Pralhada Baidar

Lecturer, PYC
Elasticity of Demand, Supply and Income:

Price Elasticity of Demand (Point Elasticity of Demand):

Suppose that the demand function is given by Q = f (P).
Let, P be a change in price and Q be the corresponding change in
quantity demanded.
The price elasticity of demand is denoted by d and defined by
% change in quantity demanded
d = % change in price
Q
% Q Q  100%
= =
%P P
P  100%
Q P
d =  (negative)
P Q
This is known as the point elasticity of demand as it measures elasticity of
commodity at a point on the demand function.
For the linear demand function, P = a – bQ,
P
Slope = =– b
Q
Q 1
=–b0
P
1 P
d= – b 
Q

Coefficient of Price Elasticity of Demand

There are three categories of price elasticity: elastic, inelastic and unit
elastic.
i. If d < – 1 i.e. |d| > 1, then the demand is elastic.
That is the percentage change in quantity demanded is greater than the
percentage change in price.
ii. If d > – 1 i.e. |d|< 1, then the demand is inelastic.
That is the percentage change in quantity demanded is less than the
percentage change in price.
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iii. If d = – 1 i.e.|d| = 1, then the demand is unit elastic.
That is percentage change in quantity demanded is equal to the
percentage change in price.

Arc Price Elasticity of Demand

Arc price elasticity of demand measures the elasticity of demand over an
interval on the demand function.
If P1, Q1 and P2, Q2 be the prices and the quintiles at the beginning and the
end of the interval considered i.e. (P1, Q1) and (P2, Q2), then the arc
elasticity of demand (or mid-point elasticity) is denoted by arc d and
defined by
1
(P + P2)
Q 2 1
arc d = 1
P
2 (Q1 + Q2)
Q P1 + P2
arc d =  , where Q = Q2 – Q1 and P = P2 – P1
P Q1 + Q2
For the linear demand function P = a – bQ, arc price elasticity or mid
points elasticity of demand is given by
Q P1 + P2
arc d = 
P Q1 + Q2
1 P1 + P2 Q 1
 arc d =–b  [Since =–b]
Q1 + Q2 P
Example 1:
Given the demand function for a good as P = 2400 – 0.5Q, determine the
coefficient of point elasticity of demand when P = Rs. 600 and P = Rs. 800.
Interpret the result. If the price of goods increases by 12%, calculate the
percentage change in the quantity demanded at P = Rs. 600.
Solution:
Here,
P = 2400 – 0.5Q
P
Slope, = -0.5
Q
Q 1
 = = -2
P -0.5
When P = 600
600 = 2400 – 0.5Q

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or, 0.5Q = 1800
or, Q = 3600
We know,
Q P 600
Elasticity of demand, d=  = -2  3600
P Q
1
d =– 3 (i.e. -0.33)
Since, |d|= 0.33  1, the demand is inelastic i.e. percentage change in
quantity demanded is less than percentage change in price.
Interpretation:
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As, d =– 3 (i.e. -0.33), this indicates that at price P = Rs. 600, 3% increase
(decrease) in price will cause 1% decrease (increase) in quantity
demanded.
Alternatively:
At price P = Rs. 600, 1% increase (decrease) in price will cause 0.33%
decrease (increase) in quantity demanded.

When P = 800
800 = 2400 – 0.5Q
or, 0.5Q = 1600
or, Q = 3200
We know,
Q P 800
Elasticity of demand, d=  = -2  3200
P Q
d =– 0.5
Since, |d|= 0.5  1, the demand is inelastic i.e. percentage change in
quantity demanded is less than percentage change in price.
Interpretation:
As, d =– 0.5, this indicates that at price P = Rs. 800, 1% increase (decrease)
in price will cause 0.5% decrease (increase) in quantity demanded.
Again,
At P = Rs. 600
1
d =–3 , %P =12%, %Q =?
% Q
We know, d =
%P
1
%Q = d  %P =– 3 12 =– 4%

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Example 2:
Suppose that when price of Pineapple rises from Rs. 40 to Rs. 90 per kg,
the quantity demanded falls from 500 units to 200 units.
a. Calculate the arc elasticity of demand for pineapple in this price range.
b. If the price of Pineapple were to increase by 25 percent what would be
the percentage change in the quantity demanded.
Solution:
Here,
P1 = 40, P2 = 90
Q1 = 500, Q2 = 200
Now,
P = P2 – P1=50
Q = Q2 – Q1= -300
a. Arc elasticity of demand is
Q P1 + P2 – 300 40 + 90 –300 130
Arc d =  = × = ×
P Q1 + Q2 50 500 + 200 50 700
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 Arc d = – (i.e. -1.11)
35
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Since, |d|= –35 > 1, the demand is elastic i.e. percentage change in
quantity demanded is greater than percentage change in price.

b. %P =25%, %Q =?

We have,
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%Q = d  %P = –35  25 =– 27.86%
Hence, quantity demand decreases by 27.86% when price increases by 25%.