EL ASTICIT Y OF

DEMAND

BY – AM S
ELASTICITY OF DEMAND
• Elasticity of demand measures the responsiveness of
the quantity demand due to change in price of the
commodity.
• Elasticity of demand is a measure of the relative
change in quantity purchased of a good in response
to a relative change in its price. It is thus, rate at
which the demand changes to the given change in
prices.
METHODS OF MEASURING ELASTICITY OF
DEMAND
Methods of
measuring
price elasticity
of
demand

Percentage Total Outlay Geometric

OR OR OR
Proportionate Total Point
Expenditure Method
Method
Method
PROPORTIONATE METHOD
• Ed = Change in Qty Dem. Price Δ𝑄 𝑃
Change in price Qty Dem ×
Δ𝑃 𝑄

Change in Qty Demand ( Q)

Change in Price ( P)
Initial Price (P)
Initial Quantity (Q)
PERCENTAGE METHOD

0ൗ 𝛥𝑄
ED= 0
0ൗ Δ𝑃
0

𝟎ൗ 𝜟𝑸 = 𝜟𝑸
𝟎 × 𝟏𝟎𝟎
𝑸

𝟎ൗ 𝜟𝑷 = 𝜟𝑷
𝟎 × 𝟏𝟎𝟎
𝑷
EXPENDITURE METHOD

• According to this method Elasticity of demand

can be measured by considering the change in
price and subsequently change in total qty of
goods purchased and the total amt spent on it

• FORMULA

Price Quantity = Total Expenditure

COMPUTING THE PRICE ELASTICITY OF
DEMAND
❑ The price elasticity of demand is computed as the percentage
change in the quantity demanded divided by the percentage
change in price.

Percentage Change in Quantity Demanded

Price Elasticity of Demand =
Percentage Change in Price
❑ Example: If the price of an ice cream cone increases from
Rs.2.00 to Rs. 2.20 and the amount you buy falls from 10 to 8
cones then your elasticity of demand would be calculated as:

(1 0 8 )
100
10 2 0 p ercen t
2
( 2 .2 0 2 .0 0 ) 1 0 p ercen t
100
2 .0 0
GEOMETRIC METHOD

FORMULA = LOWER SEGMENT

UPPER SEGMENT
FACTORS WHICH AFFECT PRICE
ELASTICITY OF DEMAND OF A GOOD
• Nature of Goods
Elasticity of demand of a good depends on whether a good is a necessary good or a luxury good.
Higher the necessity lesser the elasticity. Hence, in case of necessary goods Ed< 1. The elasticity of
demand of luxury good is greater than one i.e. Ed>1.
• Availability of Substitutes
More the substitutes of a good, higher the elasticity because even a small rise in price of the good will
induce the buyers to go for its substitutes
• For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-versa. So, in case
of higher no. of substitutes, Ed >1.
• On the other hand, commodities with few or no substitutes like wheat and salt have less price
elasticity of demand, i.e. Ed <1
• Postponement of Consumption
The demand for those goods whose consumption can be postponed for sometime is said to be elastic.
On the other hand if the commodities cannot be postponed and need to be fulfilled, demand for them
is inelastic. For example, medicine for a patient, books for a student and milk for a child cannot be
postponed. They are to be satisfied first. That is why the demand for those commodities is inelastic.
• Number of Uses
If the commodity has several uses, than its demand will be elastic, i.e. Ed>1 like milk, electricity etc. All
the uses are not of same importance. As the price of such goods rise, people use these goods for urgent
use only. Hence demand becomes elastic.

• As the price of these goods fall, they are put to certain less urgent uses. For example, electricity can
be used for a number of purposes like heating, lighting, cooking, cooling etc. If the electricity bill
increases people utilise electricity for certain important purpose and if the bill falls people use
electricity for a number of other unimportant uses. Thus, the demand for electricity is elastic.
• Income Level
Elasticity of demand for any commodity is generally less for higher income level groups in comparison to
people with low income. It happens because rich people are not influenced much by changes in the price
of goods. But, poor people are highly affected by increase or decrease in the price of goods. As a result,
demand for lower income group is highly elastic.
• Share in Total Expenditure
Proportion of consumer’s income that is spent on a commodity also influences the elasticity ofdemand
for it. Higher the proportion of income spent on the commodity, more is the elasticity of demand for it
and vice-versa.
Demand for goods like salt, needle, soap, match box, etc. tends to be inelastic as consumers spend a
small proportion of their income on such goods. When prices of such goods change, consumers
continue to purchase almost the same quantity of these goods. However, if the proportion of income
spent on a commodity is large, then demand for such a commodity will be elastic.
• Habits
If a consumer is habituated of a commodity, he continues to purchase it even if its price rises. Alcohol,
tobacco, cigarettes, etc. are some examples of habit forming commodities.

• Time Period
Elasticity of demand varies directly with time period. Demand is generally inelastic in the short period
and elastic in long time period.
• It happens because when the price of a commodity changes, consumers find it difficult to change their
habits in the short period. However, demand is more elastic in long time period as it is comparatively
easier to shift to other substitutes, if the price of the given commodity rises
DEGREES OF ELASTICITY OF DEMAND
❑ When consumers are relatively responsive to a price change, we say
that demand is elastic.

❑ When the change in quantity demanded by consumers is relatively small

in response to a price change, we say that demand is inelastic

❑ Price elasticity of demand is the percentage change in quantity

demanded given a percent change in the price.

❑ It is a measure of how much the quantity demanded of a good

responds to a change in the price of that good
DEGREES /RANGES OF ELASTICITY
Inelastic Demand
❑ Quantity demanded does not respond strongly to price changes.
❑ Price elasticity of demand is less than one.

Elastic Demand
❑ Quantity demanded responds strongly to changes in price.
❑ Price elasticity of demand is greater than one.

Perfectly Inelastic
❑ Quantity demanded does not respond to price changes.

Perfectly Elastic
❑ Quantity demanded changes infinitely with any change in price.

Unit Elastic
❑ Quantity demanded changes by the same percentage as the price.
A VARIETY OF DEMAND CURVES
Perfectly Inelastic Demand - Elasticity equals 0

Price 1. An increase in price...

10 2. ...leaves the quantity

demanded unchanged.
5

100 Quantity

Inelastic Demand- Elasticity is less than 1

Price 1. A 22 % increase in price...

5
2. ...leaves 11% decrease in
Quantity.
4

Qu antity
90 100
A VARIETY OF DEMAND CURVES
Unit Elastic Demand - Elasticity equals 1
Price 1. A 22 % increase in price...

5
2. ...leaves 22% decrease in
Quantity.
4

78 100 Quantity

Elastic Demand - - Elasticity is greater than 1

Price 1. A 22 % increase in price...

5
2. ...leaves 67% decrease in
Quantity.
4

33 100 Quantity
PERFECTLY ELASTIC DEMAND - ELASTICITY EQUALS INFINITY

Price
1 . At any price
above 4, quantity
demanded is zero.

4 Demand

2. At exactly 4,
consumers will
buy any quantity.

3. At a price below 4, Quantity

quantity demanded is
infinite.
INCOME ELASTICITY OF DEMAND
❑ Income elasticity of demand measures how m uch the quantity demanded of a
good responds to a change in consumers’ income.
❑ It is computed as the percentage change in the quantity demanded
divided by the percentage change in income.

Percentage Change
Income Elasticity in Quantity Demanded
= Percentage Change
of Demand
in Income
❑ Goods consumers regard as necessities tend to be income inelastic.
❑ Examples include food, fuel, clothing, utilities, and medical services.
❑ Goods consumers regard as luxuries tend to be income elastic.
Examples include sports cars, furs, and expensive foods.
DEGREES OF ELASTICITY OF DEMAND

• Perfectly Elastic Demand Ed=

• Perfectly InElastic Demand Ed= 0

• Unitary Elastic Demand Ed= 1

• Relatively Elastic Demand Ed >1

• Relatively InElastic Demand Ed<1

PERFECTLY ELASTIC DEMAND:
• Perfectly elastic demand is said to
happen when price remains constant
and that leads to an infinite change in
quantity demanded. In such a case the
shape of the demand curve will be
horizontal straight line.
PERFECTLY INELASTIC DEMAND
• Perfectly inelastic demand is opposite
to perfectly elastic demand. Under the
perfectly inelastic demand, irrespective
of any rise or fall in price of a
commodity, the quantity demanded
remains the same.The elasticity of
demand in this case will be equal to
zero (ed = 0)
UNITARY ELASTIC DEMAND
• The demand is said to be unitary elastic
when a given proportionate change in
the price level brings about an equal
proportionate change in quantity
demanded. The numerical value of
unitary elastic demand is exactly one i.e.
Marshall calls it unit elastic
RELATIVELY ELASTIC DEMAND
• Relatively elastic demand refers to a
situation in which a small change in price
leads to a big change in quantity demanded.
In such a case elasticity of demand is said to
be more than one (ed > 1).
RELATIVELY INELASTIC DEMAND
• Under the relatively inelastic demand, a given percentage change in price produces a relatively less
percentage change in quantity demanded. In such a case elasticity of demand is said to be less than
one (ed < 1)
ASSIGNMENT
• The following questions are for 1 mark each:
• What is meant by price elasticity of demand?
• Draw a demand curve with unitary price elasticity.
• When is the demand for a commodity called perfectly elastic?
• What is elastic demand?
• What is inelastic demand?
• Draw a perfectly inelastic demand curve.
• What will be the value of elasticity of demand if the demand curve is a vertical line parallel to the y-axis?
• A 10% increase in price leads to a 20% fall in quantity demanded. What is the value of price elasticity of
demand?
• When is demand unitary elastic?
• State one factor that affects the magnitude of price elasticity of demand.
• What is the value of elasticity of demand on a rectangular hyperbola demand curve?
• An increase in price leads to a fall in the expenditure on the commodity. What can be said about the price
elasticity of demand of the commodity?
• A decrease in price leads to a fall in the expenditure on the commodity. What can be said about the price
elasticity of demand of the commodity?
THE FOLLOWING QUESTIONS ARE FOR 3 / 4
MARKS EACH:
• Draw demand curves showing price elasticity of demand equal to
– unity (ii) infinity (iii) zero.
• Explain with the help of a diagram the geometric method of measuring the price elasticity of demand.
• Explain how the availability of close substitutes for a good affects the price elasticity of demand of that
good.
• Explain how the nature of a good affects the price elasticity of demand.
• If two negatively sloped straight line demand curves intersect each other, will price elasticity of demand be
equal at the point of intersection? Justify.
• Is the elasticity of demand equal at all points on a straight line demand curve? Give reasons.
• A consumer buys 40 units of a good at a price of Rs. 4/- per unit. When price rises to Rs. 5/- per unit he
buys 30 units. Comment on the price elasticity of demand by the total expenditure method.
• A consumer buys 2,000 units of a good at a price of Rs. 10/- per unit. When the price falls he buys 2,500
units. If price elasticity of demand is -2, what is the new price?
• A consumer buys 10 units of a good at a price of Rs. 4/- per unit. When price falls by Rs 1/- per unit, he
buys 20 units. Calculate the price elasticity of demand.
• At a price of Rs. 20/- per unit the quantity demanded of a commodity is 400 units. If the price falls by 10%, its
quantity demanded rises by 90 units. Calculate its price elasticity of demand.
• A consumer spends Rs. 250/- on a good when its price is Rs. 10/- per unit. When the price rises to Rs. 11/- per
unit, he spends Rs. 240/-. Calculate the price elasticity by the percentage method.
• As a result of a 10% fall in the price of a good, its demand rises from 200 to 240 units. Find out the price
elasticity of demand. Is its demand elastic?
• Price elasticity of demand of a good is (-)2. 100 units of this good are bought at a price of Rs. 10/- a unit. How
many units will be bought at a price of Rs 11/- per unit?
• The slope of a demand curve is -0.4, calculate is the elasticity of demand, if at an initial price of Rs. 5/- per unit,
the initial quantity demanded was 20 units of the commodity.
• Price elasticity of demand of good X is twice that of good Y. At a price of Rs. 4/- per unit, 10 units of good X are
bought. When price of good X increases to Rs. 5/- per unit, demand falls to 5 units. Calculate price elasticity of
demand for good Y. What can be said about the elasticity of goods X and Y?
THE FOLLOWING QUESTIONS ARE FOR 6
MARKS EACH:
• Explain 3 factors affecting elasticity of demand.
• Explain the relationship between the expenditure incurred on a commodity and its price
elasticity of demand.
THE FOLLOWING QUESTIONS ARE FOR
1 MARK EACH:
1. What is meant by price elasticity of demand?
2. Draw a demand curve with unitary price elasticity.
3. When is the demand for a commodity called perfectly elastic?
4. What is elastic demand?
5. What is inelastic demand?
6. Draw a perfectly inelastic demand curve.
7. What will be the value of elasticity of demand if the demand curve is a vertical line parallel to the y-axis?
8. A 10% increase in price leads to a 20% fall in quantity demanded. What is the value of price elasticity of
demand?
9. When is demand unitary elastic?
10. State one factor that affects the magnitude of price elasticity of demand.
11. What is the value of elasticity of demand on a rectangular hyperbola demand curve?
12. An increase in price leads to a fall in the expenditure on the commodity. What can be said about the price
elasticity of demand of the commodity?
13. A decrease in price leads to a fall in the expenditure on the commodity. What can be said about the price
elasticity of demand of the commodity?
THE FOLLOWING QUESTIONS ARE FOR
3 / 4 MARKS EACH:
1. Draw demand curves showing price elasticity of demand equal to
(i) unity (ii) infinity (iii) zero.
2. Explain with the help of a diagram the geometric method of measuring the price elasticity of
demand.
3. Explain how the availability of close substitutes for a good affects the price elasticity of demand
of that good.
4. Explain how the nature of a good affects the price elasticity of demand.
5. If two negatively sloped straight line demand curves intersect each other, will price elasticity of
demand be equal at the point of intersection? Justify.
6. Is the elasticity of demand equal at all points on a straight line demand curve? Give reasons.
THE FOLLOWING QUESTIONS ARE FOR
3 / 4 MARKS EACH:
1. A consumer buys 40 units of a good at a price of Rs. 4/- per unit. When price rises to Rs. 5/- per unit he
buys 30 units. Comment on the price elasticity of demand by the total expenditure method.
2. A consumer buys 2,000 units of a good at a price of Rs. 10/- per unit. When the price falls he buys 2,500
units. If price elasticity of demand is -2, what is the new price?
3. A consumer buys 10 units of a good at a price of Rs. 4/- per unit. When price falls by Rs 1/- per unit, he buys
20 units. Calculate the price elasticity of demand.
4. At a price of Rs. 20/- per unit the quantity demanded of a commodity is 400 units. If the price falls by 10%,
its quantity demanded rises by 90 units. Calculate its price elasticity of demand.
5. A consumer spends Rs. 250/- on a good when its price is Rs. 10/- per unit. When the price rises to Rs. 11/-
per unit, he spends Rs. 240/-. Calculate the price elasticity by the percentage method.
6. As a result of a 10% fall in the price of a good, its demand rises from 200 to 240 units. Find out the price
elasticity of demand. Is its demand elastic?
THE FOLLOWING QUESTIONS ARE FOR
3 / 4 MARKS EACH:
1. Price elasticity of demand of a good is (-)2. 100 units of this good are bought at a price of
Rs. 10/- a unit. How many units will be bought at a price of Rs 11/- per unit?
2. The slope of a demand curve is -0.4, calculate is the elasticity of demand, if at an initial price
of Rs. 5/- per unit, the initial quantity demanded was 20 units of the commodity.
3. Price elasticity of demand of good X is twice that of good Y. At a price of Rs. 4/- per unit, 10
units of good X are bought. When price of good X increases to Rs. 5/- per unit, demand falls
to 5 units. Calculate price elasticity of demand for good Y. What can be said about the
elasticity of goods X and Y?
THE FOLLOWING QUESTIONS ARE FOR
6 MARKS EACH:
1. Explain 3 factors affecting elasticity of demand.
2. Explain the relationship between the expenditure incurred on a commodity and its price
elasticity of demand.
3. State and explain Law of demand with the help of a demand schedule and a curve.State its
assumptions and exceptions.
4. The consumer’s optimum bundle is located at the point of tangency between the budget
cone and an indifference curve.Explain.
5. Explain five factors determining price elasticity of demand.
THE FOLLOWING QUESTIONS ARE FOR
6 MARKS EACH:
1. Explain with the help of diagrams the effect of following changes on the demand of a
commodity.
(i) A fall in the income of its buyer. (ii)A rise in the income of its buyer.
2. (i) When price of a god falls from Rs 5 to Rs 3 per unit its demand increases by 40%.
Calculate its price elasticity of demand.
(ii) At the price of Rs 4 per unit ,a consumer buys 50 units of good.Price Ed is -2.How many units
will the consumer buy at Rs 3 per unit. (3+3=6 Marks)
THANK YOU
REGARDS – AM S