TYPES OF ELASTICITY

Working with Demand

By- Akshat.D.Yadav
 Price elasticity of demand
• Price elasticity of demand
- The degree of responsiveness shown by
quantity demanded for a commodity with
relation to the change in the price of that
commodity.

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 The Elasticity Approach
• Price elasticity of demand (ED)
– percentage change in quantity
demanded divided by percentage change
in price

% QD
ED 
% P

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 Price Elasticity of Demand
• Negative
• Percentage change in quantity
demanded for each 1% change in price
• The greater the ED the more sensitive
quantity demanded is to price
• Percentage Change
– Use the arc elasticity method
• Change in variable divided by the average

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 Calculating Price Elasticity of Demand
• %Change in Price
( P1  P0 )
%P 
 P1  P0 
 2 

• %Change in Quantity demanded

(Q1  Q0 )
%Q D 
 Q1  Q0 
 2 
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 Calculating Price Elasticity of Demand
• Figure 3 Using the Arc method for Elasticity
Price
3. Elasticity of demand for the
move from A to B is
20% / 40% = 0.5
A
$1.50
2. and the percentage rise
in quantity is 1,000 / 5,000
B
1.00 = 0.2 or 20%.

1. Using the arc elasticity 4,500 5,500 Quantity

method, the percentage drop
in price is $0.50/$1.25
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= 0.40 or 40% …
 Types of Demand Curves
• Perfectly elastic demand:
– ED = infinity
• Perfectly inelastic demand: ED=0
• Less than unit elastic demand: ED <1
• For eg. 1% rise in price will cause quantity
demanded to fall by less than 1%
• More than unit Elastic demand: ED >1
• For eg. a 1% rise in price will cause quantity
demanded to fall by more than 1%
•11/02/21
Unit elastic demand: ED=1
Types Of Elasticity 7
 Types of Demand Curves
• Figure 4 Categories of Demand Curves

a) Perfectly Inelastic Demand b) Less than unit Demand

P D P

$11 $11

9 9
Price Price D
rises rises
by 20%
100 Q 95 105 Q
Quantity doesn’t change Quantity falls by less than 20%

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 Types of Demand Curves
• Figure 4 Categories of Demand Curves

c) More than unit elastic Demand d) Perfectly Elastic Demand

P P
Consumers will buy any
quantity at $9, none at
$11 a higher price
D
9 D $9
Price
rises
by 20%
85 115 Q 100 Q
Quantity falls by more than 20%

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 Income Elasticity of Demand
• Percentage change in quantity demanded
divided by the percentage change in
income
–percentage increase in quantity demanded for
each 1% rise in income

%QD
EY 
%Income

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 Income Elasticity of Demand
• Differences
– Price elasticity of Demand
• sensitivity of demand to price as we move
along a demand curve
• virtually always negative
– Income elasticity of Demand
• relative shift in demand curve
• positive or negative

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 Cross-Price Elasticity of Demand
• Percentage change in quantity demanded
of one good (x) caused by a % change in
the price of another good (y)

%QDx
E xy 
%Py
• Substitutes: Exy >0
• Complements: Exy <0
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