Managerial Economics

Elasticity of Demand
Meaning of elasticity of demand

The elasticity of demand is the ration of

change in quantity demanded due to
change in the invariants affecting demand.
These invariants may be price of a
commodity, income of the consumer and
the price of other related goods etc.
Definition

According to ‘Marshall’

“The elasticity of demand in a market is

great or small according as the
amount demanded increases much or
little for a given fall in price and
diminishes much or little for a given
rice in price”.
Types of elasticity
1)Price Elasticity

2) Income elasticity

3) Cross elasticity
1) Price Elasticity
Price Elasticity of Demand: It is a measure of the
responsiveness of the demand for a good to
changes in price. Price elasticity for a good is
defined as the percentage change in demand
for the good divided by the percentage in its
price.
EP=
Proportionate change in quantity demanded /
Proportionate p change in price
Types of Price elasticity

1. Perfectly elastic demand

2. Perfectly inelastic demand
3. Unit elastic demand
4. Less elastic demand
5. More elastic demand
Perfectly elastic demand
It refers to that situation
Y
in which a small
change in price will EP =
% c h a ng e in Q .D
Ze ro
cause and
indifferently large D
EP = O O
D
change in demand. In P
this case a small fall (R
s)e P
ric

in price leads to an
unlimited extension of X
O Q Q 2
demand. This can be 1

Q u a n tity d e m a n d e d
shown in graph:
Perfectly inelastic demand
Y

It refers to that P
D
Zero
situation in which 2 EP =
% c h a n g e in Q . D
there is absolutely P
Ze ro e la stic
no change in P1
d e m a nd

demand. As a Price(R
s)

result of change in D
X
price. O Q
Q u a n tity d e m a n d e d
Unitary elastic demand

It refers to a situation
where demand
changes in exact
proportion to the 1

E=1
changes in price. If
the price becomes
double the demand 2
will be half. If the
price becomes half
than demand will
be double.
Less elastic demand
It refers to a situation in
which the change in
demand is less than Y
the proportionate D

change in price. The P

E<1
demand for articles of
e P
ric
P
necessity comes in
this category. D

X
Q/Q< P/P O Q
1
Q 2
Q ua ntity
More elastic demand
It refers to a situation in
which in demand is Y
more than the D E>1
proportionate change P
in the price. The
demand curve of this P

(R
s)rice
P
D
type is more
horizontal. The
demand for the O Q
1 Q u a n tity
Q 2
X

articles of luxury in
general is set to be
highly elastic.
Measurement of Price elasticity of demand

The measurement of demand tells us whether

price elasticity of demand is unitary or
greater than unitary.
There are four main methods of the
measurement of price elasticity of demand:
1) Total expenditure method
2) Percentage or proportionate method
3) Revenue Method
Total expenditure method

a) Greater than unit- When the total expenditure

increases with a fall in price and decreases with a
rise in price, elasticity is said to be E>1.
b) Equal to unit- When the total expenditure remains
the same. Whether the price rice or fall.
Therefore E=1
c) Less than unit- When the total expenditure
decrease with a fall in price and increases with a
rise in price. Than elasticity said to be less than
unit or E<1
Percentage Method or
proportionate
This method measures elasticity of
demand while using mathematics.
According to this:
PE=
Percentage change in demand/
percentage change in price
Revenue Method
The price elasticity of demand can also be
measured with the help of average and
marginal revenue.
E= A/ A-M Where M = marginal
A= Average revenue
Average revenue =
Total Revenue (sold by N units)/N units
Marginal Revenue MR= PR-AR
2) Income elasticity
It is the demand for a commodity shows the
extent to which a consumer’s demand for
that commodity change as a result of a
change in his income, It shows the
responsiveness of a consumer purchases
of that commodity to a change in his
income.
Ey
= proportionate change in the quantity
demanded of the commodity/ proportionate
Change in the income of the consumer
3)Cross Elasticity
This demand is the ratio of the proportionate
change in the quantity demanded of a
commodity X in response to a given
proportionate change in the price of some
related commodity Y.
Cross elasticity of demand of X and Y=
Proportionate change in the amount
demanded of X / Proportionate change in
price of Y