Elasticity of

Demand
 Lecture Plan

 Elasticity of Demand
 Types of Elasticity of Demand
1. Price Elasticity of demand
2. Income Elasticity of demand
3. Cross Elasticity of demand
 Methods of measuring Elasticity
 Factors effecting price Elasticity of demand
 Elasticity of Demand
 “Elasticity” is a standard measure of the degree of
responsiveness (or sensitivity) of one variable to
changes in another variable.
 Elasticity of Demand: Measures the degree of
responsiveness of demand for a commodity to a
given change in any of the independent variables
that influence demand for that commodity, such as
- price of the commodity,
- price of the other commodities,
- income, taste, preferences of the consumer and
other factors.
 Types Of Elasticity
Price Elasticity

 Income Elasticity

Cross Elasticity
 Price Elasticity of Demand

 "Elasticity of demand may be defined as

the percentage change in quantity
demanded to the percentage change in
price.” Alfred Marshall

 "The elasticity of demand is a measure of

the relative change in quantity to a relative
change in price.” J.M. Keynes
 Formula

 Price Elasticity of Demand: Mathematically, it is the

percentage change in quantity demanded of a
commodity to a percentage change in price of the
commodity .

 There exists inverse relationship between quantity

demanded and price therefore elasticity of demand is
expressed with a negative sign.
Degree Of Price Elasticity Of
Demand

 Elastic Demand
 Inelastic Demand
 Unitary Elastic Demand
 Perfectly Inelastic Demand
 Perfectly Elastic Demand
 Relatively Elastic Demand

 When the percentage change in quantity demanded is greater

than the percentage change in price, the demand is said to be
elastic.

Example: Articles of Luxury like silk shirts

 Relatively Inelastic Demand
 More change in the price of the goods but less change in
demand for the goods.
 The proportionate change in price is more than the
proportionate change in demand.

Example: Salt and oil

 Unitary Elastic Demand

 The proportion of change in demand is equal to proportion of

change in price.

.
 Perfectly Inelastic Demand
 When the percentage change in quantity demanded is zero no
matter how price is changed, the demand is said to be perfectly
inelastic

 Example: Demand of Insulin by acute diabetic patients

 Perfectly Elastic Demand

 When the percentage change in quantity demanded

is infinite even if the percentage change in price is zero, the
demand is said to be perfectly elastic. Endless demand at
given price.
 Perfectly Elastic Demand

Note: It is generally for things of which price

information is easily accessible and/or the market
is highly competitive and/or the products are
identical, so you can just go to other sellers.

For example:
Two vending machines placed next to each
other, selling the exact same bags of chips. One at
a higher price, and the other cheaper. People
would go buy the cheaper one, thus it’s perfect
elastic for the higher priced vending machine
Summing up types of
elasticity
 Income Elasticity Of
Demand
 Income Elasticity of Demand measures the degree of
responsiveness of demand for a good to a given change in
income.
 Types of Income Elasticity Of
Demand

 Positive Income elasticity of demand: Demand rises as

income rises and vice versa. Example: Normal goods

 Negative Income elasticity of demand: Demand falls as

income rises and vice versa. Example: Inferior good

 Zero Income elasticity of demand : Demand is not

impacted by increase or decrease of income. Example:
Insulin
 Cross Elasticity of Demand

 Cross Elasticity of Demand measures the

responsiveness of demand of one good
to changes in the price of a related
good.
 Cross Elasticity of Demand

I. Complementary Goods: If two goods are

complementary, rise in the price of one leads
to a fall in the demand for the other.
Cross elasticity of demand is negative
Example : Car and Petrol
 Cross Elasticity of Demand

2. Substitute Goods: Fall in prices of good Y will

reduce the quantity demanded for good X.
Cross elasticity is positive.
 Example Tea and Coffee
 Factors Affecting Price
Elasticity Of Demand
 Nature of commodity
Necessities are relatively price inelastic, while luxuries are relatively price
elastic

 Availability and proximity of substitutes

Price elasticity of demand of a brand of a product would be quite high,
given availability of other substitute brands

 Alternative uses of the commodity

If a commodity can be put to more than one use, it would be relatively
price elastic

 Proportion of income spent on the commodity

The greater the proportion of income spent on a commodity, the more
sensitive would the commodity be to price Reason is income effect
 Cont…

 Durability of the Commodity

Perishable commodities like eatables are relatively price inelastic in
comparison to durable items.

 Items of Addiction
Items of intoxication and addiction are relatively price inelastic

 Peak and Off-peak Demand

The demand tends to be price inelastic at peak times.

 Time
Demand for any commodity is more price elastic in the long run
 Cont….

Examples:
 Demand for rail services
At peak times, the demand for rail transport becomes inelastic – and higher
prices are charged by rail companies who can then achieve higher
revenues and

 Mobile phone service providers

They may include penalty clauses in contracts or insist on 12-month
contracts being taken out .

 In cases of cigarettes and alcohol

If the consumer is a habitual consumer, he/she becomes much less sensitive
to the price of the good in question.

 Demand for petrol

Is often fairly inelastic. But specific brands of petrol are likely to be more
elastic following a price change.
 Thank You