Elasticity of Demand and Supply

Elasticity of Demand and
Supply
• Law of demand tells us about the direction of relationship
between price and the quantity demanded, it tells us that if
there is a increase in price than there should be a decrease in
quantity demanded of that particular commodity, but it does
not tells us that how much the quantity demanded should
decrease. The answer is given by elasticity of demand.
Elasticity of demand refers to the change in the demand of a
commodity in response to a change in price of the commodity,
or change in income of the consumer or change in the prices of
related goods.
• According to Prof, Marshall,” Elasticity of demand may be
defined as the percentage change in the quantity demanded
divided by the percentage change in the price.”
• According to Stonier and Hague,” Elasticity of demand is a
technical term used by the economists to describe the degree
of responsiveness of demand of a commodity to a change in its
price.”
• According to Dooley,” The elasticity of demand measures the
responsiveness of the quantity demanded of a good, to change
in its price, price of other goods and changes in consumer’s
income.”
• Generally we can divide elasticity of demand
into three parts,
• 1. Price elasticity of demand
• 2. Income elasticity of demand
• 3. Cross elasticity of demand
• Now we will discuss all the types of elasticity
of demand in detail,
Price Elasticity of Demand
• The increase or decrease in quantity
demanded due to increase or decrease in price
of the particular commodity is known as price
elasticity of demand. According to Prof,
Lipsey,” Price elasticity of demand may be
defined as the ratio of the percentage change
in demand to the percentage change in price.”
Percentage change in quantity demanded
Pe =
Percentage change in price
• Degree of Price elasticity of demand
• According to Prof, Marshall,” The elasticity of demand is great or small
according as the amount demanded increases much or little with a fall in
price and diminishes much or little for a given rise in price.” If there is an
increase or decrease in price, than the decrease or increase in quantity
demanded is not always equal to the change in price. There can be more
change in quantity demanded
• In comparison with change in price, or it can be less and it can also be
equal. We have five degrees of price elasticity of demand.
• 1. Perfectly Elastic Demand.
• 2. Perfectly Inelastic Demand.
• 3. Unitary Elastic Demand.
• 4. More Elastic Demand.
• 5. Less Elastic demand.
Perfectly Elastic Demand
When there is a small change in price and the quantity
demanded infinitely increases or decreases. That situation is
known as Perfectly Elastic demand.
A B
Pric e
P D
X
O Q Q1
Quantity demanded
Perfectly Inelastic Demand
It is the situation in which there is absolutely no change due to change in the price
of that particular commodity. We can explain the perfectly inelastic demand with
the help of a graph .
Y
D
P1 A
Pric e
P B
X
O
Q
Quantity Demanded
• Unitary Elastic Demand
• This is a situation in which the change in price is
exactly equals to the change in quantity demand.
When the proportionate change in price is equals to
the proportionate change in quantity demanded, that
situation is refers to unitary elastic demand. We can
better understand the concept of unitary elastic
demand with the help of a graph.
Y
A
P
Pric e
B
P1
D
X
O Q Q1
Quantity Demanded
• More Elastic Demand
• This refers to that situation in which the
proportionate change in price is less and the
proportionate change in quantity demanded is more
in comparison with price. It means a little or less
change in price leads to a greater change in quantity
demanded. It can also be easily understand with the
help of a graph of more elastic demand.
Y
D
A
B
P
P1 D
Price
X
O Q Q1
Quantity Demanded
• Less Elastic Demand
• In this case the proportionate change in price
is more in comparison with proportionate
change in quantity demanded of a particular
commodity. In case of necessities goods, the
demand is less elastic. The demand curve in
this situation tends to be vertical, that can be
seen in the graph that is given below:
Y
A
P1
Price
P B
X
O Q1 Q
Quantity Demanded
Factors determining Price Elasticity of Demand
• It is not possible to classify goods according to the nature of

their demand and lay down rigid rules to determine whether
demand in any particular case is elastic or inelastic. We can
only formulate some general rule in this connection.
• We know that elasticity is relative .For one person or at one

place, the demand may be elastic and, fro another person and
at another place, It may be inelastic .Subjected to the
important provision, we may lay down the following rules:
• Necessaries and conventional Necessaries .we
must buy fixed quantities of such commodities,
what ever the price .In a poor country like
India, even the demand for things like salt is
somewhat elastic .In India in 1923, the
doubling of the salt duty reduced the
consumption of salt. The change in the price of
wheat may be immaterial for upper classes,
• But its consumption will certainly increase
among the poor when the price falls.
• It may be carefully noted that demand for
wheat (a necessity of life) as a whole may be
inelastic, but in a competitive market, demand
for the output of any particular firm is highly
elastic .If it raises the price a bit, it may lose
the entire market
• Demand for Luxuries is Elastic: It stands to reason that lowing
of the price of things like radio and TV. Sets refrigerator and
artistic furniture will lead to more being brough.i.e the
demand is elastic. But the demand even for such Luxuries on
the part of the rich people is not elastic. For them these things
are conventional necessaries. They must buy them and having
purchased one. They will not buy another, whatever thee price
.Their demand therefore is not elastic for people of lesser
means is not elastic; it is elastic for people of lesser means
only
• Here again we cannot generalize. A luxury is a
relative term. A high-priced luxury of the poor man is
low-priced necessary for the rich .A thing may be
luxury in one country and a necessary in another. It is
said that the luxuries of yesterday have become
necessary of today, for the same article the demand
may be elastic for some people and inelastic for
other ,elastic in one country and inelastic in another
and elastic at one time inelastic at another .
Methods of Measuring Elasticity
Ratio (or Percentage) Method or Point Elasticity
This is the most popular method used to measure

elasticity,
Ep = Q2 – Q1 / Q1
P2 – P1/ P1
Ques: Suppose quantity demanded of Apple is initially 800

units at a price of INR 10 and increase to 1000 units when
price falls to INR 8. calculate Price elasticity of demand of
apple.
Arc Elasticity Method
Arc Elasticity is used as a measure in case we want to

calculate price elasticity price elasticity of demand between
any two points on the demand curve. To be specific, arc
elasticity is used to find the elasticity at the midpoint of an
arc between any two points on a demand curve, by taking
the average of the prices and quantities.
Q2 – Q1 P2 – P1
Ep = ÷
Q1 + Q2 P1 + P2
Ques: Price = 4, Qd = 1000

Price = 3, Qd = 2000, find out ed?
Income Elasticity of demand
Income elasticity of demand is the ratio of proportionate

change in quantity demanded and proportionate change
in income of the consumer. If the other things are
constant it shows that when the income of the
consumer increase, how the quantity demanded will
change, According to Prof, Watson,” Income elasticity of
demand means the ratio of the percentage change in
the quantity demanded to the percentage change in
income.”
Measurement of Income
Elasticity of Demand

Proporti onat e change i n Quantity Demanded

EY =
Proporti onat e change i n I ncome
Where EY Ref ers i ncome el asticity of demand

∆Q ∆Y
EY= ÷
Q Y
∆Q Y
= ×
Q ∆Y
Or
∆Q Y
EY = ×
∆Y Q
We can divide income elasticity of demand into
three types,
• 1. Positive income elasticity of demand
• 2. Negative income elasticity of demand
• 3. Zero income elasticity of demand
• Positive Income Elasticity of Demand
• When there is a positive relationship between income and the
quantity demanded, that situation is known as positive income
elasticity of demand. In other words we can say if the quantity
demanded of a commodity increases with the increase in
income of the consumer and decreases with the decrease in
income the income elasticity of demand is positive. It can be
explain with the help of a figure,
EY = Positive
D
Y1
Q Q1
Positive Income Elasticity of Demand

• Negative income Elasticity of Demand
• When there is a negative relationship between increase in income of the
consumer and quantity demanded of a particular commodity that situation
is known as negative income elasticity of demand. In other words we can
say that if the income of the consumer increases but the quantity
demanded of a particular commodity decreases, and with the decreases
income the quantity demanded increases, the income elasticity of demand
said to be negative. We can better understand the concept of negative
income elasticity of demand with the help of a figure, it should be noted
that those goods or commodities which have the negative income effect
(quantity demanded decreases with the increases income of the consumer)
are known as inferior Goods.
y
D
EY is negative
Y1
In c o m e
D
X
O Q
Q1
Quantity
Negative Income Elasticity of Demand

• Zero Income Elasticity of Demand
• If there is no relationship between increases in income and
quantity demanded that situation is known as Zero Income
Elasticity of Demand. In other words we can say that if there is
no affect of increase or decrease in income of the consumer on
the quantity demanded of a particular commodity the Income
Elasticity of demand said to be Negative. We can better
understand the concept with the help of an example and a
figure.
y
D
EY is 0
Y1
In c o m e
D
X
O
Q
Quantity
Zero Income Elasticity of Demand

• Degrees of Income Elasticity of Demand
• There are mainly three degrees of income elasticity of
demand,
• 1. Income elasticity of Demand equal to unity.
• 2. Income elasticity of demand more than unity.
• 3. Income elasticity of demand less than unity.
• Income elasticity of Demand equal to unity
• When the proportionate change in quantity
demanded is just equals to the proportionate
change in income, in that situation the income
elasticity of demand equal to unity.
• Income elasticity of Demand more than unity
• When the proportionate change in the quantity
demanded of a commodity is more than the
proportionate change in the income of the
consumer, the income elasticity of demand in
this situation is more than unity.
• Income elasticity of Demand less than unity
• When proportionate change in quantity
demanded is less than the proportionate
change in income of the consumer, the income
elasticity of demand is less than unity.
Cross Elasticity
• Cross Elasticity is the measure of responsiveness of demand
for a commodity to the changes in the price of its substitutes
and complementary goods.
• It is important to note here that when two goods are

substitutes for each other, their demand has a positive cross
elasticity of demand because increase in the price of one
increases the demand for the other. But, the demand for
complementary goods has negative cross elasticity, for
increase in the price of a good decreases the demand for its
complementary goods.
Thanks
Dr. A. K. Upadhyay

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Elasticity of Demand and

the help of a graph .

• It is not possible to classify goods according to the nature of

• We know that elasticity is relative .For one person or at one

Ratio (or Percentage) Method or Point Elasticity

This is the most popular method used to measure

Ques: Suppose quantity demanded of Apple is initially 800

Arc Elasticity is used as a measure in case we want to

Ques: Price = 4, Qd = 1000

Income elasticity of demand is the ratio of proportionate

Proporti onat e change i n Quantity Demanded

Where EY Ref ers i ncome el asticity of demand

Positive Income Elasticity of Demand

Negative Income Elasticity of Demand

Zero Income Elasticity of Demand

• It is important to note here that when two goods are

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