Unit-2 Concept of Measurement POE | BBA First Year

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 Definition Concept of measurement of elasticity of demand     

• Change in the price of a commodity affects its demand. We can find out the elasticity of demand, or the degree of responsiveness of demand, by comparing the percentage price change with the quantity demanded. In this article, we will look at the concept of elasticity of demand and take a look at its different types.
  

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Elasticity Of Demand         

• To start, let’s look at the definition of elasticity of demand: “Elasticity of demand is the response of the quantity demanded of a good to a change in the variable on which the demand depends. In other words, it is the percentage change of demand. The quantity demanded is divided by the percentage of some one variable on which the demand depends.”
• The following points highlight the top five methods used to measure elasticity of demand. The methods are:

1. Price elasticity of demand
2.  Income elasticity of demand
3. Cross elasticity of demand
4. Advertisement or promotional Elasticity of Sales
5. Elasticity of price expectations.

Method # 1. Price elasticity of demand·        

• Price elasticity of demand is a measure of the responsiveness of demand to changes in a good’s own price.
• Furthermore, elasticity is the percentage of percentage change in price.
• If the percentage is known, the numerical value of elasticity can be calculated. The coefficient of elasticity of demand is a pure number i.e. it stands on its own being independent of the units of measurement. The coefficient of price elasticity of demand can be calculated with the help of the following formula.

Method # 2. Income elasticity of demand

• The response of quantity demanded to changes in income is called income elasticity of demand. With income elasticity, consumer income varies while tastes, own price of the good, and other prices remain constant.
  
• Where- ey is for coefficient of income elasticity, Y is for income.
• While price-elasticity of demand is always negative, income-elasticity of demand is always positive (except for inferior goods) because the relationship between income and the quantity demanded of a product is positive. The income elasticity of demand for inferior goods is negative because as income increases, consumers turn to·

Method # 3. Cross Elasticity of Demand·

• Cross elasticity measures the response of quantity demanded to changes in the price of other goods and services.

•  When cross-elasticity is greater than zero, the goods or services involved are classified as complements. An increase in the price of y reduces the quantity demanded of that product. Decrease in demand for Y reduces demand for bread and butter, cars and tires, and tire, and computer and computer program are examples of pairs of goods that are complements.
• If A and B are substitutes then the coefficient is positive because the price change and quantity change are in the same direction. If A and B are complements the coefficient is negative, because a change in the price of one good causes an opposite change in the quantity demanded of the other.

Method #4. advertising or promotional elasticity of sales.

• Advertising expenditure helps in promoting sales. The effect of advertising on sales is not uniform at all levels of total sales. The concept of advertising elasticity is important in determining the optimal level of advertising outlay especially in view of competitive advertising by rival companies.

Method #5. elasticity of price expectations.

• People’s price expectations also play an important role as a determinant of demand. English economist J.R. Hicks formulated the concept of elasticity of price expectations in 1939. 
• Consumer equilibrium refers to a situation in which a consumer obtains maximum satisfaction, has no intention of changing it and is subject to given prices and his given income.

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