ELASTICITY OF DEMAND

Price Elasticity of Demand Cross Elasticity of Demand Income Elasticity of Demand

Dr.A.K.Upadhyay

Price Elasticity of Demand (E)

Measures responsiveness or sensitivity of consumers to changes in the price of a good

%Q E %P

P & Q are inversely related by the law of demand so E is always negative The larger the absolute value of E, the more
sensitive buyers are to a change in price
Dr.A.K.Upadhyay

Price Elasticity of Demand (E)

Table 6.1
Elasticity Elastic Unitary Elastic Responsiveness

Q %P E 1 % Q %P E 1 % Q %P E 1 %
Dr.A.K.Upadhyay

Inelastic

Price Elasticity of Demand (E)

Percentage change in quantity demanded can be predicted for a given percentage change in price as:

%Qd = %P x E

Percentage change in price required for a given change in quantity demanded can be predicted as:

%P = %Qd E
Dr.A.K.Upadhyay

Factors Affecting Price Elasticity of Demand

Availability of substitutes

Percentage of consumers budget

The better & more numerous the substitutes for a good, the more elastic is demand
The greater the percentage of the consumers budget spent on the good, the more elastic is demand The longer the time period consumers have to adjust to price changes, the more elastic is demand
Dr.A.K.Upadhyay

Time period of adjustment

Calculating Price Elasticity of Demand

Price elasticity can be calculated by multiplying the slope of demand (Q/P) times the ratio of price to quantity (P/Q) Q 100 Q P Q %Q E P P Q %P 100 P
Dr.A.K.Upadhyay

THANKS

Dr.A.K.Upadhyay