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Kamal
Ludhani
 l l ow m e
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on
d P r e s s
Wor
Quora i n
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Twitte L i p t
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ion
 Elasticity of Demand
• It shows the direction and extent to which demand will change with the change in
price of the product, income of the consumer and price of the related goods.

Elasticity of
Demand

Price Elasticity of Income Elasticity Cross Elasticity

Demand of Demand of Demand
 Price Elasticity of
•
Demand
Price elasticity of demand is a measure of the degree of
responsiveness of demand for a commodity to change in its
price.
• It is also defined as the ratio of percentage or proportionate
change in Quantity Demanded of a commodity to a
percentage or proportionate change in its price.

• ed or ep = % change in Q.D.
% change in Price
Or
= Δ Q.D. X P
ΔP Q.D.
Degrees or Forms of Elasticity of
Demand
• Perfectly Elastic Demand ed = ∞

• Perfectly Inelastic Demand ed = 0

• Highly Elastic Demand e d >1

• Highly Inelastic Demand ed < 1

• Unit Elastic Demand ed = 1

1. Perfectly Elastic Demand
• When the demand for a commodity rise or falls to any extent without any change or
with very little change in its price, the demand for that commodity is said to be
perfectly elastic.

• In such a situation demand curve becomes horizontal and parallel to X-axis.

• It is an imaginary situation.
• In such a case ed = ∞

Price
Price (₹) Q.D. (units)
10 10 D C A B
10 11 P D

10 9

= Δ Q.D. X P
ΔP Q.D.
Q2 Q Q1 Q.D.
2. Perfectly Inelastic Demand
• When the quantity demanded for a commodity does not change at all in response to
change in price of the commodity, the demand for that commodity is said to be
perfectly inelastic.

• In such a situation demand curve becomes vertical and parallel to Y-axis.

• It is an imaginary situation.
In such a case ed = 0

Price
•
D

Price (₹) Q.D. (units)

P1 B
10 100
9 100 P A
11 100
P2 C
= Δ Q.D. X P
D
ΔP Q.D.
Q Q.D.
3. Highly Elastic Demand or Elastic Demand
• When percentage or proportionate change in quantity demanded for a commodity is
more than the percentage or proportionate change in its price, it is termed as highly
elastic demand.

• Demand curve is flatter

• Examples : the demand curve for luxuries like car, home, AC etc.

Price
D
• In such a case ed > 1

Price (₹) Q.D. (units) A

P
10 10
B
11 8 P1
9 12
D

= Δ Q.D. X P
ΔP Q.D.
Q Q1 Q.D.
4. Highly Inelastic Demand or Inelastic Demand
• When percentage or proportionate change in quantity demanded for a commodity is
less than the percentage or proportionate change in its price, it is termed as highly
inelastic demand.

• Demand curve is steeper.

• Examples : the demand for necessities like food grain, salt, water etc.
D

Price
• In such a case ed < 1

Price (₹) Q.D. (units) P A

10 10
12 9 P1 B
8 11

= Δ Q.D. X P D
ΔP Q.D. Q Q1 Q.D.
5. Unit elastic Demand
• When percentage or proportionate change in quantity demanded for a commodity is
equal to the percentage or proportionate change in its price, it is termed as unit
elastic demand or unitary elastic demand.

• The change in Q.D. is equal to change in price.

• Examples : the demand for comforts like TV, bike, mobile phone etc.

Price
• In such a case ed = 1

Price (₹) Q.D. (units) A

P
10 10
11 9 P1 B

9 11

D
= Δ Q.D. X P
ΔP Q.D.
Q Q1 Q.D.
Combined Diagram

Price
ed = ∞

ed > 1

ed = 1
ed < 1
ed = 0
Q.D.
Methods of Measuring Price Elasticity of
Demand
• Percentage Method

• Algebraic Method

• Total Outlay Method

• Point Method or Geometric Method

1. Percentage or Proportionate Method
Price elasticity of demand is measured by the ratio of percentage or proportionate change
quantity demanded to the percentage or proportionate change in price of the commodity.
Thus,
ed or ep = % change in Q.D.
% change in Price

2. Algebraic Method
ep = change in demand X 100 ÷ change in price X 100
original demand original price

ep = change in demand ÷ change in price

original demand original price

ep = Δ Q.D. ÷ Δ P
Q.D. P
ep = Δ Q.D. X P
ΔP Q.D.
3. Total Outlay Method or Total Expenditure Method
• This method was developed by Prof. Marshall
• According to this method, price elasticity of demand is measured by comparison of total expenditure before the
price change and after the change in the price of the commodity.
• Total expenditure is the product of the price of a commodity and the quantity demanded at that price.
• Symbolically,
T.E. = P X Q.D.
• By using this method we can measure three types of elasticities:
1. Elastic Demand ed >1

2. Inelastic Demand ed <1

3. Unit Elastic Demand ed = 1

1. Elastic Demand
• If with a fall in price of the commodity, total expenditure increases and with rise in its price, total expenditure
decreases, then demand for that commodity will be elastic or greater than one.
• In other words, when there is an inverse relationship between the price and total expenditure, the price elasticity of
demand will be greater than one.
Price (₹) Q.D. (Units) T.E. = P X Q.D. (₹)
2 100 200
4 40 160
1 300 300

2. Inelastic Demand
• If with a fall in price of the commodity, total expenditure decreases and with rise in its price, total expenditure
increases, then demand for that commodity will be inelastic or less than one.
• In other words, when there is a direct relationship between the price and total expenditure, the price elasticity of
demand will be less than one.
Price (₹) Q.D. (Units) T.E. = P X Q.D. (₹)
2 100 200
4 75 300
1 150 150
3. Unit elastic Demand
• If rise or fall in the price of the commodity makes no change in its total expenditure or total expenditure remains
constant with change in the price of the commodity, the price elasticity of demand will be equal to one or unit elastic
Price (₹) Q.D. (Units) T.E. = P X Q.D. (₹)
2 100 200
4 50 200
1 200 200
4. Point Method or Geometric Method
• This method was also developed by Prof. Marshall.
• Measuring the elasticity at a particular point on the demand curve is known as point elasticity of
demand.
• Point method is used when elasticity of demand is measured at different points on a straight line
demand curve or linear demand curve.
• According to point method, price elasticity of demand at any point is measured by dividing the lower
sector of the demand curve with the upper sector of the demand curve at that point.

ed = Lower Sector of Demand Curve

Upper Sector of Demand Curve
Price Price elasticity of Demand at different points on a Straight line or Linear Demand Curve

A ed = ∞ 1. ep at the mid-point C
ep = Lower Sector = CE = 1
B ed > 1
Upper Sector CA

C ed = 1 2. ep at point A
ep = Lower Sector = AE = ∞
D ed < 1 Upper Sector 0

E ed = 0 3. ep at B
Q.D. ep = Lower Sector = BE = > 1
Upper Sector BA

4. ep at point D
ep = Lower Sector = DE = <1
Upper Sector DA

5. ep at point E
ep = Lower Sector = 0 =0
 Elasticity of Demand for Two Intersecting
•Curves
If two negatively sloped demand curves intersect each other then at the point of intersection, flatter demand
curve (DD) is more elastic than the steeper one (D1D1)
• DD ( flatter curve) and D1D1 (steeper curve) both intersect at point E. The price is OP and the quantity
demanded is OQ at point E. When price falls from OP to OP1 , quantity demanded increases from OQ to OQ1
for D1D1 demand curve and from OQ to OQ2 for DD demand curve.
• It is clear from the diagram that the change in demand OQ 2 is more than change in demand OQ1, with the
same change in price (PP1). Therefore, DD is more elastic than D1D1.
D1
Price

P E

B
P1
A

D1
Q Q1 Q2 Q.D.
Determinants or Factors Affecting Elasticity of
Demand
1. Nature of Commodity
• When a commodity is a necessity, its demand is generally inelastic, for example, food grains, salt, school etc.
• When a commodity is a comfort, its demand is generally unit elastic, for example, cooler, TV, mobile etc.
• When a commodity is a luxury its demand is generally elastic, for example, car, home, AC etc.

2. Availability of Substitutes
• Demand for those commodities which have large number of close substitutes, are relatively more elastic because
more choice is available to the consumer.
• Commodities having no or less substitutes have an inelastic demand.

3. Proportion of Income spent in a commodity

• Goods on which a consumer spends a very small proportion of his income will have an inelastic demand.
• Goods on which a consumer spends a large proportion of his income will have an elastic demand.

4. Different uses of a commodity

• Demand for a commodity which has various or large number of uses is generally elastic.
• Commodities which have less number of uses will generally have an inelastic demand.
5. Time period
• The demand for a commodity will be more elastic if it involves longer period of
adjustment.
• In the short run, demand is inelastic because supply cannot be completely adjusted
with the changed demand.

6. Consumer Habits
• If a consumer is habitual of a commodity, he will continue to consume it even at a
higher price, thus the demand for a commodity will be inelastic and vice-versa.

7. Income of the consumer

• Demand will be inelastic for high income groups and elastic for low income groups.
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