ELASTICITY OF

DEMAND &
SUPPLY
Introduction

■ Elasticity of demand refers to the degree of responsiveness of quantity demanded of a

commodity to a change in any of its determinants
■ Elasticity of demand can be of three types:

Price Income cross

elasticit elasticity elasticity
y
 PRICE ELASTICITY OF DEMAND
DEFINITION:

Measures the sensitivity/responsiveness of the quantity demanded

due to a change in its price.

FORMULA:

d = %  Quantity Demanded
%  Price
Classification of Price Elasticity of
Demand
■ Perfectly inelastic: when quantity demanded of a commodity does not respond to a
change in its price
■ Perfectly elastic: when consumers are prepared to purchase all that they can get at a
particular price but nothing at a slightly higher price
■ Unitary elastic: when a given percentage change in the price of a commodity causes an
equivalent percentage change in the quantity demanded
■ Elastic: when the percentage change in the quantity demanded of a commodity exceeds
the percentage change in its price
■ Inelastic: when the percentage change in the quantity demanded of a commodity is less
than the percentage change in its price
Types of elasticity Numerical value of elasticity Description

Quantity demanded doesn’t

Perfectly inelastic change as price changes

Quantity demanded changes by a

smaller percentage than change
Inelastic in price

Quantity demanded changes

exactly at the same rate as
Unitary Elastic change in price

Quantity demanded changes by a

larger percentage than change in
Elastic price

Consumers are prepared to buy

Perfectly elastic all they can get at some price but
Perfectly elastic non at all at slightly higher price
Methods of measurement of price
elasticity of demand
■ The following points highlight the top four methods used for measuring elasticity of
demand. The methods are:-
1. The Percentage Method 
2. 2. The Point Method 
3. 3. The Arc Method
4. 4. Total Outlay Method.
1) The Percentage Method:
■ The price elasticity of demand is measured by its coefficient (Ep). This coefficient (Ep)
measures the percentage change in the quantity of a commodity demanded resulting
from a given percentage change in its price.
■ Thus

■ Where q refers to quantity demanded, p to price and Δ to change. If EP>1, demand is

elastic. If EP< 1, demand is inelastic, and Ep= 1, demand is unitary elastic
Calculate Elasticity of demand when consumer shifts from combination D to
G using percentage method.
■
2. The
  Point Method:
■ With the help of the point method, it is easy to point out elasticity at any point along a
demand curve
■ = Lower Segment on demand curve
Upper Segment on demand curve
3. The Arc Method:
■ When elasticity is measured between two
points on the same de­mand curve, it is
known as arc elasticity.
■ “Arc elasticity is a measure of the
average responsiveness to price change
exhibited by a demand curve over some
finite stretch of the curve.”
■ On the basis of this formula, we can
measure arc elasticity of demand when
there is a movement either from point P to
M or from M to P.
■ From P to M at point P, p1 =8, q1 = 10, and
at point M, p2 = 6, q2 = 12. Calculate
elasticity using arc method
4) The Total Outlay Method:
■ Total outlay / total revenue / total ex­penditure method measures elasticity by comparing
the total expenditure of a purchaser both before and after the change in price, it can be
known whether his demand for a good is elastic, unity or less elastic.
■ Total outlay is price multiplied by the quantity of a good purchased:
Total Outlay = Price x Quantity Demanded
a) Elastic Demand: when a fall in the price of the commodity results in increase in total
expenditure and a rise in the price leads to decrease in total expenditure , elasticity of demand
will be greater than one
Price Quantity Total expenditure

60 10 600

50 13 650
b) Inelastic Demand : When a fall in the price of a commodity reduces total expenditure
and a rise in its price increases total expenditure, price elasticity will be less than one.

Price Quantity Total expenditure

60 10 600

50 11 550

c) Unitary elastic: when total expenditure does not change in the price of the commodity,
the elasticity of demand is equal to unitary.
Price Quantity Total expenditure
60 10 600
50 12 600
 Types of price elasticity of demand

Change in price
Unitary elastic Inelastic Elastic

Falls in price TE remains TE falls TE rises

constant

Rise in price TE remains TE rises TE falls

constant
Income Elasticity of Demand
DEFINITION:
Measures the sensitivity/responsiveness of the
quantity demanded due to a change in income.

Formula:

Y = %  Quantity Demanded
%  Income
Determinants of Price Elasticity of
Demand
■ Availability of Substitute
■ Proportion of consumer income spend
■ Number of uses of a commodity
■ Time factor
■ Possibility of postponement of consumption
QUESTIONS

■ If an increase in the price of a pen from Rs 50 to Rs 60 results in fall in demand from

1000 units to 800 units. Calculate its price elasticity of demand by percentage method
■ Suppose the price of a commodity falls from Rs6 to Rs4 per unit and to this quantity
demanded of the commodity increases from 80 units to 120 units. Find price elasticity of
demand using arc/ mid-point method.
■ Suppose a seller of a textile cloth wants to lower the price of its cloth from Rs. 150 per
metre to Rs. 14.5 per metre. If its present sales are 2000 metre per month and further it is
estimated that price elasticity of demand is 0.7. Find out the new quantity demanded.
Price A’s demand B’s demand C’s demand

5 80 40 20

10 40 20 10

15 20 10 5

20 10 5 0

25 0 0 0

Find:
a) market demand curve and schedule
b) Elasticity of demand when price falls from Rs.15 to Rs.10
c) ) Elasticity of demand when price increases from Rs.10 to Rs.15
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.
Price Elasticity of Supply

■ It
  measures the degree of responsiveness of the quantity supplied of a commodity to a
change in the price of the commodity price
Types of Price Elasticity

■ Perfectly elastic supply

■ Perfectly inelastic supply
■ Unitary elastic supply
■ Elastic supply
■ Inelastic supply
Measurement of elasticity of supply

■ Percentage method
■ Mid-point method
■ Geometric method
Determinants of Elasticity of Supply
Market Equilibrium
■ A market equilibrium is a situation
when quantity demanded and quantity
supplied are equal and there is no
tendency for price or quantity to
change.
■ QDD = QSS
Equilibrium Price & Output
Changes in Demand
Changes in Supply
Changes in Both Supply & Demand
Changes in Both Supply & Demand
Changes in Both Supply & Demand
Questions
■
1.   From a demand function =2000-30P and a supply function , find out the equilibrium
price, quantity. Also, gap between demand and supply at P=Rs. 20 and P= Rs. 50
2. Popeye’s income declines, and as a result, he buys more spinach. Is spinach an inferior
or a normal good? What happens to Popeye’s demand curve for spinach?
3. Define the equilibrium of a market. Describe the forces that move a market toward its
equilibrium.
4. Beer and pizza are complements because they are often enjoyed together. When the
price of beer rises, what happens to the supply, demand, quantity supplied, quantity
demanded, and the price in the market for pizza?.
5. Consider the market for mini-vans. For each of the events listed here, identify which of
the determinants of demand or supply are affected. Also indicate whether demand or
supply increases or decreases. Then draw a diagram to show the effect on the price and
quantity of mini-vans.
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. A stock-market crash lowers people’s wealth

6. Market research has revealed the following information about the market for chocolate
bars: The demand schedule can be represented by the equation QD = 1,600 – 300P,
where QD is the quantity demanded and P is the price. The supply schedule can be
represented by the equation QS = 1,400 + 700P, where QS is the quantity supplied.
Calculate the equilibrium price and quantity in the market for chocolate bars.
■ Suppose that the price of basketball tickets at your college is determined by market
forces.
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