ELASTICITY OF DEMAND

 The Responsiveness of buyers to a change in the price

of a commodity is called as Elasticity of Demand.

 It is the rate at which the quantity demanded of a

commodity varies with a change in price.

 Demand is also effected by the Income of the customers

and prices of related goods. So therefore, we have
Income Elasticity of Demand (Ey) and Cross Elasticity
of Demand (Exy)
 TYPES OF ELASTICITY OF
DEMAND
1. Price Elasticity of Demand (Ed):
It is the ratio of the percentage change in quantity
demanded of a product to the percentage change in
its price.

Ed = % change in Qd = q/q
% change in Price p/p
 TYPES OF ELASTICITY OF DEMAND

2. Income Elasticity of Demand (Ey):

It is the degree of change or responsiveness of
quantity demanded of a good to a change in the income
of the consumer.

Ey = % change in Qd = q/q
% change in Income y/y
 TYPES OF ELASTICITY OF DEMAND

3. Cross Elasticity of Demand (Exy):

It is the percentage change in the quantity demanded
of one commodity say X due to the percentage
change in the price of related commodity Y.

Exy = % change in Qd of X = qx/qx

% change in Price of Y Py/Py

 Cross Elasticity is concerned with two types of goods

1). Substitutes, it has positive Exy
2). Complementary, it has negative Exy
DEGREES OF PRICE ELASTICITY OF
DEMAND

Type of Elasticity Curve Tendency Elasticity Value

Perfectly Inelastic Vertical ε=0
Perfectly Elastic Horizontal ε=
DEGREES OF PRICE ELASTICITY OF
DEMAND
Type of Demand Curve Tendency Elasticity Values Elasticity For
Elastic Relatively Flat E>1 Luxuries
Inelastic Relatively Steep E<1 Necessities
DEGREES OF PRICE ELASTICITY OF
DEMAND

• Unitary Elasticity = 1

D
Price
P1
10%
Po

10%
D

0 Q1 Qo
Quantity
 DETERMINANTS OF PRICE
ELASTICITY OF DEMAND
 Necessities vs. Luxuries

 Availability of Substitutes

 Proportion of Income

 Time
 MEASUREMENT OF PRICE
ELASTICITY OF DEMAND
1. Total Outlay or Revenue Method:
 We measure “Ed” with change in Total
Revenue of a firm due to change in a it’s
price level.

 Elasticity is expressed in Three ways;

 Unitary Elasticity (Total Revenue remains the
same)
 Elastic Demand (TR increases with decrease in
the prices)
 Inelastic Demand (TR decreases with decrease
in the prices)
 MEASUREMENT OF PRICE
ELASTICITY OF DEMAND
Total Outlay or Revenue Method:

Price of Quantity Total Coefficient of

Pencil per Demanded Revenue Elasticity of
Dozen (Rs.) in Dozen Demand
8 3 24
7 4 28 Elastic
6 5 30 Elastic
5 6 30 Unity
4 7 28 Inelastic
3 8 24 Inelastic
 MEASUREMENT OF PRICE
ELASTICITY OF DEMAND
2. The Proportional or Percentage
Method:
 Under this method we calculate Ed by the
formula as

Ed = % change in Qd = q/q
% change in Price p/p

= Q2 – Q1 X P1
P2 – P1 Q1
 MEASUREMENT OF PRICE
ELASTICITY OF DEMAND
3. Geometrical or Point Method
 Under this method we measure elasticity
of demand at any point on a demand
curve.

Ed = Lower Amount of Qd from the

midpoint Upper Amount of Qd
from the midpoint

At midpoint Ed = 1
Above midpoint Ed < 1
APPLICATIONS OF ELASTICITY
OF DEMAND

 Taxation
 Monopolist Price
 Wages
 Economic Policies
 International Trade
 Rate of Foreign Exchange
 ELASTICITY OF SUPPLY
 The percentage increase in the amount of Quantity
Supplied in response to a given percentage increase in
price.

 It represents the extend of change in supply in response

to a change in price.

 The rate at which quantity supplied varies with a change

in the price of that commodity.

Es = % change in Qs = q/q
% change in Price p/p
 DEGREES OF ELASTICITY OF
SUPPLY
 Perfectly Elastic Supply (Horizontal &
Infinite)

 Perfectly Inelastic Supply (Vertical &

Zero)

 Elastic Supply

 Inelastic Supply
 ELASTICITY OF SUPPLY

 The Short Run:

 Es is more Inelastic or even Perfectly
Inelastic because a firm cannot change its
machinery in short run.

 The Long Run:

 Es is more elastic in this case because it
can change all it factors of production to
supply more goods.