CH.

4: ELASTICITY OF DEMAND & SUPPLY MICRO ECONOMICS BY ZIA-UL-

HAQ

ELASTICITY OF DEMAND
Dr. Marshal introduced the concept of Elasticity of demand in his book “Principles of Economics”.
When price of a product changes, its demands also changes. Elasticity of demand shows the degree
of change in the demand of the product.
ELASTICITY OF DEMAND IS A TECHNICAL TERM THAT SHOWS PERCENTAGE CHANGE IN
QUANTITY DEMANDED DUE TO A SPECIFIC PERCENTAGE CHANGE IN PRICE.
In simple words we can say that elasticity of demand is the rate of change in quantity demanded due to
a specific change in price.
DEGREE OF ELASTICITY OF DEMAND
Elasticity of demand can be discussed as.
 Elasticity of demand equal to unity (Ed = 1)
 Elasticity of demand less than unity (Ed < 1)
 Elasticity of demand greater than unity (Ed > 1)
MEASUREMENT OF ELASTICITY OF DEMAND
Elasticity of demand can be measured with the help of following methods.
1. Total Expenditure Method
2. Flux (Percentage Method)
3. By Mathematical Formula
4. Geometric Method
TOTAL EXPENDITURE (REVENUE) METHOD
In such method, Elasticity of demand can be measured with the help of Total Expenditures faced by the
people. Total expenditures = Quantity X Price  (Qd)(P)
ELASTICITY OF DEMAND EQUAL TO UNITY [Ed = 1]
When price changes and as a result Quantity demanded also changed in such a way that total
expenditures remains the same then elasticity of demand will be equal to unity.
P Qd T. Exp
10 2 20
5 4 20
At Rs. 10 per unit price, quantity demanded was 2 units and
expenditure was Rs. 20. As price decreases to Rs. 5, quantity
demanded increases to 4 units and the expenditure is Rs. 20 which
remains the same.
In case of elasticity of demand equal to unity, the nature of the slope of demand curve is normal.
ELASTICITY OF DEMAND GREATER THAN UNITY [Ed > 1]
When price changes and as a result Quantity demanded also changed in such a way that total
expenditures increases then elasticity of demand will be greater than unity.
P Qd T. Exp
10 2 20
5 6 30
At Rs. 10 per unit price, quantity demanded was 2 units and
expenditure was Rs. 20. As price decreases to Rs. 5, quantity
demanded increases to 6 units and the expenditure increases to Rs.
30. Such increase in total expenditure shows elasticity of demand is
greater than unity.
CH. 4: ELASTICITY OF DEMAND & SUPPLY MICRO ECONOMICS BY ZIA-UL-
HAQ

In case of elasticity of demand greater than unity, the nature of the slope of demand curve is
flatter. It falls from left to right slowly.

ELASTICITY OF DEMAND LESS THAN UNITY [Ed > 1]

When price changes and as a result Quantity demanded also changed in such a way that total
expenditures decreases then elasticity of demand will be less than unity.
P Qd T. Exp
10 2 20
5 3 15
At Rs. 10 per unit price, quantity demanded was 2 units and
expenditure was Rs. 20. As price decreases to Rs. 5, quantity
demanded increases to 3 units and the expenditure decreases to Rs.
15. Such decrease in total expenditures shows elasticity of demand
less than unity.
In case of elasticity of demand less than unity, the nature of the slope of demand curve is
steeper. It falls from left to right sharply.
MATHEMATICAL FORMULA
Elasticity of demand can be discussed by mathematical formula in two ways.
 Point Elasticity (Minor change in Qd and P)
 Arc Elasticity (Prominent change in Qd and P)
 POINT ELASTICITY OF DEMAND
When there is a minor or very small change in quantity demanded and price is called point
elasticity. Such change is so small that is looks as a single point at demand curve.
Point Elasticity can be calculated as.
∆Qd P
Ed = --------- X -------
∆P Qd
Let the price of the product is Rs. 10 and consumer demands 2 units.
As price decreases to Rs. 9.5, the demand increases to 2.5 units.

 ARC ELASTICITY OF DEMAND

When there is a prominent or big change in quantity demanded and price is called Arc elasticity.
Such change can be shown in two prominent points at demand curve.
Arc Elasticity can be calculated as.
Q2 – Q1 P2 – P1
Ed = --------------- ÷ -------------
Q2 + Q1 P2 + P1
Let the price of the product is Rs. 10 and consumer demands 2
units. As price decreases to Rs. 5, the demand increases to 4 units.
CH. 4: ELASTICITY OF DEMAND & SUPPLY MICRO ECONOMICS BY ZIA-UL-
HAQ

FLUX (PERCENTAGE) METHOD

Percentage method for the measurement of elasticity of demand was presented by prof. flux. In this
method percentage changes in price and quantity demand is examined.
Here Elasticity of demand can be measured with the help of formula.
% Change in Qd % Qd
Elasticity of demand = ----------------------------  ----------------
% Change in P % P
If % Qd = % P  Ed = 1
Let Qd = 10% P = 10% Ed = 10% / 10% = 1 (Ed = 1)
If % Qd > % P  Ed > 1
Let Qd = 15% P = 10% Ed = 15% / 10% = 1.5 (Ed > 1)

If % Qd > % P  Ed > 1
Let Qd = 8% P = 10% Ed = 8% / 10% = 0.8 (Ed < 1)
GEOMETRIC METHOD (GRAPHICAL)
At the demand curve, elasticity of demand at a point can be calculated by formula.
Distance from the specific point to OX
Ed = ----------------------------------------------------------
Distance from specific point to OY
AT MID POINT
DISTANCE TO OX = DISTANCE TO OY  Ed = 1
RIGHT TO THE MID POINT
DISTANCE TO OX < DISTANCE TO OY  Ed < 1
LEFT TO THE MID POINT
DISTANCE TO OX > DISTANCE TO OY  Ed > 1
AT OX
DISTANCE TO OX = 0  Ed = 0
AT OY
DISTANCE TO OY = 0  Ed = ∞
KINDS OF ELASTICITY OF DEMAND
Elasticity of demand can be discussed in three ways.
1. Price Elasticity
2. Income Elasticity
3. Cross Elasticity
PRICE ELASTICITY [PE]
Price Elasticity of demand can be defined as,
PRICE ELASTICITY OF DEMAND IS A TECHNICAL TERM THAT SHOWS PERCENTAGE
CHANGE IN QUANTITY DEMANDED DUE TO A SPECIFIC PERCENTAGE CHANGE IN PRICE.
Price Elasticity can be calculated as.
∆Qd P
CH. 4: ELASTICITY OF DEMAND & SUPPLY MICRO ECONOMICS BY ZIA-UL-
HAQ

Ed = --------- X -------
∆P Qd
Let the price of the product is Rs. 10 and consumer demands 2 units.
As price decreases to Rs. 5 the demand increases to 4 units.
Here ∆Qd = Q2 – Q1 ∆P = P2 – P1 Q=2 P = 10
=4–2=2 = 5 – 10 = – 5
Putting in the formula
2 10
Ed = --------- X --------  – 2 (Ed > 1)
–5 2
INCOME ELASTICITY [YE]
Income Elasticity of demand can be defined as,
INCOME ELASTICITY OF DEMAND IS A TECHNICAL TERM THAT SHOWS PERCENTAGE
CHANGE IN QUANTITY DEMANDED DUE TO A SPECIFIC PERCENTAGE CHANGE IN THE
LEVEL OF INCOME.
The relationship between income and quantity demanded is positive.
Income Elasticity of demand can be measured as
10000 2000
∆Qd y Income
Ey = --------- X -------
∆y Qd 5 10
Demand
Let the level of income of the consumer increases from Rs. 10,000 to Rs. 20,000. As a result Consumer
increases the demand of the product from 5 units to 10 units.
HERE: ∆Qd = 5 ∆Y = 10,000
Qd = 5 Y = 10,000
5 10000
Ey = ----------- X ---------  1 (Ey = 1) Income Elasticity of demand is equal to unity.
10000 5
CROSS ELASTICITY
Cross Elasticity of demand can be defined as,
CROSS ELASTICITY IS A TECHNICAL TERM THAT SHOWS PERCENTAGE CHANGE IN
THE QUANTITY DEMANDED OF ONE PRODUCT DUE TO A SPECIFIC PERCENTAGE
CHANGE IN THE PRICE OF AN OTHER PRODUCT.
Cross Elasticity of demand can be calculated by the formula.
∆Qd(a) P(b)
Ec = ----------- X -----------
∆P(b) Qd(a)
EXPLANATION
Suppose Wheat and Rice are substitute products. The price of Rice increases from Rs. 150 to Rs. 160,
the demand of Wheat also increases from 20 Kg to 22 Kg. Here demand of Wheat changes due to
change in the price of Rice.
HERE: ∆ Qda = 2 ∆Pb = 10 Goods Price Demand
Qda = 20 Pb = 150 Wheat (a) Rs. 50  Pa 20 Kg Qa
2 150 3 22 Kg
Ec = ----- X -------  ------  1.15 > 1 (Ec > 1)
20 10 2 Rice (b) Rs. 150  Pb Qa = 2
Rs. 160
Pb = 10 10 Kg  Qb
CH. 4: ELASTICITY OF DEMAND & SUPPLY MICRO ECONOMICS BY ZIA-UL-
HAQ

ELASTICITY OF SUPPLY
Dr. Marshal introduced the concept of Elasticity of supply in his book “Principles of Economics”. When
price of a product changes, its supply also changes. Elasticity of supply shows the degree of change
in the supply of the product.
ELASTICITY OF SUPPLY IS A TECHNICAL TERM THAT SHOWS HOW MUCH CHANGE
OCCURES IN QUANTITY SUPPLIED DUE TO A SPECIFIC CHANGE IN PRICE.
In simple words we can say that elasticity of supply is the rate of change in quantity supplied due to a
specific change in price.
DEGREE OF ELASTICITY OF SUPPLY
Elasticity of supply can be discussed as.
 Elasticity of supply equal to unity (Es = 1)
 Elasticity of supply less than unity (Es < 1)
 Elasticity of supply greater than unity (Es > 1)
MEASUREMENT OF ELASTICITY OF SUPPLY
Elasticity of supply can be measure in the following ways.
 The unit Method
 Percentage or Flux Method
 Mathematical Formula
UNIT METHOD
In such method, change in quantity supplied is compared with change in price.
ELASTICITY OF SUPPLY EQUAL TO UNITY [Es = 1]
When change in quantity supplied is equal to change in quantity supplied then elasticity of supply will
be equal to unity.
Let the price of the product increases from Rs. P Qs
10 to To. 20, quantity supplied also increases 10 50
from 50 units to 100 units. 20 100

In case of elasticity of supply equal to unity,

ELASTICITY OF SUPPLY GREATER THEN UNITY [Es > 1]
When change in quantity supplied is greater then change in quantity supplied then elasticity of supply
will be greater then unity.
Let the price of the product increases from Rs. P Qs
10 to 20, quantity supplied also increases from 10 50
50 units to 150 units.
20 150

ELASTICITY OF SUPPLY LESS THEN UNITY [Es < 1]

When change in quantity supplied is less then change in quantity supplied then elasticity of supply will
be less then unity.
Let the price of the product increases from Rs.
10 to 20, quantity supplied also increases from
CH. 4: ELASTICITY OF DEMAND & SUPPLY MICRO ECONOMICS BY ZIA-UL-
HAQ

P Qs
10 50
20 75

FLUX (PERCENTAGE) METHOD

Percentage method for the measurement of elasticity of supply was presented by prof. flux. In this
method percentage changes in price and quantity supplied is examined.
Here Elasticity of supply can be measured with the help of formula.
% Change in Qs % Qs
Elasticity of supply = ----------------------------  ----------------
% Change in P % P
If % Qs = % P  Es = 1
Let Qs = 10% P = 10% Es = 10% / 10% = 1 (Es = 1)
If % Qs > % P  Es > 1
Let Qs = 15% P = 10% Es = 15% / 10% = 1.5 (Es > 1)

If % Qs > % P  Es > 1
Let Qs = 8% P = 10% Es = 8% / 10% = 0.8 (Es < 1)
MATHEMATICAL FORMULA
Elasticity of supply can be measured with the help of mathematical formula.

∆Qs P HERE: ∆Qs = 50 ∆P = 5 5 10

Es = -------- X ------ Qs = 50 P=5 Price
∆P Qs 50 100
Qd
50 5
Es = ------ X --------  1 (Es = 1)
5 50