CLASS XI

MICROECONOMICS
ELASTICITY OF DEMAND

A change in the price of a commodity affects its demand. We can find the
elasticity of demand, or the degree of responsiveness of demand by
comparing the percentage price changes with the quantities demanded.

Elasticity of demand is the responsiveness of the quantity demanded of

a commodity to changes in one of the variables on which demand
depends. In other words, it is the percentage change in quantity
demanded divided by the percentage in one of the variables on which
demand depends.”

One point to note is that unless otherwise mentioned, whenever

the elasticity of demand is mentioned, it implies price elasticity.
Price Elasticity

The price elasticity of demand is the response of the quantity demanded to change in
the price of a commodity. It is assumed that the consumer’s income, tastes, and prices
of all other goods are steady. It is measured as a percentage change in the quantity
demanded divided by the percentage change in price.

Price Elasticity of Demand (PED) = % change in quantity demanded

/ % change in price

Coefficient of Price Elasticity

Economists measure the price elasticity of demand (PED) in coefficients. In response
to the change in price, demand for a product can be elastic, perfectly elastic, inelastic,
or perfectly inelastic based on the coefficient.

Now, you need to understand that since price and demand move in opposite
directions, the coefficient will have a negative value. However, in most cases,
economists do not use the negative sign and focus on the coefficient itself. Let us
now look at the numerical values of the coefficient of PED.

Perfectly Inelastic (PED = 0)

When the price elasticity of demand or PED is zero, then the demand is perfectly
inelastic. That is, there is no change in the quantity demanded in response to the
change in price. The demand curve remains vertical. Demand is completely
unresponsive to the change in price.

Inelastic (PED is between 0 and 1)

If the percentage of change in demand is less than the percentage of change in price,
then the demand is inelastic. For instance, let us say that the price of a chocolate
increases from Rs.10 to Rs.20 and the associated demand decreases from ten
chocolates to five chocolates. So now the PED will be 50% divided by 100%, which
is 0.5. Hence, the demand here is inelastic.
 Elastic or Unit Elastic (PED = 1)
When the percentage of change in demand is the same as the percentage of change in
price, then the demand is unit elastic. For example, let us say that the price of a candy
drops from Rs.10 to Rs.5 and the demand increases from 10 candies to 15 candies.
Here, the percentage of change in demand is equal to the percentage of change in
price (50% divided by 50%, which is 1).

Perfectly Elastic (PED > 1)

If the percentage of change in demand is more than the percentage of change in price,
then the demand is perfectly elastic. For instance, if a 10% increase in price causes a
20% drop in demand, then the coefficient of PED is 3, which means that the demand
is perfectly elastic.
Factors that affect Price Elasticity
A change in price does not always lead to the same proportionate
change in demand. For example, a small change in price of AC
may affect its demand to a considerable extent/whereas, large
change in price of salt may not affect its demand. So, elasticity of
demand is different for different goods.

Now that you are familiar with the coefficient of the price elasticity of demand, let us
understand the factors that affect the elasticity of demand.

1. Nature of commodity:
Elasticity of demand of a commodity is influenced by its nature. A commodity for a
person may be a necessity, a comfort or a luxury.

i. When a commodity is a necessity like food grains, vegetables, medicines, etc., its
demand is generally inelastic as it is required for human survival and its demand
does not fluctuate much with change in price.

ii. When a commodity is a comfort like fan, refrigerator, etc., its demand is generally
elastic as consumer can postpone its consumption.

iii. When a commodity is a luxury like AC, DVD player, etc., its demand is generally
more elastic as compared to demand for comforts.

iv. The term ‘luxury’ is a relative term as any item (like AC), may be a luxury for a
poor person but a necessity for a rich person.
 2. Availability of substitutes:
Demand for a commodity with large number of substitutes will be more elastic. The
reason is that even a small rise in its prices 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.

Thus, availability of close substitutes makes the demand sensitive to change in the
prices. On the other hand, commodities with few or no substitutes like wheat and salt
have less price elasticity of demand.

3. Income Level:
Elasticity of demand for any commodity is generally less for higher income level
groups in comparison to people with low incomes. 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.

4. Level of price:
Level of price also affects the price elasticity of demand. Costly goods like laptop,
Plasma TV, etc. have highly elastic demand as their demand is very sensitive to
changes in their prices. However, demand for inexpensive goods like needle, match
box, etc. is inelastic as change in prices of such goods do not change their demand by
a considerable amount.

5. Postponement of Consumption:
Commodities like biscuits, soft drinks, etc. whose demand is not urgent, have highly
elastic demand as their consumption can be postponed in case of an increase in their
prices. However, commodities with urgent demand like life saving drugs, have
inelastic demand because of their immediate requirement.

6. Number of Uses:
If the commodity under consideration has several uses, then its demand will be
elastic. When price of such a commodity increases, then it is generally put to only
more urgent uses and, as a result, its demand falls. When the prices fall, then it is
used for satisfying even less urgent needs and demand rises.
For example, electricity is a multiple-use commodity. Fall in its price will result in
substantial increase in its demand, particularly in those uses (like AC, Heat
convector, etc.), where it was not employed formerly due to its high price. On the
other hand, a commodity with no or few alternative uses has less elastic demand.

7. Share in Total Expenditure:

Proportion of consumer’s income that is spent on a particular commodity also
influences the elasticity of demand for it. Greater 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.

8. Time Period:
Price elasticity of demand is always related to a period of time. It can be a day, a
week, a month, a year or a period of several years. Elasticity of demand varies
directly with the time period. Demand is generally inelastic in the short period.

It happens because consumers find it difficult to change their habits, in the short
period, in order to respond to a change in the price of the given commodity.
However, demand is more elastic in long rim as it is comparatively easier to shift to
other substitutes, if the price of the given commodity rises.

9. Habits:
Commodities, which have become habitual necessities for the consumers, have less
elastic demand. It happens because such a commodity becomes a necessity for the
consumer and he continues to purchase it even if its price rises. Alcohol, tobacco,
cigarettes, etc. are some examples of habit forming commodities.

Finally it can be concluded that elasticity of demand for a commodity is affected by

number of factors. However, it is difficult to say, which particular factor or
combination of factors determines the elasticity. It all depends upon circumstances
of each case.
NUMERICALS-

1. As the price of peanut packet increases by 5%, the number of peanut packet
demand falls by 8%.What is the elasticity of demand of peanut packets?

2. A 5 % fall in the price of X leads to a 10% rise in demand of X. A 2% rise in the

price of Y leads to a 6% fall in demand for Y. Calculate the price elasticity of
demand of X and Y.

3. Suppose the price elasticity of demand of a good is -0.4. If there is a 10% increase
in the price of the good, by what percentage will the demand of good go down?

4. The demand of a good rises by 20% as result of fall in its price. Its price elasticity
of demand is (-) 0.8. Calculate the percentage fall in price?

5. The quantity demanded of a commodity at a price of Rs.8 per unit is 500 units. Its
price falls to Rs.6 and as a result, its quantity demanded rises to 600 units. Calculate
its elasticity of demand.

6. When a price of a good is Rs.12 per unit, the consumer buys 24 units of that good.
When price rises to Rs. 14 per unit, the consumer buys 20 units. Calculate price
elasticity of demand.

7. When price of a good is Rs.13 per unit, the consumer buys 11 units of that good.
When price rises to Rs.15 per unit, the consumer continues to buy 11 units. Calculate
price elasticity of demand.

8. Price of a commodity falls from RS.4 per unit to RS.3 per unit. As a result total
expenditure on it rises from Rs.200 to Rs.300.Find out price elasticity of demand by
percentage method.

9. A consumer spends Rs.80 on a commodity when its price is Rs.1 per unit and
spends Rs. 2 per unit. What is the price elasticity of demand for the commodity?

10. When price of a good is Rs. 7 per unit, a consumer buys 12 units. When price
falls to Rs. 6 per unit, he spends Rs.72 on the good. Calculate price elasticity of
demand by using the percentage method. Comment on the likely shape of demand
curve based on this measure of elasticity
11. A consumer buys 20 units of a good at a price of Rs.5 per unit. He incurs an
expenditure of Rs.120 when he buys 24 units. Calculate price elasticity of demand
using the percentage method. Comment upon the likely shape of demand curve based
on this information.

12. The price elasticity of demand of a commodity is (-) 0.5. At a price of Rs. 20 per
unit, total expenditure on it is Rs. 2000. Its price is reduced by 10%. Calculate its
demand at reduced price.

13. At Rs.5 per unit, consumer buys 40 units of a commodity and the price elasticity
of demand is -2. How much will he buy if the price reduces to Rs.4 per unit?

14. A consumer buys 80 units of good at a price of Rs.5 per unit. Suppose price
elasticity of demand is (-) 2. At what price will he buy 64 units?

15. When the price of good X is Rs.5, the consumer buys 100 units of good X. At
what price will he be willing to purchase 140 units of good X? The price elasticity of
demand is 2.

16. Supposing the initial demand was 100 units. With the rise in price by Rs.5, the
quantity demanded decreases by 5 units. Elasticity of demand is 1.2. Find out the
price before change in demand.

17. When the price of a commodity falls by Rs.2 per unit, its quantity demanded
increases by 10 units. Its elasticity of demand is (-) 1. Calculate its quantity
demanded at the price before change which was Rs.10 per unit.

18. Calculate the price elasticity of demand for a commodity, when its price increases
by 25% and its quantity demanded falls from 150 to 120 units.

19. The demand for a commodity declines by 10% when its price rises from Rs.4 to
Rs.5 per unit. What is the price elasticity of demand of the commodity?

20. The price of a commodity is Rs. 15 per unit and its quantity demanded is 500
units. Its quantity demanded rises by 80 units as a result of fall in its price by 20
percent. Calculate its price elasticity of demand. Is its demand inelastic? Give reason
for your answer.

21. Price elasticity of demand of good is 1.2. The price of good rises by 10% and as a
result its quantity demanded falls by 60 units. Calculate initial level of demand.
22. When price of good falls from Rs.5 to Rs.3 per unit, its demand rises by 40%.
Calculate its price elasticity of demand.

23. A certain quantity of a commodity is purchased when its price is Rs.10 per unit.
Quantity demanded increases by 30% in response to fall in price by Rs.2 per unit.
Find elasticity of demand.

24. Price elasticity of demand of a good is 2. Its price rises by 10%. Calculate
quantity demanded at increased price, if initially it was 120 units.

25. Price elasticity of demand for a good is (-) 2. The consumer buys a certain
quantity of this good at a price of Rs. 8 per unit. When the price falls, he buys 50 %
more quantity. What is the new price?

26. The price of a good is Rs.20 per unit and total expenditure on it is Rs.1000. When
its price falls to Rs. 18 per unit, total expenditure rises by 8%. Calculate price
elasticity of demand using percentage method.

27. The demand for goods X and Y have equal price elasticity. The demand of X
rises from 200 units to 250 units due to a 10% fall in price. Calculate the percentage
rise in demand of Y, if its price falls by 8 per cent.

28. The price elasticity of demand of good X is half the price elasticity of demand of
good Y. A 5 percent rise in the price of Y reduces its demand from 400 units to 340
units. Calculate the percentage increase in demand of good X when its price falls
from Rs.10 to Rs.8 per unit.

29. When the price of a good rise from Rs.10 per unit to Rs.12 per unit. Its quantity
demanded falls by 20 percent. Calculate price elasticity of demand. How much would
be the percentage change in the quantity demanded, if the price rises from Rs.10 per
unit to Rs.13 per unit?

30. When the price of commodity A falls from Rs.10 to Rs.5 per unit, its quantity
demanded doubles, calculate its elasticity of demand. AT what price will its quantity
demanded falls by 50n%?

31. When the price of a commodity doubles, its quantity demanded falls from 160
units to 120 units. Calculate price elasticity of demand. How much quantity of the
commodity will be demanded, if the price rises by 25 percent.

32. The ratio of change in price (delta P) to initial price (P) is -0.1. I the price
elasticity of demand is -.1.5, calculate the percentage change in quantity demanded.
33. If the ratio of change in quantity (delta Q) to original quantity (Q) is 0.20 and
price elasticity of demand is (-2), calculate the percentage change in price.

Methods of Measurement of Price Elasticity of Demand

When price of a good is 13 per unit, the consumer buys 11 units of that good. When price
rises to 15 per unit, the consumer continues to buy 11 units. Calculate Price Elasticity of
Demand. (All India 2011)

Ans.

When price of a good is 12 per unit, the consumer buys 24 units of that good. When price
rises to 114 per unit, the consumer buys 20 units. Calculate Price Elasticity of Demand. (All
India 2011)

Ans.
From the following table, calculate Price Elasticity of Demand.(All India 2011)

A 5% fall in price of a good leads to 10% rise in its demand. A consumer buys 40 units of a
good at a price of 10 per unit. How many units will he buy at a price of 12 per unit?
Calculate.(All India 2009)

Ans.

A 5% rise in price of a good leads to 5% fall in its demand. A consumer buys 100 units of a
good when price is 5 per unit. At what price will he buy 120 units? Calculate. (All India 2009)
Ans.

Price Elasticity of Demand of a good is (-)1. At a given price, the consumer buys 60 units of the
good. How many units will he buy if the price falls by 10%?(All India 2008)

Ans.
Price Elasticity of Demand of a good is (-) 2. The consumer buys a certain quantity of this good
at a price of ? 8 per unit. When the price falls he buys 50% more quantity. What is the new
price?(All India 2008)

Ans.

22.Price
Elasticity of Demand of a good is (-) 3. If the price rises from ? 10 per unit to X12 per unit, what
is the percentage change in demand? (All India 2008)
Ans.

Due to a 10% fall in the price of a commodity, its quantity demanded rises from 400 units to
450 units. Calculate its Price Elasticity of Demand. (Delhi 2008 C)

Ans.

When the price of a commodity rises from 110 per unit to 11 per unit, its quantity demanded
falls by 15%. Calculate its Elasticity of Demand. (Delhi 2008 C)
Ans.