SESSION 6: ELASTICITY OF

DEMAND

Chhavi Tiwari
 • Law of Demand (Supply): Direction of
relationship between demand (Supply) and
price
ELASTICITY • Elasticity: Magnitude, How sensitive is the
OF demand to the changes in the determinants
DEMAND • Elasticity
AND • Percentage change in one variable resulting
from a 1-percent increase in another.
SUPPLY • Elasticity of Supply
• Elasticity of Demand
• Price elasticity
• Income elasticity
• Cross elasticity
 • Price elasticity of supply
• a measure of how much the quantity
supplied of a good responds to a
PRICE change in the price of that good.

ELASTICITY • percentage change in quantity

supplied of a good resulting from a 1-
OF SUPPLY percent increase in its price.
 COMPUTING ELASTICITY OF SUPPLY

• Elasticity of supply measures how much 𝑄𝑆 responds to a change in P.

Elasticity of Supply Percentage change in 𝑄𝑆

=
Percentage change in P

∆𝑄𝑆 ∆𝑃
𝑒𝑠 = /
𝑄𝑆 𝑃
∆𝑄𝑆 𝑃
𝑜𝑟, 𝑒𝑆 = .
∆𝑃 𝑄𝑆

𝜕𝑄𝑆 𝑃
𝑒𝑠 = .
𝜕𝑃 𝑄𝑆
 • Price elasticity of demand
• a measure of how much the quantity
demanded of a good responds to a
PRICE change in the price of that good.
ELASTICITY • percentage change in quantity
OF demanded of a good resulting from a 1-
DEMAND percent increase in its price.
 COMPUTING PRICE ELASTICITY OF DEMAND

• Price elasticity of demand measures how much 𝑄𝐷 responds to a change in P.

• Loosely speaking, it measures the price-sensitivity of buyers’ demand.

Price elasticity of Percentage change in 𝑄𝐷

=
demand Percentage change in P
∆𝑄 ∆𝑃
|𝑒𝑃 | = /
𝑄 𝑃
∆𝑄 𝑃
𝑜𝑟, |𝑒𝑃 | = .
∆𝑃 𝑄

𝜕𝑄 𝑃
𝑒𝑝 = .
𝜕𝑃 𝑄
 PRICE ELASTICITY OF DEMAND

Price elasticity of Percentage change in 𝑸𝑫

=
demand Percentage change in P
P
Example:
P rises
Price elasticity by 10%
P2
of demand P1
equals
D
15% Q
= 1.5 Q2 Q1
10%
Q falls
by 15%
 ARC ELASTICITY

From A to B,
P rises 25%, Q falls 33%,
elasticity = 33/25 = 1.33
Demand for
your websites From B to A,
P P falls 20%, Q rises 50%,
B elasticity = 50/20 = 2.50
₹2500
A
₹2000 Mid-point method
D
Q
8 12 ∆𝑄 𝑃(𝐴𝑣𝑔)
|𝑒𝑃 | = .
∆𝑃 𝑄(𝐴𝑣𝑔)
 • If, |𝑒𝑃 |<1 ⟹ percentage change in demand is
less than the percentage change in price.
Demand is inelastic.
PRICE
ELASTICITY • If, |𝑒𝑃 | >1 ⟹ percentage change in demand is
more than the percentage change in price.
OF Demand is elastic.
DEMAND • If, |𝑒𝑃 | =1 ⟹ percentage change in demand is
equal to the percentage change in price.
Demand is unitary elastic.
 • The price elasticity of demand is closely related to
the slope of the demand curve.
• Rule of thumb:
VARIOUS The flatter the curve, the bigger the elasticity.
DEMAND The steeper the curve, the smaller the elasticity.
CURVES • Five different classifications of D curves.…
“PERFECTLY INELASTIC DEMAND” (ONE EXTREME CASE)
Price elasticity % change in Q 0%
= = =0
of demand % change in P 10%

D curve: P
D
vertical
P1
Consumers’
price sensitivity: P2
none
P falls Q
Elasticity: by 10% Q1
0 Q changes
by 0%
 “INELASTIC DEMAND”
Price elasticity % change in Q < 10%
= = <1
of demand % change in P 10%

D curve: P
relatively steep
P1
Consumers’
price sensitivity: P2
relatively low D
P falls Q
Elasticity: by 10% Q1 Q 2
<1
Q rises less
than 10%
 “UNIT ELASTIC DEMAND”

Price elasticity % change in Q 10%

= = =1
of demand % change in P 10%

D curve: P
intermediate slope
P1
Consumers’
price sensitivity: P2
intermediate D

P falls Q
Elasticity: by 10% Q1 Q2
1
Q rises by 10%
 “ELASTIC DEMAND”

Price elasticity % change in Q > 10%

= = >1
of demand % change in P 10%

D curve: P
relatively flat
P1
Consumers’
price sensitivity: P2 D
relatively high
P falls Q
Elasticity: by 10% Q1 Q2
>1
Q rises more
than 10%
“PERFECTLY ELASTIC DEMAND” (THE OTHER EXTREME)

Price elasticity % change in Q any %

= = = infinity
of demand % change in P 0%

D curve: P
horizontal
P2 = P1 D
Consumers’
price sensitivity:
extreme
P changes Q
Elasticity: by 0% Q1 Q2
infinity
Q changes
by any %
 ELASTICITY ALONG LINEAR DEMAND CURVE

• Linear demand curve : Demand curve that is a straight line

𝑸𝑫 = 𝑎 − 𝑏𝑃
The price elasticity of
demand depends not only
on the slope of the demand
curve but also on the price
and quantity.

The elasticity, therefore,

varies along the curve as
price and quantity change.
Slope is constant for this
linear demand curve.

Near the top, because price

is high and quantity is
small, the elasticity is large
in magnitude.

The elasticity becomes

smaller as we move down
the curve.
 • Necessary versus luxury goods
DETERMINANTS • Availability of close substitute
OF PRICE
ELASTICITY OF • Time horizon : Short run versus long
DEMAND run elasticity