Elasticity of Demand

Dr. K. Anbumani
Associate Professor
 Elasticity of Demand

“The degree of
responsiveness in quantity demanded due to
the degree of change in price”

It is proportional or percentage changes;

not on absolute changes in price and demand
 Elastic and Inelastic Demand
A change in demand is always not proportional to change in
price.
Inelastic demand: A large change in price may bring small or
no change in demand (Salt, Sugar, Medicine etc ).
Elastic demand: A small change in price may bring large
change in demand (electronic gadgets, gold jewellery, etc ).
 Elasticity of Demand
Price Elasticity: The degree of responsiveness in quantity demanded
due to the degree of change in price.
Income Elasticity: The degree of responsiveness in quantity
demanded due to the degree of change in income.

Advertisement Elasticity: The degree of responsiveness in quantity

demanded due to the degree of change in advertisement expenses.

Cross Elasticity: The degree of responsiveness in quantity demanded

of Commodity X due to the degree of change in price of commodity Y.
 Five Cases of Elasticity

1. Perfectly elastic (∞) Infinity

2. Perfectly inelastic (0) Zero
3. Unitary elastic (1) One
4. Relatively elastic (> 1) More than 1
5. Relatively inelastic (< 1) Less than 1
 Perfectly Elastic (ep = ∞ )

Extreme case where the quantity

demanded (Qd) changes by an infinite
amount in response to even no change in
price. 
Luxury goods, goods that take a large
share of individuals’ income, and goods
with many substitutes are likely to have
highly elastic demand curves.

Examples: In today’s Indian bike market

The demand for bikes is increasing day by
day without any effect of price change.
Perfectly Elastic (ep = ∞ )
 Perfectly Inelastic (ep = 0)

Extreme case in which a percentage

change in price, no matter how large,
results in zero change in quantity. 
Necessities with no close substitutes
are likely to have highly inelastic
demand curves.

Examples: Life-saving drugs, gas, etc

Perfectly Inelastic (ep = 0)
 Unitary elastic (ep = 1)

Occurs when a price change of

one percent results in a
quantity change of one percent.
Example: The price of digital
cameras, mobile phones, etc
increases by 10%, the quantity
of demanded decreases by
10%. 
Unitary elastic (ep = 1)
 Relatively elastic (ep > 1)

Occurs when the percentage change in

quantity demanded is greater than the
percentage change in price. 
There are commodities for which a small
change in price will drastically reduce the
amount of the commodity demanded.

Example: Air-travel for vacationers is very

sensitive to price. An increase in the air fare
will lead the vacationer to choose another
mode of transportation like car or lead him to
postpone the vacation plan for the time being.
Relatively elastic (ep > 1)
 Relatively inelastic (ep < 1)

Occurs when the percentage change

in quantity demanded is lesser than
the percentage change in price. 
Example: if we observe the prices of
petrol and comparing its demand
change with the change in price levels
of petrol (even though the price
changes to great extent, there will not
be much change in demand)

 
Relatively inelastic (ep < 1)
 Factors Determining the
PRICE ELASTICITY OF
Price Elasticity
DEMAND
 Factors Determining the
Price Elasticity
Availability of substitutes: The more and closer the substitutes
available, the higher the elasticity is likely to be, as people can
easily switch from one good to another.
Nature of commodity: Luxury goods (Diamond jewellery, Flight
journey, SUV Cars) have high elasticity; Comfort goods (Bus travel,
Fan, Washing machine) have medium elasticity and; Necessity
goods (Rice, Sugar, Salt) have low or no elasticity.
Also demand for durable goods is more elastic than non-durable
 Factors Determining the
Price Elasticity
Weightage in total consumption: If the proportion of income
spent is more on a commodity, demand would be more
elastic. A person drawing Rs. 30,000 salary wouldn't mind if
price of candle increases from Rs. 5 to Rs.7. But he would
care if price of mobile phone he wants to buy becomes Rs.12,
000 from Rs.11,000.

Time required for adjustment in consumption: Longer the

time available, greater would be the elasticity. For example, If
the price of TV decreases its demand would not increase
from next day, it need some time to pick up.
 Factors Determining the
Price Elasticity
Range of commodity use: More the range a commodity
can be used (gas, electricity, water) demand would be
highly elastic; less the range lee or no elasticity (ex: zandu
balm).

Proportion of market supplied: If less than half of the

market is supplied price elasticity will be more than 1 and
more than half it is supplied elasticity will be less than 1.
 How to measure the
Price Elasticity?

Where Q = Original quantity demanded

ΔQ = Change in quantity demanded
P = Original price
Δ P = Change in price

Note: Minus sign (-) is inserted in the formula before the fraction in order
to
make elasticity co-efficient a non-negative value.
How to calculate the
Arc Elasticity?
How to calculate the
Point Elasticity?

•
How to calculate the
Point Elasticity?

•
How to calculate the
Point Elasticity?

•
INCOME ELASTICITY OF
DEMAND
 What is called
Income Elasticity?
The degree of responsiveness in quantity demanded due to the
degree of change in the income of the consumer.
Higher the income elasticity, bigger will be the consumers'
response in their purchasing habits, when real income changes.

Inferior goods: Negative Income Elasticity

Luxury goods: Positive Income Elasticity
Normal goods: Inelastic or proportionately less elastic
 ey = How to measure the
Income Elasticity?
=
*
ey =

ey = = *

Where Q = Original quantity demanded

ΔQ = Change quantity demanded
Y = Original Income
ΔY = Change in Income
 O F
ITY
T IC
LA S
S E A N D
OS EM
CR D
 What is called
Cross Elasticity?
The degree of responsiveness in quantity demanded of one
commodity (X) due to the degree of change in the price of
another commodity (Y).

Substitutes: Positive Cross Elasticity (Tea price Coffee

demand )
Complementary: Negative Cross Elasticity
(Petrol price Bike
demand )
 How to measure the
Cross Elasticity?
•
 ADVERTISEMENT
ELASTICITY OF DEMAND
 What is called
Advertisement Elasticity?
The degree of responsiveness in quantity demanded due to the
degree of change in the advertisement expenditure.
ea = 0 Sales do not respond to advertisement expenditure
ea = 1 Sales change is proportional to adv. Expenditure change
ea > 1 Sales change is higher than adv. Expenditure change
ea > 0 but < 1 Sales change is less proportional to advertisement
Expenditure change
 How to measure the
Advertisement Elasticity?

ea =

ea = = *

Where S = Original sales quantity

ΔS = Change in sales quantity
A = Original Expense for Advt.
ΔA = Change in Advt. Expenses
 Uses of elasticity in
Managerial Decisions
1. To determine output level: For making production profitable, it is
essential that the quantity of goods and services should be
produced corresponding to the demand for that product.
2. To determine the price: The elasticity of demand for a product is
the basis of its price determination.
If the demand for a product is inelastic, the producer can charge
high price for it, whereas for an elastic demand product he will
charge low price.
 Uses of elasticity in
Managerial Decisions
3. In price discrimination by monopolist: The problem of
pricing the same commodity in two different markets also
depends on the elasticity of demand in each market. In the
market with elastic demand for his commodity, the
discriminating monopolist fixes a low price and in the market
with less elastic demand, he charges a high price.

4. In Price Determination of Factors of Production: Factors of

production are paid according to their elasticity of demand. In
other words, if the demand of a factor is inelastic, its price will
be high and if it is elastic, its price will be low.
 Uses of elasticity in
Managerial Decisions
5. In Demand Forecasting: The knowledge of income
elasticity is essential for demand forecasting of producible
goods in future. Long- term production planning and
management depend more on the income elasticity.

6. In Dumping: A firm enters foreign markets for dumping his

product on the basis of elasticity of demand to face foreign
competition.
 Uses of elasticity in
Managerial Decisions
7. In the Determination of Prices of Joint Products: The pricing of
joint products, like wool and mutton, wheat and straw, cotton and
cotton seeds, etc. In such cases, separate cost of production of
each product is not known. Therefore, the price of each is fixed on
the basis of its elasticity of demand.

8. In the Determination of Government Policies: The knowledge of

elasticity of demand is also helpful for the government in
determining its policies. Before imposing statutory price control on
a product, the government must consider the elasticity of demand
for that product.
THANK
YOU