ELASTICITY OF DEMAND

INTRODUCTION
According to ‘Law of demand’, quantity demanded
increases with the fall in price and decreases with
the price.
It does not specify the magnitude, amount or the
extent by which the quantity demanded changes
with a change in price
Therefore the concept of ‘elasticity of demand was
developed to measure the magnitude of change in
the quantity demanded.
CONCEPT OF ELASTICITY OF DEMAND
Developed by Prof. Marshall in his book ‘ principles of
economics’.
Elasticity of demand refers to the percentage change
in demand for a commodity with respect to percentage
change in any of the factors affecting demand for that
commodity.
Elasticity of demand=
percentage change in dd for X
percentage change in the factor affecting the dd for X
Determinants of demand:
Price of the given commodity
Price of related goods
Income of the consumer

Three dimensions of elasticity of demand:

Price elasticity
Cross elasticity of demand
Income elasticity of demand
PRICE ELASTICITY OF DEMAND
Price elasticity of demand means the degree of
responsiveness of demand for a commodity with
reference to change in the price of such commodity.
It establishes a quantitative relationship between
demand and price.
Higher the numerical value of elasticity, larger is the
effect of a price change.
For certain goods, a change in price leads to a great
change in demand, some cases, there is a small change
in demand.
PERCENTAGE METHOD
(Prof. Marshall.)

Also known as Flux method or Proportionate

method or Mathematical method.
Acc to this method , elasticity is measured as the
ratio of percentage in the quantity demanded to
percentage change in the price.
elasticity of demand =
% change in quantity demanded
% change in Price
PROPORTIONATE METHOD
This method can also be converted into proportionate
method. Putting the values of 123 and 4 in the formula
of percentage method, we get
Example: 1
Find the price elasticity of demand, if price of a
commodity rises by 40% and accordingly its demand
falls by 80% what is the Price elasticity of demand?
Solution;
PeD = % change in quantity demanded
% change in Price
= -80%
+ 40%
PeD = -2 or + 2

( note: - sign for fall , + sign for rise)

Example: 2
A 5% fall in price of x causes 10% rise in demand for x.
A 20%rise in price of Y leads to5% fall in demand for y.
calculate PeD for x and y.
PeD = % change in quantity demanded /
% change in Price

PeD of x = +10%/ -5%

= -2
PeD of y = -5%/ +20%
= -0.25
PeD = % change in quantity demanded /
% change in Price
PeD of x = +10%/ -5%
= -2
PeD of y = -5%/ +20%
= -0.25
Example 3:
If price of a commodity rises from rs 8 to rs 10 per unit
and its demand falls 50% What is ed?
Example 3:
If price of a commodity rises from rs 8 to rs 10 per unit and its
demand falls 50% What is ed?
PeD = % change in quantity demanded
% change in Price
% change in quantity demanded = 50%
% change in Price=?
P = p1-p
=10-8
=2
P = P /P X 100
=2/8 X 100
=25%
PeD= -50%/25%
=2
Example 4
A consumer buys 10 units of a commodity at Rs 5 per
unit. He buys 12 units, when the price falls to Rs4 per
unit. Calculate PeD.
Example 4
A consumer buys 10 units of a commodity at Rs 5 per
unit. He buys 12 units, when the price falls to Rs4 per
unit. Calculate PeD.
Q= Q1-Q P= P1 -P
=10-12 =5-4
=2 =1
PeD= Q/ P X P/Q
= 2/-1 X 5/10
=-1
Percentage method
Elasticity of demand by percentage method
When both price and quantity are given
When elasticity of demand is given
When total expenditure is given
Lets work out…..
1. As a result of a 5% fall in the price of a good, its demand
rises by 12%. Find out the price elasticity of demand.
2. Find out the price elasticity of demand when the price fall
by 80%, the quantity demanded of it increases by 100%.
3. A 3% fall in the price of X to 9%rise in its demand. A
2% rise in the price if Y leads to a 6%fall in the demand
of y. calculate the elasticity of demand of X and Y.
4. At a price of 20 per unit, the quantity demanded of a
commodity is 300 units. If the price falls by 10%, its quantity
demanded rises by 60 units. Calculate the price elasticity.
5. As a result of 10% rise in the price of a good, its
demand falls from 100 units to 90 units. Find out the
price elasticity of demand.
When price and quantity are given
6. The quantity demanded increases from 100 units to
200 units when the price decrease from Rs 12 to Rs 10.
calculate the elasticity of demand.
7. As price of a commodity increases from Rs 4 per
unit to Rs 5 per unit, demand falls from 20 units to 10
units. Find out the elasticity of demand.
8. A consumer buys 10 units of a commodity at Rs
5 per unit. He buys 12 units, when the price falls to
Rs 4 per unit. Calculate price elasticity of demand.
9.The demand for a good falls to 240 units in response
to rise in price by Rs 2. if the original demand was 300
units at a price of Rs 20, calculate price elasticity of
demand
10. The following are the demand schedule of commodities A
and B, which one of them has more elastic demand?
Commodity A Commodity B
price Quantity Price Quantity
demanded demanded
10 100 20 100
12 90 18 110
When elasticity of demand is
given
11. The coefficient of price elasticity of demand for a commodity is 0.2.
when price was Rs.10 per unit, the quantity demanded was 40 units. If
the price falls to 5 per unit, how much will be its quantity demanded?
12. When the price of good x is 5, the consumer buys 100 units of good
X, at what price would he be willing to purchase 140 units of good X?
The price elasticity of demand for good is 2.
13. A consumer buys 30 units of a good at a price of Rs 10. Price
elasticity of demand is -1 . How many units the consumer will
buy at a price of 9 per unit. Calculate.
14. The elasticity of demand is zero. If the demand is 2 kg at a price of
Rs 5 per kg, calculate the demand, if the price rises to Rs 7.50 per kg?
15. When the price of the commodity falls by re 1 per unit, its quantity
demanded rises by 3 units. Its price elasticity od demand is -2.
calculate its original quantity demanded if the price before the change
was Rs 10 per unit.
When total expenditure is
given
16. calculate
Price Total expenditure Quantity demanded
(Total expenditure /Price)

5 500
6 420
17. As the price of a commodity falls from Rs 7 per kg
to Rs 5 per Kg, the total expenditure on it increases
from Rs 3500 to Rs 6250. find out the elasticity of
demand.
18.A customer spends Rs 200 on a commodity and
bought 20 units of it. When its price changed, he spent
Rs 300 and bought15 units. Find out the elasticity of
demand.
19. A consumer spends Rs 80 0n a commodity at a
price of Re 1 per unit and Rs 100 at a price of Rs2 per
unit. What is the price elastic of demand?
20. On the basis of information given below, compare
price elasticities of Goods A and B.
Good A Good B
Price per unit Total expenditure Price per unit Total expenditure
(Rs) (Rs) (Rs) (Rs)

4 20 3 15
5 15 4 24
Assignment:
3. A 3% fall in the price of X to 9%rise in its demand. A
2%risein the price if Y leads to a 6%fall in the demand
of y. calculate the elasticity of demand of X and Y.
5. As a result of 10% rise in the price of a good, its
demand falls from 100 units to90 units. Find out the
price elasticity of demand.
8. A consumer buys 10 units of a commodity at Rs 5
per unit. He buys12 units, when the price falls to Rs 4
per unit. Calculate price elasticity of demand.
13. A consumer buys 30 units of a good at a price of
Rs 10. Price elasticity of demand is -1 . How many
units the consumer will buy at a price of 9 per
unit. Calculate.
DEGREES OF ELASTICITY OF DEMAND
When the prices of different commodities change, the
quantity demanded of each commodity reacts in a
different manner.
The degree of responsiveness of quantity demanded to
a change in price may differ and hence, elasticity of
demand could also differ.
Price elasticity of demand can be expressed in terms of
numerical value, which ranges from zero to infinity.
DEGREES OF ELASTICITY OF DEMAND
1. Perfectly Elastic Demand
2. Perfectly Inelastic Demand
3. Highly Elastic Demand
4. Less Elastic Demand
5. Unitary Elastic Demand
Perfectly Elastic Demand
It refers to the situation when demand of a commodity
is infinite at the prevailing price.
A slightest increase in the price by the seller causes the
quantity demanded of the commodity to fall to zero.
Ed= infinity
Demand curve is parallel to the X axis.
Price( Rs) Demand(units)
30 100
30 200
30 300
Perfectly elastic demand
Perfectly Inelastic Demand
When there is no change in demand with change in
price, then demand for such a commodity is said to be
perfectly inelastic.
Ed= 0
Demand curve is vertical to the straight line.
This situation exists in case of demand for basic
necessities. Ex: medicines.
Price( Rs) Demand(units)

10 100
20 100
30 100
Perfectly inelastic demand
. Highly Elastic Demand
When the percentage change in quantity demanded is
more than percentage change in price, then demand
for such a commodity is said to be highly elastic.
Ed=>1
Demand curve is flatter and its slope is more incline
towards X axis.
This exits in case of luxury goods.
Price(Rs) Demand(units)
20 100
10 200
Highly elastic demand
Less Elastic Demand
When the percentage change in quantity demanded is
less than percentage change in price, then demand for
such a commodity is said to be less elastic or inelastic.
Ed<1
The demand curve is steeper and its slope inclined
towards y axis.
This exists in case of necessities like salt ,vegetables,
etc.
Price(Rs) Demand (units)
20 100
10 120
Less elastic demand
Unitary Elastic Demand
When the percentage change in the quantity
demanded is equal to percentage change in price, then
the demand for such a commodity is said to be unitary
elastic.
Ed= 1
Demand curve is the rectangular hyperbola
This exists in case of goods like scooter refrigerator etc
Price(Rs) Demand(Units)
20 100
10 150
Unitary elastic demand
Flatter the curve more is the elasticity.
When 2 demand curve intersect each other, then the
flatter curve is more elastic at the point of intersection.
Coefficients of Ed
FACTORS AFFECTING PRICE ELASTICITY
OF DEMAND
Nature of the commodity
Availability of substitutes
Income level
Level of price
Postponement of consumption
Number of uses
Share in total expenditure
Time period
Habits