ELASTICITY OF

DEMAND
 ELASTICITY OF DEMAND
• Concept of Elasticity of Demand
• Law of demand describes the qualitative aspect regarding the inverse relationship between price and demand
and fails to describe quantitative aspects of demand i.e Law of demand fails to measure how much‘ of
quantity of the product changes due to change in price. Elasticity of demand is the extension over law
of demand which describes the quantitative aspects regarding the inverse relationship between price &
demand.
• Elasticity of Demand can be define as ― “the degree of responsiveness of quantity demand of
a product to its change in price, other things remaining constant”. The concept of elasticity of demand
is generally associated with the name of Alfred Marshal.
• RESPONSIVENESS OF DEMAND BECAUSE OF % CHANGE IN THE DETERMINANTES
 TYPES OF ELASTICITY OF
DEMAND
• Elasticity of demand is three types. i.e., price elasticity, income elasticity, and cross elasticity.
1) Price elasticity of demand :- it can be define as ―the degree of responsiveness of quantity demand of a

• product to its change in price, other things remaining constant. It is measured as percentage of change in

• quantity demanded divided by the percentage change in price.

• Formula to calculate Price Elasticity =Edp

Formula –

Y= Income of the consumer

Q=Quantity
 CROSS ELASTICITY OF DEMAND:
3) Cross elasticity of demand: it can be define as the degree of responsiveness of quantity demand of a
product X to its change in price of Product Y, other things remaining constant.

• Cross Elasticity-
• Types of Price Elasticity of Demand/Degree of Price Ed
• 1]Perfectly Elastic Demand:
• When a small change in price of a product causes a major change in its demand, it is said to
be perfectly elastic demand. In perfectly elastic demand, a small rise in price results in fall in
demand to zero, while a small fall in price causes increase in demand to infinity. In such a
case, the demand is perfectly elastic or ep = 00.
• In perfectly elastic demand, the demand curve is represented as a horizontal
straight line.
• 2]Perfectly Inelastic Demand:
• A perfectly inelastic demand is one when there is no change in the demand of a
product with change in its price. The numerical value for perfectly inelastic demand
is zero (ep=0).
• In case of perfectly inelastic demand, demand curve is represented as a
straight vertical line.
• Relatively Elastic Demand:
• Relatively elastic demand refers to the demand when the proportionate change in demand
is greater than the proportionate change in price of a product. The numerical value of
relatively elastic demand ranges between one to infinity.
• Mathematically, relatively elastic demand is known as more than unit elastic demand
(ep>1). For example, if the price of a product increases by 20% and the demand of the
product decreases by 25%, then the demand would be relatively elastic.
• Therefore, a small change in price produces a larger change in demand of the product.
• The demand curve of relatively elastic demand is gradually sloping.
• Relatively Inelastic Demand:
• Relatively inelastic demand is one when the percentage change in demand is less
than the percentage change in the price of a product.
• For example, if the price of a product increases by 30% and the demand for the
product decreases only by 10%, then the demand would be called relatively inelastic.
The numerical value of relatively inelastic demand ranges between zero to one
(ep<1). Marshall has termed relatively inelastic demand as elasticity being less than
unity.
• The demand curve of relatively inelastic demand is rapidly sloping.
Unitary price elasticity of demand
• Q1]Calculate the price elasticity of demand and determine the type of price
elasticity.
• Solution:
• P= 15
• Q = 100
• P1 = 20
• Q1 = 90
• Therefore, change in the price of milk is:
• ∆P = P1 – P
• ∆P = 20 – 15
• ∆P = 5
• Similarly, change in quantity demanded of milk is:
• ∆Q = Q1 – Q
• ∆Q = 90 – 100
• ∆Q = -10[- ignore ]
• The change in demand shows a negative sign, which can be ignored.
This is because of the reason that the relationship between price and
demand is inverse that can yield a negative value of price or demand.
• Price elasticity of demand for milk is:
• ep = ∆Q/∆P * P/Q
• ep = 10/5 * 15/100
• ep = 0.3
• The price elasticity of demand for milk is 0.3, which is less than one. Therefore,
in such a case, the demand for milk is relatively inelastic.
 PROBLEMS
• Q2] A house hold increases its demand for a commodity from 40 units to
50 units when its price falls by 10%. What is the price elasticity for the
commodity?
• Ans] % change in Q= Q1-Q/Q*100
• 50-40/40*100=25%
• Ep=% change in demand/% change in price=25/-10= -2.5[- sign ignore]
• *[-10 because price falls]
• In this case price ed is relatively elastic
• Q3]At price of Rs 50 per unit the quantity demanded is 1000 units . When price fall to 10%,QD
rises to 1080 units .Calculate the price elasticity of demand. Is its demand is inelastic? Give reason
• Ans] dQ/dP*P/Q
• P=Rs 50
• P1=10% of 50=50*10/100=-5 [ - sign ignore]
• New price [P1]=P1-P=45-50=-5
• 80/-5*50/1000= -4/5=-0.8[Ep is less then 1][- sign ignore]
• Q4]A 5% fall in price of X leads to a 10% rise in the demand for X. A 2% rise in the price of Y leads
to 6% fall, in the demand for Y. Calculate the price elasticity of demand of X and Y.
• Ans]
• Ep of X=10/-5= -5
• Ep of Y=-6/2=-3
• Q 5] A 7% fall in price leads to 49% increase in demand of that goods Find out Ep.
• Ans] % change in QD/% change in price=49/-7=-7 [- sign ignore]
• Q6]When price of a good falls from Rs 15 to Rs 12 per unit ,its demand rises by 25 %.Calculate
Ep.
• Ans]
• Ep= % change in demand/ % change in the price
• Q7]Suppose the price of X rises from Rs. 3 per kg. to Rs. 5 per kg. and the quantity
demanded decreases from 30 kgs. to 10 kgs.
• Ans]???
• Other methods
• 2.The Point Method:
• Prof. Marshall devised a geometrical method for measuring elasticity at a point on
the demand curve. Let RS be a straight line demand curve in given picture. If the price
falls from PB(=OA) to MD(=OC). the quantity demanded increases from OB to OD.
Elasticity at point P on the RS demand curve according to the formula is: Ep = ∆q/∆p x p/q
• Where ∆ q represents changes in quantity demanded, ∆p changes in price level while p and
q are initial price and quantity levels.
• ∆ q = BD = QM
• ∆p = PQ
• p = PB
• q = OB
• (3) The Arc Method:
• We have studied the measurement of elasticity at a point on a demand curve. But when
elasticity is measured between two points on the same demand curve, it is known as arc
elasticity. In the words of Prof. Baumol, “Arc elasticity is a measure of the average
responsiveness to price change exhibited by a demand curve over some finite stretch of
the curve.”
• (4) The Total Outlay Method:/Expenditure
• Prof Marshall evolved the total outlay, total revenue or total expenditure method as a
measure of elasticity. By comparing the total expenditure of a purchaser both before and
after the change in price, it can be known whether his demand for a good is elastic, unity
or less elastic. Total outlay is price multiplied by the quantity of a good purchased:
• Total Outlay = Price x Quantity Demanded.
• This is explained with the help of the demand schedule in the given
• Table--
• i) Elastic Demand:
• Demand is elastic, when with the fall in price the total expenditure increases and with the rise in price
the total expenditure decreases. Table shows that when the price falls from Rs. 9 to Rs. 8, the total
expenditure increases from Rs. 180 to Rs. 240 and when price rises from Rs. 7 to Rs. 8, the total
expenditure falls from Rs. 280 to Rs. 240. Demand is elastic (E p > 1) in this case
• ii) Unitary Elastic Demand:
• When with the fall or rise in price, the total expenditure remains unchanged; the elasticity of demand
is unity. This is shown in the Table when with the fall in price from Rs. 6 to Rs. 5 or with the rise in
price from Rs. 4 to Rs. 5, the total expenditure remains unchanged at Rs. 300, i.e., E p = 1.
• (iii) Less Elastic Demand:
• Demand is less elastic if with the fall in price the total expenditure falls and with the rise in price the
total expenditure rises. In the Table when the price falls from Rs. 3 to Rs. 2 total expenditure falls from
Rs. 240 to Rs. 180, and when the price rises from Re. 1 to Rs. 2 the total expenditure also rises from Rs.
100 to Rs. 180. This is the case of inelastic or less elastic demand, Ep < 1.
 • DETERMINANTS/ FACTORS AFFECTING THE ELASTICITY OF DEMAND

1.Nature of the Commodity: The commodities satisfying humans wants can be classified broadly into
necessaries on the one hand and comforts and luxuries on the other hand. The nature of demand for a
commodity depends upon this classification. The demand for necessities is inelastic and for comforts and
luxuries it is elastic.
2.Availability of substitutes: The availability of substitutes is a major determinant of the elasticity of
demand. The large the number of substitutes, the higher is the elastic. It means if a commodity has many
substitutes, the demand will be elastic. As against this in the absence of substitutes, the demand becomes relatively
inelastic because the consumers have no other alternative but to buy the same product irrespective of whether
the price rises or falls.
3.Several uses of Commodity: If a commodity can be put to a variety of uses, the demand will be more elastic.
When the price of such commodity rises, its consumption will be restricted only to more important uses and
when the price falls the consumption may be extended to less urgent uses, e.g. coal electricity, water etc.
4.Range of prices: The demand for very low-priced as well as very high-price commodity is generally inelastic.
When the price is very high, the commodity is consumed only by the rich people. A rise or fall in the price
will not have significant effect in the demand. Similarly, when the price is so low that the commodity can be
brought by all those who wish to buy, a change, i.e., a rise or fall in the price, will hardly have any effect on the
demand.
5.Proportion of Income Spent: Income of the consumer significantly influences the nature of demand. If only
a small fraction of income is being spent on a particular commodity, say newspaper, the demand will tend to be
inelastic.
• Importance of the Concept of Elasticity of Demand:
• The concept of elasticity of demand has great practical importance:
• For Businessmen and Monopolists:
• It guides the businessman in fixing the prices of his goods. If the demand for a commodity is inelastic, he knows that the
people must buy it whatever be the price. In such cases, he will be able to raise the price. If he is a monopolist he will certainly do
so and earn a larger net Profit. When the demand is elastic, a small fall in price will increase the sales and bring more profit.
• For the Finance Minister:
• The Finance Minister also takes note of elasticity of demand when selecting commodities for taxation. In case he/she wants
to be certain of the revenue, he taxes those commodities for which the demand is inelastic. People must continue buying them
even though the prices rise with the tax. If the demand is elastic, people will buy less of them and the Government would get less
revenue.
• Joint Products:
• In case of joint products, separate costs of production of the two commodities are not ascertainable. In such cases, price of
each will depend on the elasticity of demand of each. The transport authorities also fix the prices of the various services they sell,
after considering their elasticity of demand for the respective services.
• In Industrial Production: The volume of industrial output depends on the nature of demand. If the demand is elastic, by slightly
reducing the price, sales can be increased, and the output too will increase.
• Paradox of Poverty in Plenty:
• The concept of elasticity can explain how the farmers may remain poor even when there is a bumper crop. If the elasticity of
demand for wheat is unity, the incomes of the growers would remain the same whatever the condition of the crop. In a year
of bad harvest the rise in price would compensate for reduced output and in a year of good crop, the price will fall and thus
reduce the income.
• Determination of Wages:
• Elasticity can also influence wages. If demand for a particular type of labor is inelastic, it can succeed in raising wages.
• Q8]
P=10 Q=40
P1=11 Q1=(32)
Edp= -2
-2=dQ/1*10/40
dQ=-8
Q =40+(-8)=32 units
• Q9]Price ed of a good is (-)1.Calculate the % change in the price that will rise demand from
20 units to 30 units.
• Edp=dQ/dP*P/Q
• % change in demand/% change in price
• 10/20*100=50%
• -1=50%/% change in the price
• -50% (change in the price)—Price fall 50%
• Q10] Price ed=(-)2
• Consumer buys certain quantity of the good at a price of Rs 8 per unit.
When price falls he buys 50% more quantity . What is the new price?
Ans]ep=%change in qd/% change in price
(-)2= 50%/ % change in the price
% change in price= 50/-2=- 25%
New price = P+ % change in price
=8+(-25% of change of 8)
=8-2= Rs 6 per unit[Ans]
• Q11] HW= Price ed=(-)1.
• At a given price consumer buys 60 units of a good.
• How many units the consumer will buy if the price falls by 10%?
• Q12]Edp=(-)3 .At a Price of Rs 8 per unit a consumer buys 160 units of the good. How many units
of the goods will the consumer buy when price falls to Rs 6 per unit?.
• Q13] When price of a good rises from Rs. 5 per unit to Rs. 6 per unit ,its demand falls from 20
units to 10 units. Compare expenditure on the good to determine whether demand is elastic or
inelastic.
• Q14]when the price of a good is Rs7 per unit a consumer buys 12 units. When price falls to Rs 6
per unit he spends Rs 72 on the good . calculate price edof demand by using % method. Comment
on the likely shape of demand curve on this measure of elasticity.
• Q15]When the price of a good is Rs.13 per unit, a consumer buys 11 units. When the price rises to
Rs.15 per unit ,the consumer continues to buy 11 units. Calculates price ed.
• Q16] Price ed of demand of two goods A and B is (-)3 and (-) 4 respectively . Which of the two
goods has higher elasticity and why?
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