Elasticity-of-demand.doc 43w2e

PROJECT ON MANAGERIAL ECONOMICS TOPIC: ELASTICITY OF DEMAND GROUP

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 economist’s 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 IT’S 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.