Theory of Demand

Elasticity of Demand
Changes in Quantity Demanded Versus Changes in Demand

In economic analysis, ‘changes in quantity demanded’ and ‘changes in

demand’ altogether have different meanings.

The changes in quantity demanded relates to the law of demand and it

has reference to ‘extension’ (enhancement) or ‘contraction’
(diminution) of demand, but the changes in demand is related to
‘increase’ or ‘decrease’ in demand pattern.
Changes in Quantity Demanded Versus Changes in Demand

Cont…

Changes in quantity demanded take place only in response to the own price of the
commodity, while changes in demand take place due to changes in non-price factors
such as income, taste & preference, price of related goods etc.
“Price demand” is an example of changes in quantity demanded
and
“Income demand” and cross demand represent the case of changes in demand.

Price is the driving force in bringing changes in amount demanded, while non-price
factors are responsible for the changes in demand.
Changes in Quantity Demanded Versus Changes in Demand

Cont…

In graphical depiction, “changes in quantity demanded” are shown by the movement

along the same demand curve. A downward movement from one point to another on
the same demand curve implies extension of demand, i.e., more quantity is demanded
at lower price.

Contrary to it, upward movement from one point to another on the same demand
curve implies contraction of demand, i.e., less quantity is demanded at higher price.
Changes in Quantity Demanded Versus Changes in Demand
Changes in Quantity Demanded Versus Changes in Demand

Cont…

Changes in demand (increase or decrease), is graphically depicted by shifting of the demand

curve. In case of an increase in demand, the demand curve is shifted to the right/ upward
and in case of decrease in demand, the demand curve is shifted to the left/ downward.
Increase in demand: Technically, it may be in the following two forms:
• Higher quantity at the same price,
• Same quantity at higher price
Similarly, decrease in demand may also be in following two forms:
• Lesser quantity at the same price.
• Same quantity at lower price.
Changes in Quantity Demanded Versus Changes in Demand
Law of Demand

Law of Demand states that if price of commodity increases quantity

demanded will falls and if price of commodity falls quantity will
increases.

Law of demand indicates only direction of change in quantity demanded

in response to change in price but ELASTICITY OF DEMAND states with
how much or to what extent the quantity demanded will change in
response to change in any determinants.
ELASTICITY - The Concept

• If price rises by 10% - what happens to demand?

• We know demand will fall.

• By more than 10% ?

• By less than 10% ?

• Elasticity measures the extent to which demand will change.

Meaning & Definition of Elasticity of Demand

Elasticity of Demand measures the extent to which quantity demanded

of a commodity increases or decreases in response to increase or
decrease in any of its quantitative determinants.

So, we have several types of elasticity of demand according to the source

of the change in the demand. For example, if the price is the source of the
change, we have the “price elasticity of demand”.

“The elasticity (or responsiveness) of demand in a market is great or small

according as the amount demanded increases much or little for a given
fall in price, and diminishes much or little for a given rise in price”.
– Dr. Marshall.
Price Elasticity of Demand

Price Elasticity of demand is a measurement of percentage change in

demand due to percentage change in own price of the commodity.

The price elasticity of Demand may be defined as the ratio of the relative
change in demand and price variables.

Ep = Percentage/Proportional Change in Quantity Demanded

Percentage/Proportional Change in Price
 EXAMPLES OF
PERFECTLY ELASTIC & PERFECTLY INELASTIC PRODUCTS.

The moment you raise your price even just a little, the quantity demanded will
decrease. Examples of perfectly elastic products are luxury products such as jewels,
gold, and high-end cars.

An example of perfectly inelastic demand would be a lifesaving drug that people will
pay any price to obtain. Even if the price of the drug would increase dramatically, the
quantity demanded would remain unchanged.
That’s all for Today, Guys…