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Take–away of today’s lecture
 1. Elasticity of demand
2. Types of elasticity of demand
3. Factors affecting Elasticity of
demand
 Lecture Outcome

1. Enabling the student to understand the concept of

elasticity and factors behind the elasticity
 Lets recall

1. What happens when demand is greater than

supply?

2. What happens to equilibrium price when demand

increases and supply remains constant?
Elasticity of demand
• Elasticity is the responsiveness implies the
proportion by which the quantity demanded of a
commodity changes, in response to a given change
in any of its determinants.
How demand is different from
elasticity of demand?
 Degrees of Elasticity of Demand

1. Perfectly elastic demand

2. Perfectly inelastic demand
3. Unitary elastic demand
4. Greater than unitary elastic demand
5. Less than unitary elastic demand
Polling question
At the point of equilibrium
a) Only one price prevails
b) Quantity demand = Quantity supplied
c) The demand curve intersects the supply curve
d) All the above
Types of elasticity of demand
1. Price Elasticity of demand

2. Income Elasticity of demand

3. Cross Elasticity of demand

 PRICE ELASTICITY OF DEMAND

Measures the sensitivity/responsiveness

of the quantity demanded
due to a change in its price.
 FORMULA:

d = %  Quantity Demanded
%  Price

d = Q2 – Q1 x P1

Q1 P2 – P1
INCOME ELASTICITY OF DEMAND

DEFINITION:

Measures the sensitivity/responsiveness

of the quantity demanded
due to a change in income.
 FORMULA:

Y = %  Quantity Demanded
%  Income

Y = Q2 – Q1 x Y1

Q1 Y2 – Y1
CROSS ELASTICITY OF DEMAND

DEFINITION:

Measures the sensitivity/responsiveness

of the quantity demanded of one product
due to a change in the price of a related product.
 FORMULA:

X = %  Quantity Demanded of good X

%  Price of good Y

X = QX2 – QX1 x PY1

QX1 PY2 – PY1

Polling question
• The degree of response of demand to change in
price is
a) Income elasticity of demand
b) Cross-elasticity of demand
c) Price elasticity of demand
d) All the above
Factors affecting elasticity of
demand
 Proportionofofthe
Proportion the
expenditureon
expenditure onaa Nature of
Existenceofof
Existence product
product goods
substitutes
substitutes

Frequently DETERMINANTS Income level

purchased OF PRICE ELASTICITY
products OF DEMAND

Time
Complementary dimension
goods Habits