Elasticity of Demand

Elasticity is a measure of the sensitivity or

responsiveness of quantity demanded or quantity
supplied to changes in price (or other factors).
Elasticity measures the way one variable
(dependent variable) responds to changes in
other variables (independent variables). We
express the dependent variable (Y) as a function
of the independent variables (Xi) as in the
following function:
• In this function, Y is given as a function of n
variables. As any one of these variables (Xi)
changes, there will be consequent change in
the value of Y.
• The formula to determine the responsiveness
of Y to changes in the Xi can be expressed as
• Depending on the variables involved, three measures of
elasticity of demand could be considered:
• Price elasticity of demand measures the responsiveness of
quantity demanded to changes in output price, ceteris
paribus.
• Cross elasticity of demand measures the responsiveness of
quantity demanded to changes in the price of other goods,
ceteris paribus.
• Income elasticity of demand measures the responsiveness
of quantity demanded to changes in consumers’ income,
ceteris paribus.
 E = % change in Quantity Demand/ % change in Price
Where, Q is change in quantity and P is change in price.
• If a good has an elasticity of demand greater than 1 in absolute
value, it is said to have an elastic demand. Such values imply
that a given percentage fall in price causes more than
proportionate rise in price.
• With most demand curves, the elasticity coefficient varies along
the curve. In this regard, a good example is a linear demand
curve. The coefficients of elasticity of such demand curves range
from perfectly elastic (at the intercept of y-axis) to perfectly
inelastic (at the x-axis intercept).
• Depending on the magnitude (size) of the elasticity coefficient,
five types of price elasticity could be traced along a linear
demand curve.
• Numerical coefficients Responsiveness of quantity demanded to changes
in price Terminology

• e=0 None Perfectly inelastic

• 0<e<1
• Quantity demanded changes by a smaller percentage than the percentage change in price
• Inelastic
• e=1
• Quantity demanded changes by a percentage equal to the percentage change in price
• Unit elastic
• 1<e<
• Quantity demanded changes by larger percentage than the percentage change in price
• Elastic
• e=
• Quantity demanded goes to zero or to all that is available
• perfectly elastic