What is elasticity?

● How does elasticity in

demand affect
businesses?
● Elasticity and Its Importance for Business
● The elasticity of demand is an
important concept to understand
for any business owner.

● By knowing how and when to

adjust prices, you can ensure that
your products are always in high
demand and that you’re making
the most profit possible.

● It’s a tricky balance, but with a

little practice and knowledge of
the different types of elasticity,
you should be able to stay ahead
of the competition.
Elasticity of Demand

● The elasticity of demand refers to the change in demand

when there is a change in another economic factor, such as
price or income.

● A product with inelastic demand allows a business to charge a

higher price and increase its profit margin with a limited
impact on units sold.

● However, for a product with elastic demand, a business needs

to charge a lower price to boost sales volume and maintain a
steady level of demand and profit.

● Eg: Food Delivery in India

Degree of elasticity of demand
The degree of elasticity of demand refers to how responsive the
quantity demanded of a good or service is to changes in its price.
There are three main classifications
Elastic Demand

Elastic demand is a demand As the price of a good or Consumers are very sensitive
where the quantity service increases, the to price changes and may
demanded is highly quantity demanded reduce their purchases or
responsive to changes in decreases significantly. switch to alternatives.
price.
Perfectly Elastic
Demand
● Perfectly elastic demand is a
demand where any price increase
would cause the quantity
demanded to fall to zero.
● Consumers are extremely sensitive
to price changes and completely
stop consuming the good or
service.
● In real life, demands are not
perfectly elastic, and there are
factors that keep elasticity of
demand relatively elastic.
 Relatively Elastic Demand

Relatively elastic
demand is a demand
where the percentage
01
change in quantity
demanded is greater
02 If the price of a
than the percentage specific brand of
change in price (|PED| > smartphones increases
1). by 10% and the
quantity demanded
Consumers are highly 03 decreases by 20%, the
sensitive to price changes demand is considered
and significantly alter elastic.
their purchases.
Inelastic Demand

● Inelastic demand is a demand where

the quantity demanded is not very
responsive to changes in price.
● Even if the price of a good or service
increases, the quantity demanded
decreases slightly.
● Consumers perceive the good or
service as a necessity and are less
responsive to price changes.
Perfectly Inelastic
Demand

01 In real life, demands are not perfectly inelastic,

and there are factors that keep the inelastic
demand relatively inelastic.

02 Perfectly inelastic demand is a demand where a

change in the price of a product or service has no
impact on the quantity demanded.

03 Consumers are completely unresponsive to price

changes.
Relatively Inelastic
Demand
● Relatively inelastic demand is a
demand where the percentage
change in quantity demanded is less
than the percentage change in price (|
PED| < 1).
● If the price of salt increases by 10%
and the quantity demanded
decreases by only 2%, the demand is
considered inelastic.
● Consumers perceive salt as a
necessity and are less responsive to
price changes.
Unitary Elastic Demand

Unitary elastic demand is a If the price of a product This indicates that the total
demand where the increases by 10% and the revenue remains constant
percentage change in quantity demanded when price changes.
quantity demanded is exactly decreases by 10%, the
equal to the percentage demand is unitary elastic.
change in price (|PED| = 1).
Factors affecting Elasticity of demand

Many factors determine the High-priced products often Price is the most common
demand elasticity for a are highly elastic because, if economic factor used when
product, including price prices fall, consumers are determining elasticity. Other
levels, the type of product or likely to buy at a lower price. factors include income level
service, income levels, and and Related products.
the availability of any
potential substitutes.
1.Availability of
Substitutes:

● Goods with close substitutes tend to have more

elastic demand. When the price of a product
rises, consumers can easily switch to a similar
substitute, making the demand for the original
product more elastic.

Example: Coffee vs. Tea

If the price of coffee rises significantly, consumers

might switch to tea as a substitute, making the
demand for coffee more elastic due to the availability
of alternatives.
2.Necessities vs. Luxuries:

● Necessities like basic food items or gasoline

tend to have inelastic demand because
consumers need them regardless of price
changes. Conversely, luxury goods often have
more elastic demand as consumers can easily
cut back on these items when prices rise.

Example: Gasoline vs. Movie Tickets

Gasoline is a necessity for many people, so even if

its price rises, consumers may not drastically reduce
their consumption. On the other hand, movie tickets,
being a luxury, might see a sharp decline in demand
with a small increase in price.
3.Proportion of Income
Spent:
● Goods that represent a significant portion of a
consumer's budget typically have more elastic
demand. For example, a small change in the
price of a luxury car might not greatly impact
overall consumer spending, but a similar
change in the price of bread could significantly
affect household budgets.

Example: Generic vs. Branded Medicines

Generic medicines, which represent a smaller

portion of an individual's healthcare spending, tend
to have more elastic demand compared to branded
medications, which might be perceived as essential
and thus have inelastic demand
4.Time Horizon:

● Short-run vs. long-run elasticity differs. In the

short run, consumers might not have many
options or time to adjust to price changes,
making demand inelastic. However, in the long
run, consumers have more flexibility to adjust
their consumption patterns, making demand
more elastic.

Example: Apple Products

Apple products often have inelastic demand due to

brand loyalty. Even if their prices increase, many
consumers are loyal to the brand and may not
readily switch to other smartphone or computer
brands.
5.Perceived Necessity:

● Short-run Products that consumers perceive as

necessities despite having substitutes may
exhibit inelastic demand. For instance,
prescription medications or specific brands of
essential goods.

Example: Prescription Medications

Some prescription medications may have inelastic

demand because consumers perceive them as
essential for their health despite potential substitutes
or generic alternatives being available.
Income Elasticity, Cross-Price Elasticity & Other Types of Elasticities

Similar to price elasticity of Price elasticity of demand Cross price elasticity of

demand discussed in earlier measures the responsiveness demand measures the
slides there are other types of quantity demanded to a responsiveness of quantity
of elasticity of demand which change in price where in demanded for good A to the
are going to be discussed in Income elasticity of measures change in the price of good
upcoming slides the responsiveness of B.
quantity demand to a change
in income
Income elasticity of demand (YED)

Income elasticity of demand (YED) measures the

responsiveness of the quantity demanded of a good to
changes in income levels. It helps understand how
consumer demand for a particular product or service
changes as their income changes.

Formula: Income Elasticity of Demand = % Change in

Quantity Demanded / % Change in Income
Interpretation of Income elasticity of demand (YED)

Similar to Price elasticity of The magnitude of the Income elasticity of

demand the degree curve of elasticity tells the degree to demand(YED) interpretations
income elasticity of demand which the goods are will be discussed in upcoming
is same where price of the complementary or slides
products is replaced with substitutable
income of consumers
YED > 1: Indicates a luxury good. As income rises, demand for these goods
increases at a faster rate.

Luxury goods are products that see These goods are often associated When income levels rise, demand for
an increase in demand at a with higher income brackets. expensive smartphones with advanced
proportionately higher rate than the features and higher price tags tends to
Example: High-end Electronics (e.g., increase significantly. Consumers in
increase in income.
Smartphones) higher income brackets often prioritise
these luxury electronics, leading to a
YED greater than 1.
YED < 1: Represents a necessity. As income increases, demand for these goods
rises, but at a slower rate.

Necessities are goods for which These goods are essential for daily As income increases, demand for basic
demand increases with rising living. food items tends to rise, but at a slower
income, but not as quickly as rate compared to the increase in
Example: Basic Food Staples (e.g., income. These goods have a YED less
income itself.
Rice, Bread) than 1, indicating they are necessary but
not highly responsive to income
changes.
YED = 0: Represents a good with perfect income elasticity. Changes in income do
not affect the quantity demanded.

Example:Salt is a classic example of a Even if people have more disposable This YED of 0 signifies that changes in
good with a YED of 0. income, they won’t significantly increase income do not impact the quantity
their salt consumption, nor will they demanded for salt.
It's an essential commodity used drastically decrease it if their income
universally regardless of income levels. decreases. It remains a consistent and essential
When individuals' incomes increase or item in households, irrespective of
decrease, their demand for salt typically income fluctuations.
remains stable.
YED < 0: Represents an inferior good. As income rises, demand for these goods decreases.
Inferior goods are those for which demand decreases when income rises.

Example: Store-brand Goods vs. As consumers' income increases, they This shift indicates a negative YED,
Name-brand Goods might shift away from lower-priced store- where the demand for the inferior goods
brand goods towards higher-priced, decreases as income rises.
more prestigious name-brand products.
Cross-Price Elasticity of Demand (XED)

Cross-Price Elasticity of Demand (XED) measures how the quantity

demanded of one good changes in response to a change in the
price of another good. It helps understand whether two goods are
substitutes or complements.

Example: Tea and Coffee

If the price of coffee increases, and the quantity demanded for tea
increases as a result, it suggests that these goods are substitutes.
Consumers switch to tea when the price of coffee rises, indicating a
positive cross-price elasticity.
CONCLUSION
● Understanding Price elasticity ,Income elasticity and Cross product elasticity is
crucial for businesses and policymakers.

● For businesses, it helps in product positioning, understanding consumer

behaviour, and developing marketing strategies.

● For policymakers, it aids in assessing the impact of income changes on

different goods and in shaping economic policies related to income
distribution, taxation, and social welfare, how much they can stretch the price
(hence the term elasticity) of any product before it impacts.
Thank you. Please feel free to ask any
questions. 😄