ELASTICITY OF

DEMAND
 LAW OF DEMAND

Quantity Demanded

‘Price’
 ELASTICITY OF DEMAND

Quantity Demanded increases by 40%

‘Price’ falls by 10%
 MEANING OF ELASTICITY
Elasticity of Demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in
any of the determinants

% change in quantity demanded of a commodity

Ed = ______________________________________________________________________
% change in ‘factor’
• 0<=Ed<=Infinity
• May be negative or positive –
A negative sign - an inverse relation between factor and quantity demanded
whereas
A positive sign indicates a direct relation
• No unit.
 PRICE ELASTICITY

Price elasticity of demand measure the degree of responsiveness of demand for a

commodity due to change in its price

% Change in quantity demanded.

Ed= ------------------------------------------
% Change in Price
Using the formula
(-2/5) *(5/10)
(ignoring the ‘-’ sign)
E = 0.2
 Price Demand Price Demand
1000 10 1000 10
1200 8 1200 10

Using the formula Using the formula

-2/200 * 1000/10 0/200 * 1000/10
(ignoring the ‘-’ sign) (ignoring the ‘-’ sign)
E=1 E =0
 PRICE ELASTICITY - DEGREES

Perfectly Inelastic Inelastic Unitary Elastic Perfectly

Elastic
 PRICE ELASTICITY - DEGREES
Perfectly Inelastic Inelastic
When the percentage
When the quantity
change in quantity
demanded of a commodity
demanded of a commodity
does not respond to change
is less than the percentage
in its price.
change in its price.
Ed = 0
Ed <1
Vertical Curve
Steep Curve
Unitary Elastic Perfectly
Elastic
When the percentage When the consumers are
When the percentage
change in the quantity prepared to purchase all
change in the quantity
demanded of a commodity that they can get at a
demanded of a commodity
is equal to the percentage particular price and nothing
is more than the percentage
change in the price of the at all at a slightly higher
in the price.
commodity price.
Ed > 1
Ed = Infinity
Ed = 1
Flat Curve
Rectangular Hyperbola Horizontal Curve
Using the formula
(-2/5) *(5/10)
(ignoring the ‘-’ sign)
E = 0.2
Inelastic Demand
 Price Demand Price Demand
1000 10 1000 10
1200 8 1200 10

Using the formula Using the formula

-2/200 * 1000/10 0/200 * 1000/10
(ignoring the ‘-’ sign) (ignoring the ‘-’ sign)
E=1 E =0
Unitary Elastic Demand Perfectly Inelastic Demand
CHANGES IN PRICE ELASTICITY
 FACTORS AFFECTING ELASTICITY

• Availability of Substitutes
• Nature of the commodity
• Proportion of Income Spent
• Number of Uses of the commodity
• Time Factor
• Postponement of Consumption
• Price Range
• Habits
 FACTORS AFFECTING ELASTICITY
• Many • Long Term
Availability of • Few Time Factor
• Short Term
Substitutes

• Comfort / Luxury • Possible

Postponement
Nature of the • Necessity of • Not Possible
commodity Consumption

• Large • Moderate
• Very High/Very Low
Proportion of • Small Price Range
Income Spent

• Many • Not Habituated

Number of • Few • Habituated
Habits
Uses of the
commodity
 OBJECTIVE

To understand the magnitude of impact of the determinants on the demand and its relevance in
various macroeconomic decisions taken in an economy

• Producers

• Sellers

• Government
THANK YOU