Elasticity of Demand (PED)

 The Elasticity of Demand measures the percentage change in quantity demanded for a percentage
change in the price. Simply, the relative change in demand for a commodity as a result of a relative
change in its price is called as the 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”. – Alfred Marshall, British Economist
 An inelastic demand or supply curve is one where a given percentage change in price will cause a
smaller percentage change in quantity demanded or supplied.
 Unitary elasticity means that a given percentage change in price leads to an equal percentage
change in quantity demanded or supplied.
 Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a
change in its price. It is computed as the percentage change in quantity demanded—or supplied—
divided by the percentage change in price.
 Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very
responsive.
Types of Elasticity of Demand
1. Price Elasticity of Demand (PED)
 Any change in the price of a commodity, whether it’s a decrease or increase, affects the quantity
demanded for a product. For example, when there is a rise in the prices of ceiling fans, the quantity
demanded goes down.
 Price Elasticity of Demand (PED) measures how consumers change their behavior when prices
change. In other words, it identifies the relationship between price, demand, and how it reacts when
prices change.
 Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or
supplied (Qs) and the corresponding percent change in price.
 The price elasticity of demand is the percentage change in the quantity demanded of a good or
service divided by the percentage change in the price.
 Price elasticity of demand measures how consumers react to a change in price.
 This measure of responsiveness of quantity demanded when there is a change in price is termed as
the Price Elasticity of Demand (PED).

 The mathematical formula given to calculate the Price Elasticity of Demand is:
PED =% Change ∈Quantity Demanded
% Change ∈Price
 The result obtained from this formula determines the intensity of the effect of price change on the
quantity demanded for a commodity.
2. Income Elasticity of Demand (YED)
 The income levels of consumers play an important role in the quantity demanded for a product.
This can be understood by looking at the difference in goods sold in the rural markets versus the
goods sold in metro cities.
 The Income Elasticity of Demand, also represented by YED, refers to the sensitivity of quantity
demanded for a certain good to a change in real income (the income earned by an individual after
accounting for inflation) of the consumers who buy this good, keeping all other things constant.
 The formula given to calculate the Income Elasticity of Demand is given as:
YED =% Change ∈Quantity Demanded
% Change ∈Income
 The result obtained from this formula helps to determine whether a good is a necessity good or a
luxury good.
3. Cross Elasticity of Demand (XED)
 In a market where there is an oligopoly, multiple players compete. Thus, the quantity demanded for
a product does not only depend on itself but rather, there is an effect even when prices of other
goods change.
 Cross Elasticity of Demand, also represented as XED, is an economic concept that measures the
sensitiveness of quantity demanded of one good (X) when there is a change in the price of another
good (Y), and that’s why it is also referred to as Cross-Price Elasticity of Demand.
 The formula given to calculate the Cross Elasticity of Demand is given as:
XED =% Change ∈Quantity Demanded for one good ( X )
% Change ∈Price of another Good (Y )
 The result obtained for a substitute good would always come out to be positive as whenever there is
a rise in the price of a good, the demand for its substitute rises. Whereas, the result will be negative
for a complementary good.
 These three types of Elasticity of Demand measure the sensitivity of quantity demanded to a
change in the price of the good, income of consumers buying the good, and the price of another
good.
 Apart from these three types, we have some other types of Elasticity of Demand which we would
look at now.
5 other types of Elasticity of Demand

 The effect of change in economic variables is not always the same on the quantity demanded for a
product.
 The demand for a product can be elastic, inelastic, or unitary, depending on the rate of change in
the demand with respect to the change in the price of a product.
 On the basis of the amount of fluctuation shown in the quantity demanded of a good, it is termed
as ‘elastic’, ‘inelastic’, and ‘unitary’.
 An elastic demand is one that shows a larger fluctuation in the quantity demanded of a product, in
response to even a little change in another economic variable. For example, if there is a hike of
$0.5 in the price of a cup of coffee, there are very high chances of a steep decline in the quantity
demanded.
 An inelastic demand is one that shows a very little fluctuation in the quantity demanded with
respect to a change in another economic variable. An example of this can be petrol or diesel.
 Unitary elasticity is one in which the fluctuation in one variable and quantity demanded is equal.
We can further classify these elastic and inelastic types of demand into five categories.
1. Perfectly Elastic Demand
 When there is a sharp rise or fall due to a change in the price of the commodity, it is said to be
perfectly elastic demand.
 In perfectly elastic demand, even a small rise in price can result in a fall in demand of the good to
zero, whereas a small decline in the price can increase the demand to infinity.
 However, perfectly elastic demand is a total theoretical concept and doesn’t find a real application,
unless the market is perfectly competitive and the product is homogenous.
 The degree of elasticity of demand helps to define the slope and shape of the demand curve.
Therefore, we can determine the elasticity of demand by looking at the slope of the demand curve.
 A Flatter curve will represent a higher elastic demand. Thus, the slope of the demand curve for a
perfectly elastic demand is horizontal.
2. Perfectly Inelastic Demand
 A perfectly inelastic demand is the one in which there is no change measured against a price
change.
 Like perfectly elastic demand, the concept of perfectly inelastic is also a theoretical concept and
doesn’t find a practical application. However, the demand for necessity goods can be the closest
example of perfectly inelastic demand.
 The numerical value obtained from the PED formula comes out as zero for a perfectly inelastic
demand.
 The demand curve for a perfectly inelastic demand is a vertical line i.e. the slope of the curve is

zero.
3. Relatively Elastic Demand
 Relatively elastic demand refers to the demand when the proportionate change in the demand is
greater than the proportionate change in the price of the good. The numerical value of relatively
elastic demand ranges between one to infinity.
 In relatively elastic demand, if the price of a good increases by 25% then the demand for the
product will necessarily fall by more than 25%.
 Unlike the aforementioned types of demand, relatively elastic demand has a practical
application as many goods respond in the same manner when there is a price change.
 The demand curve of relatively elastic demand is gradually sloping.
4. Relatively Inelastic Demand
 In a relatively inelastic demand, the proportionate change in the quantity demanded for a
product is always less than the proportionate change in the price.
 For example, if the price of a good goes down by 10%, the proportionate change in its demand
will not go beyond 9.9..%, if it reaches 10% then it would be called unitary elastic demand.
 The numerical value of relatively inelastic demand always comes out as less than 1 and the
demand curve is rapidly sloping for such type of demand.
5. Unitary Elastic Demand
 When the proportionate change in the quantity demanded for a product is equal to the
proportionate change in the price of the commodity, it is said to be unitary elastic demand.
 Unitary elasticity means that a given percentage change in price leads to an equal percentage
change in quantity demanded or supplied.
 The numerical value for unitary elastic demand is equal to 1. The demand curve for unitary
elastic demand is represented as a rectangular hyperbola.
Conclusion
 We can conclude the blog by stating the fact that the demand for a commodity is affected by
several factors and the three main types of elasticity of demand explains the effect of those factors.
 To explain the extent of the effect of the economic variables on the quantity demanded, we have 5
other types of elasticity of demand which are perfectly elastic, perfectly inelastic, relatively elastic,
relatively inelastic, and unitary elastic.
 Price Elasticity of Demand (PED) measures how consumers change their behavior when prices
change. In other words, it identifies the relationship between price, demand, and how it reacts
when prices change.
 Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or
supplied (Qs) and the corresponding percent change in price.
 The price elasticity of demand is the percentage change in the quantity demanded of a good or
service divided by the percentage change in the price.
 The price elasticity of supply is the percentage change in quantity supplied divided by the
percentage change in price.
The Elasticity of Supply

 The price elasticity of supply is a measure of the degree of responsiveness of

the quantity supplied to the change in the price of a given commodity. It is an
important parameter in determining how the supply of a particular product is
affected by fluctuations in its market price. It also gives an idea about the
profit that could be made by selling that product at its price difference. In this
article, we will discuss the elasticity of the supply formula, different types of
elasticity of supply, the supply curve characteristics, and many more.
 The price elasticity of supply refers to the response to a change in a good or
service's price by the supply of that good or service. According to basic
economic theory, the supply of goods decreases when its price increases.
 Similarly, one can also study the price elasticity of demand. This illustrates
how easily the demand for a product can change based on changes in price.
Price changes fairly rapidly if the price of a product changes. This is known as
price elasticity of demand.
 fter having understood the elasticity of supply definition in economics, we now
move to the elasticity of supply formula which is based on its definition.


5 Types of Elasticity of Supply

Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit
elastic supply, less than unit elastic, and perfectly inelastic. Read below to know
them in more detail.
1. Perfectly Elastic Supply: A commodity becomes perfectly elastic when its
elasticity of supply is infinite. This means that even for a slight increase in
price, the supply becomes infinite. For a perfectly elastic supply, the
percentage change in the price is zero for any change in the quantity
supplied.
2. More than Unit Elastic Supply: When the percentage change in the
supply is greater than the percentage change in price, then the commodity
has the price elasticity of supply greater than 1.
3. Unit Elastic Supply: A product is said to have a unit elastic supply when
the change in its quantity supplied is proportionate or equal to the change
in its price. The elasticity of supply, in this case, is equal to 1.
4. Less than Unit Elastic Supply: When the change in the supply of a
commodity is lesser as compared to the change in its price, we can say
that it has a relatively less elastic supply. In such a case, the price
elasticity of supply is less than 1.
5. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic
when the percentage change in the quantity supplied is zero irrespective of
 the change in its price. This type of price elasticity of supply applies to
exclusive items. For example, a designer gown styled by a famous
personality.

The point to be noted is that the elasticity of supply is always a positive number.
This is because the law of supply states that the quantity supplied is always
directly proportional to the change in the price of a particular commodity. This
means that the supply of a product either increases or remains the same with the
increase in its market price.

Determinants of Price Elasticity of Supply

 Marginal Cost- As the cost of producing one more unit is rising with output
or Marginal Costs (which are the increased costs related to each additional
unit produced) are rising rapidly with output, then the rate of output
production will be limited, i.e Price Elasticity of Supply will be inelastic.,
which means that the percentage of quantity supplied changes less than
the change in price. However, if Marginal Cost rises slowly, then Supply
will be elastic.
 Time- As the price elasticity of supply increases over time, producers
would increase the quantity supplied by a greater percentage than the
price increases.
 Number of Firms- It is more likely that the supply will be elastic when
there are a large number of firms. This occurs because other firms can
step in to fill the supply gap.
 Mobility of Factors of Production- When the factors of production are
mobile, then the price elasticities of supply are higher. This means that
labor and other manufacturing inputs may be imported from other regions

to quickly increase production.

Cross Elasticity of Demand
 The cross elasticity of demand is an economic concept that measures the
responsiveness in the quantity demanded of one good when the price for
another good changes. Also called cross-price elasticity of demand, this
measurement is calculated by taking the percentage change in the
quantity demanded of one good and dividing it by the percentage change
in the price of the other good.

 The cross elasticity of demand is an economic concept that measures the

responsiveness in the quantity demanded of one good when the price for
another good changes.

 The cross elasticity of demand for substitute goods is always positive

because the demand for one good increases when the price for the
substitute good increases.

 Alternatively, the cross elasticity of demand for complementary goods is

negative.
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