ELASTICITY OF

DEMAND
 Elasticity of Demand
• Elasticity is a term used in economics to describe
responsiveness in one variable to changes in another.
• Demand for a commodity is affected by many factors such as
its price, price of related goods, income of its buyer, tastes
and preferences etc. Elasticity means degree of response.
Elasticity of demand means degree of responsiveness of
demand. Demand for a commodity responds to change in
price, price of related goods, income etc.
• Elasticity is defined as the ratio of the percentage change in
quantity demanded to the percentage change in some factor
(such as price or income) that stimulates the change in
quantity.
• The reason for using percentage change is that it obviates
the need to know the units in which quantity and price are
measured. For example, quantity could be in kilograms,
grams, litres or gallons and price could be in dollars, rupees,
euro etc.
Formula for elasticity of demand
• Elasticity= % change in quantity demanded / % change in
economic factors
• Elasticity is the percentage change in some dependent
variable given a one-percent change in an independent
variable, ceteris paribus. If we let Y represent the dependent
variable, X the independent variable, and E the elasticity,
then elasticity is represented as-
• E = % change in Y / % change in X
Types of Elasticity
• Price elasticity of demand
• Income elasticity of demand
• Cross elasticity of demand
Price elasticity of demand
• The price elasticity of demand is the percentage change in the quantity
demanded of a good or service by the percentage change in the price.
• In other words, the price elasticity of demand is the rate at which the
demand increases or decreases with the corresponding change in price.
• Mathematically, the price elasticity of demand is represented as follows:
• Price elasticity of demand (PED) = %∆ in Qd / %∆ in P
• Where,
• %∆ in Qd = Percentage change in the quantity demanded
• %∆ in P = Percentage change in price
How to measure price elasticity
of demand?
• I. Percentage method

• The Percentage method is one of the widely used methods for calculating
demand price elasticities, where price elasticity is calculated in terms of the
rate of the percentage change in the quantity requested to the percentage
change in price.
• The price elasticity of demand can, according to this approach, be
mathematically expressed as –
• %change in Qd / %change in P
Formula-
 II. Graphical Method-
• This method was also suggested by Prof. Marshall. According to the
Geometric Method, also known as the Graphic Method, Point
Method, or Arc Method, the elasticity of demand for a commodity is
measured at a point on the demand curve. The Geometric Method of
determining the Price Elasticity of Demand is used when there an infinitely
small changes in the demand and price of a commodity. It means that the
Elasticity of Demand for such commodities is different at different points on
the same straight line demand curve. The formula to measure Ed of a
commodity under the Geometric Method is:
• Elasticity= lower segment of demand curve/ upper segment of demand
curve.
Graphical method
Expenditure Method-
• Under this method, we measure elasticity of demand by examining
the change in the total expenditure due to a change in price.
• Prof. Alfred Marshall evolved the total outlay, or 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.
Expenditure Method
Types of price elasticity-
• 1. Perfectly elastic demand
• Perfectly elastic demand is when the price is constant but there is a change in the
demand i.e. increase or decrease of a commodity. Thus, the demand curve is
parallel to the X-axis.
• Here, EP = ∞
• 2. Perfectly inelastic demand
• Perfectly inelastic demand is when the demand is constant or there is no change in
the demand of a commodity even if the price changes i.e. increases or decreases.
• Thus, the demand curve is parallel to the Y-axis. Demand for salt is an example of
perfectly inelastic demand.
• Here, EP = 0
• 3. Relatively elastic demand
• Relatively elastic demand is when the proportionate change in demand is more than the
proportionate change in the price.
• In other words, this means that a little change in the price shall cause more change in
demand. Thus, the demand curve slopes downward from left to right. An example of this
is luxury goods.
• Here, EP ˃ 1
• 4. Relatively inelastic demand
• Relatively inelastic demand is when the proportionate change in demand is less than the
proportionate change in the price.
• In other words, this means that more change in price shall cause less change in demand.
Thus, the demand curve slopes downward from left to right but is steeper. An example of
this is the necessary goods.
• Here, EP ˂ 1
• 5. Unitary elastic demand
• Unitary elastic demand is when the proportionate change in demand
is equal to the proportionate change in price.
• In other words, it means that the change in demand is the same as
the change in price it may increase or decrease.
• Thus, the demand curve slopes downward from left to right but it is a
rectangular hyperbola. An example of this is comfort goods.
• Here, EP = 1
Types of Price Elasticity-
Income elasticity-
• Income elasticity of demand denotes the responsiveness to change in
consumers’ income with the change in the demand for a certain good.
• For a certain product, the income elasticity of demand can be positive
or negative, or non-responsive.
• The larger the income elasticity of demand for a certain product, the
greater the shift in demand there is from a change in consumer
income.
• Income Elasticity of Demand = % Change in Demand Quantity / %
Change in Income of Consumer
 Important Points:
• For superior goods income elasticity is positive, whereas for inferior good it
is negative. Positive income elasticity can assume three forms: greater than
unity (one) elasticity, unity elasticity and less than unity elasticity.
• When a change in income results in a direct and more than proportionate
change in the quantity demanded, the income elasticity is said to be
positive and more than unity. Luxury goods are its example.
• When an increase in income results in a less than proportionate increase in
quantity demanded, then the elasticity is positive and less than unity.
Necessary goods falls under this category.
Income elasticity-
Cross Elasticity
• The cross price elasticity of demand refers to how responsive or
elastic the demand for one product is with the response to the
change in price of another product. In other words, the cross price
elasticity of demand tracks the relationship between price of related
goods and demand.
• The sales volume of one product may be influenced by the price of
either substitute or complementary products. Cross-price elasticity of
demand provides a means to quantify that type of influence.
Therefore, the degree of responsiveness of changes in the demand for
one good in response to change in price of another good represents
the cross elasticity of demand of one goods for the other.
Formula for cross elasticity-
• Let us assume that there are two commodities X and Y, which are Substitutive in nature. If the price of
commodity Y increases, given that the price of commodity X remains constant, the quantity demanded
of commodity X will increase. In case the commodities X and Y are a perfect substitute for one another,
the Cross elasticity of demand will be Infinity. Therefore, Positive Cross elasticity of demand indicates
that a change in a commodity will change the demand for another commodity in the same direction.
• The type of cross elasticity of demand in which commodities are not related to one another is known
as Zero Cross elasticity of demand. To explain, if two commodities have no substitutive nature in them,
the Cross elasticity of demand will be Zero (0). This indicates that the price of one commodity will not
have any impact on the quantity demanded of another commodity. For instance, there is no relation
between the price of milk and the quantity demanded of clothes.
• Now, let us assume that Commodities X and Y are complementary in nature. If the Price of Commodity
Y increases, then the quantity Demanded of both Commodity X and Commodity Y will decrease. This is
because of the Complementary nature of the Commodities. For instance, an increase in the price of
milk will cause a decrease in the quantity demanded of Milk and Sugar. Because Sugar is used along
with Milk. This type of cross elasticity of demand is known as Negative Elasticity of Demand- indicating
that the Price of one commodity changes the quantity demanded of another commodity in an opposite
direction.
Graph-
For substitute goods: