INSTITUTE- University School of

Business
DEPARTMENT- MBA USB
MANAGERIAL ECONOMICS, 20BAT616
FACULTY NAME: Dr. Rasna Sharma

Chapter3- Elasticity of Demand DISCOVER . LEARN . EMPOWER

 Elasticity of
Demand
www.economicsblogspot.com

• Space for visual (size 24)

Course Outcome

CO Title Level
Number

CO3 students will be able to: Remember

remember Price Elasticity of Demand,  
Degrees, Determinants, Measures, Income
Elasticity of Demand, and Cross Elasticity of Will be covered in this
Demand lecture

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 Lecture 7

ELASTICITY OF
DEMAND

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Measurement Of Price Elastcity Of
Demand
There are main methods like
1. Percentage method or proportonate method
2. Total revenue method
3. Geometric method or point method
4. Arc elastcity of demand

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Percentage Method Or Proportonate
Method
• Price elastcity of demand is measured by a rato between the
proportonate change in the quantty of a product demanded as a
result of a proportonate change in its price
• Formula for calculate this is given further as following

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Percentage Method Or Proportonate
Method
Price
Proportionate change in demand for x
elasticity of
=
demand Proportionate change in Price for x

OR
qx px
_____ _____
/
Qx Px

Here,
qx = change in the quantity of x demanded

Qx = original quantity of x demanded

px = change in the price of x

Px = original price of x

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Total Outlay Method
• Total outlay means total expenditure and since total expenditure of
consumers on a product implies total receipts or total revenue of
sellers, it is known as total revenue method.
• It will be clear with following table

Price Quantty Total Outlay Price Elastcity

1 5 100 500 Elastcity Of Demand Is
4 130 520 Greater Than 1(e>1)
2 5 100 500 Elastcity Of Demand Is
4 120 480 Less Than 1(e<1)
3 5 100 500 Elastcity Of Demand Is
4 125 500 Equal Than 1(e=1)

Source : H.L Ahuja , Microeconomics 7

 Total Outlay Method Or Total Revenue
Method
• This can be shown in graph as given

p4 E>1
P
R p3
E=1
I
p2
C
p1 E<1
e

0 Q1 Q2 Q3 x

Total outlay 8
Geometric Method Or Point Method

• This method atempts to measure numerical elastcity of demand at a

partcular point on the demand curve
• Price elastcity can be measure by following method

Price Lower segment of the demand curve

elasticity of =
upper segment of the demand curve
demand

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 Geometric Method Or Point Method
• It can be shown in graph as following
y d

e=

8
b
e>1

c e=1

e<1 d

e=0
0 a x
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 Arc Elastcity Of Demand
• It is the use of middle points between old and new fgures in the case of both price and
quantty. This method is known as arc elastcity method
• We can measure it with formula as given

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 Arc Elastcity Of Demand

Price elastcity of Q1-Q2 P1-P2

= /
demand Q1+Q2 P1+P2
WHERE,
Q1 = original quantty demanded
Q2 = new quantty demanded
p1 = original price
p1 = new price

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Factors Afectng Price Elastcity Of
Demand
• Nature of the Commodity
• Availability of Substtutes
• Variety of uses of commodity
• Postponement
• Influence of habits
• Proporton of Income spent on a commodity
• Income Groups
• Elements of tme

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 MCQ’s

1. The price elastcity of demand for any partcular perfectly compettve frm's output is
a. Less than 1. b. Equal to zero. c. Infnite. d. 1.
2. Brand loyalty usually makes the demand curve for a product:
a. More price elastc. b. Less price elastc. c. Unitary elastc. d. More income elastc.
3. If elastcity of demand is very low it shows that the commodity is:
A. A necessity B. A luxury C. Has litle importance in total budget D. (a) and (c) above
4. The value of elastcity of demand ranges from
a. Zero to one b. One to infnity c. Zero to infnity d. None of these

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 Implicatons
• Determinaton of Rates of Foreign Exchange
• For Natonalizaton of Certain Industries
• In economic Analysis ,the concept of price elastcity of demand helps in
explaining the irony of poverty in the midst of plenty.
• Importance of the concept in formatng Tax Policy of the government
• For determining the rewards of the Factors of Producton
• To determine the Terms of Trades Between the Two Countries

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 Summary

. There are main methods like

1. Percentage method or proportonate method
2. Total revenue method
3. Geometric method or point method
4. Arc elastcity of demand

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 References

• Ahuja, H.L. Macroeconomics, Theory and Policy, S. Chand & Co., New Delhi.
• Chopra, P.N. (2010). Managerial Economics, Kalyani Publishers, New Delhi.
• Karl E. Case / Ray Fair, Principles of Economics Ninth Editon.
• D.M Mithani (2015) ,Managerial Economics
• Keat Paul and Philips Young (2015), Managerial Economics
• Internatonal Journal Of economics

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Assessment Pattern

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THANK YOU

For queries
Email:
rasna.usb@cumail.in

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