a good or service that is considered less of
a necessity will deter more consumers because the opportunity cost of
buying the product will become too high.. It is the degree to which
changes in price effect in changes in demand. One typical application of
the concept of elasticity is to consider what happens to consumer demand
for a good (for example, apples) when prices increase. As the price of a
good rises, consumers will usually demand a lower quantity of that good,
perhaps by consuming less, substituting other goods, and so on. The
greater the extent to which demand falls as price rises, the greater the
price elasticity of demand. Conversely, as the price of a good falls,
consumers will usually demand a greater quantity of that good, by
consuming more, dropping substitutes, and so forth. However, there may
be some goods that consumers require, cannot consume less of, and
cannot find substitutes for even if prices rise (for example, certain
prescription drugs). Another example is oil and its derivatives such as
gasoline.
The term price elasticity of demand is used to measure the
responsiveness of demand to a change in the price of that product. The
value of the price elasticity of demand can be calculated by using the
following formula.

Price elasticity of demand = % change in quantity demanded

% change in price

From the formula we derive two possibilities

ELASTIC DEMAND

INELASTIC DEMAND
 TYPES OF ELASTICITY OF DEMAND

Following are the types of price elasticity of demand:

PERFECTLY ELASTIC DEMAND

PERFECTLY INELASTIC DEMAND

UNITARY ELASTIC DEMAND

RELATIVELY ELASTIC DEMAND

RELATIVELY INELASTIC DEMAND

uNITARY ELASTIC DEMAND

Elasticity = 1

This case is referred to as unitary elasticity. The change in quantity

demanded is in the same proportion as the change in price. A change in
price in either direction therefore would result in no change in revenue.
 RELATIVELY ELASTIC DEMAND

When change in quantity demanded is greater than the change in price, in

percentage term, demand is said to be relatively elastic. The numerical
value of relatively elastic demand is greater than unity and the demand is
gradually sloping towards the x-axis

Relatively inelastic demand

When percentage change in quantity demanded of a commodity is less

than the percentage change in prices demand is said to be relatively
inelastic. The numerical co-efficient relatively inelastic demand is less
than one. In this case, the demand Curve is steeply sloping downwards.

The elasticity of demand can usually be

estimated by examining the answers to three key
questions. All three answers do not have to be
the same in order to determine elasticity, and in
some cases the answer to a single question is so
important that it alone might dominate the
answers of the other two.

1. Can the purchase be delayed?

The ability to delay or postpone the purchase of a product is one of the

determinants of elasticity. If the purchase can be delayed, the demand for
the product tends to be elastic. If it cannot be delayed it tends to be
inelastic.

For example, since I can wait to buy a new car until the price drops
demand will vary greatly in accordance with price. This product thus
would tend to be elastic. Salt on the other hand is a daily necessity, its
purchase cannot be delayed, Thus demand does not vary greatly with price
and the product tends to be inelastic.

2. Are adequate substitutes available?

If a product has many substitutes, the demand for it tends to be elastic.
The fewer substitutes available for a product, the more inelastic the
demand. Note we are talking about product not brand!

For example, if the price of coffee were to go up dramatically then many

people would switch to tea, thus a substitute is available. Since this is the
case the price is causing demand to drop. This product would then be
considered elastic. Since there is no real substitute for gasoline of heating
oil, demand remains the same regardless of price. These products are
inelastic.

3. Does the purchase use a large portion of income?

If a product is expensive, and is a large percentage of one's income, then

the product tends to be more elastic. If a product is not a significant
portion of the income the product tends to be more inelastic.

Take a house for example, if prices were to drop, demand would go up

alot. A bar of soap, steak, clothes, since even an expensive product can be
readily afforded the change in price is not a tremendous factor in demand.

FACTORS INFLUCING ELASTICITY OF DEMAND

Whether the demand for a commodity is elastic or inelastic, more elastic

or less elastic depends upon a wick variety of factors discussed as under:

Possibility of postponement:

If the consumption of the commodity can be

postponed the demand for such a commodity would be elastic that is if
the price rises the people will postpone their consumption till the price
falls while on the other hand demand for the commodity the consumption
of which cannot be postpone will possess a inelastic demand.
Existence of substitutes:

The demand for a commodity is more elastic if it has a number of

substitutes. A small rise in the price of such commodity will induce the
consumers to go for its substitutes.

Nature of commodity:
Goods & services which are regarded as necessaries of life have generally
inelastic demand whereas demand for comforts and luxuries are generally
elastic.

Severeal uses:
the demand for a commodity is said to be more
elastic when it can be put to a variety of uses. A fall in its price will
result in a substantial increase In its demand.

Time:

In the short period, demand for the commodity is generally less

elastic but it becomes more elastic in the long run.

Proportion of income spends:

The demand for the commodity on which the consumer spends only
a small proportion of his income is less elastic.

Habits:

The demand for a commodity to which the consumers are

accustomed is generally inelastic.

Range of prices:

At a very high range of price the demand for a commodity is

generally inelastic since the commodity is being sold at very high price, a
slight fall in price will not increase the demand. Similarly, the demand for
the commodity will be inelastic if it is being sold at very low price.
However, the demand will be elastic in the middle range of elastic.
 SWOT ANALYSIS

S- STRENGTH

W WEAKNESS

O OPPOURTUNITES

T THREAT

Strength & weakness are come under the internal

factors.
Opportunities & threats come under the external
factors.

STRENGTH:

Monopoly market:
In the monopoly market the particular firm is sole king of market.
The price of goods are decided by the proprietor, since the demand for
the commodity is inelastic consumers having no option for them, they
have to purchase the commodity even at high price.
Example: If it had only a single manufacturer for salt and salt being
a daily necessity, consumers have to purchase goods even at high price,
since the price is being ruled out by a manufacturer.

HABITS:
DEMAND FOR THE CO MMODITY FOR WHICH CONSUMERS
ARE ACCOUSTOMED IS GENERALLY INELASTIC.
EXAMPLE: FOR A CHAINSMOKER, A RISE IN PRICE FOR
CIGRATTES WOULD NOT EFFECT HIS CONSUMPTION OF
CIGRATTES, SINCE HE IS ADDICTED TO SMOKING.

INNOVATION:

NEW INVENTIONS AND INNOVATIONS LEAD TO

INTRODUCTION OF NEW PRODUCTS IN THE MARKET,
MAKING THE NEW PRODUCT OBSELETE.
 EXAMPLE: IN CASE OF MOBILE COMPANIES NEW
MODELS ARE BEING INTRODUCED IN MARKET WHICH
MAKES THE OLD PRODUCTS OBSLETE.

POPULATION:

AS THE POPULLATION INCREASES THE DEMAND FOR

PRODUCTS ALSO INCREASES AND THE FIRMS CAN MAKE
MORE AND MORE PROFIT.

WEAKNESS

SUBISTITUTES:

IF THE PRICE OF THE COMMODITY RISES PEOPLE

TEND TO GO FOR ITS SUBISTITUTES.
EXAMPLE: IF THE PRICE OF TEA RISES THE DEMAND
FOR COFFEE RISES.

COMPLIMENTARY GOODS:
WHEN THE PRICE OF COMPLIMENTARY GOODS
RISES THE DEMAND FOR ITS PRODUCTS DECREASES.
EXAMPLE: IF THERE IS A RISE IN THE PRICE OF
PETROL THERE IS A DECREASE IN DEMAND FOR
AUTOMOBILE VECHILES.

PERFECTLY ELASTIC AND INELASTIC DEMAND.

IT IS NOT PRATICALLY POSSIBLE FOR, DEMAND TO

REMAIN CONSTANT IN CASE OF RISE OR FALL IN PRICE
AND WHEN PRICE IS CONSTANT AND DEMAND IS
FLUCTUATING
 OPPOURTINITIES

PRODUCT PACKING:
IF THE PACKING OF THE PRODUCT IS ATTRACTIVE,
IT CREATES AN OPPOURTUNITY FOR THE FIRM TO
ATTRACT THE CONSUMERS TOWARDS ITS PRODUCT
WHICH MAY HELP THE FIRM TO INCREASE ITS DEMAND.

RESEARCH AND DEVELOPMENT

THE RESEARCH AND DEVELOPMENT DEPARTMENT OF

THE COMPANY, RESEARCHES AND ANALYSIS THE
DEMAND FOR ITS PRODUCTS, AND DEVELOPS ITS
PRODUCT ACCORDING TO DIFFERENT MARKET DEMAND.

EXPANSION OF BUSINESS:

FOR THE EXPANSION OF BUSINESS, THE FIRMS OR

THE MANUFACTORING UNITS MUST ENTER INTO NEW
MARKETS INORDER TO CREATE THEIR POSITION IN
MARKET, WHICH WILL CREATE AN OPPOURTUNITY FOR
FIRM TO INCREASE ITS DEMAND FOR THE PRODUCT.

THREATS

COMPETITION:

IN THE COMPETITIVE MARKET, THE FIRM MAY HAVE

TO FACE COMETITION FROM ITS COMPETITIORS. A
SLIGHT REDUCTION IN PRICE OF ANY PRODUCT MAY
INDUCE THE CONSUMERS TO GO FOR OTHER PRODUCT.
 POSSIBILITY OF POSTPONMENT

IF THE PRICE OF THE PRODUCT RISES THEN THE

CONSU MERS WILL POSTPOND ITS DEMAND UNTILL
THERE IS FALL IN PRICE.

CONCLUSION

THUS IT CAN BE SEEN THAT IT IS A NORMAL HUMAN

TENDENCY OF THE CONSUMERS TO PURCHASE THE
COMMODITY WHEN THE PRICE IS LOW & TO POSTPOND
ITS DEMAND WHEN THERE IS RISE IN PRICE IN CASE OF
ELASTIC GOODS.

THUS IT CAN BEEN SEEN THAT IN THE SHORT RUN THE

DEMAND FOR THE PRODUCT IS INELASTIC AND IN LONG
RUN THE DEMAND IS ELASTIC

INCASE OF INELASTIC DEMAND THE CONSUMER CANNOT

POSTPOND ITS DEMAND.