CLASS XII ECONOMICS

ELASTICITY OF
DEMAND
1
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

ELASTICITY OF DEMAND
POINT 1: INTRODUCTION
Elasticity of demand measures the extent to which quantity demanded of a commodity
increases or decreases in response to increase or decrease in any of its quantitative determinants
[factors]. Thus, by Elasticity of Demand, we mean the extent to which the quantity demanded of a
commodity changes with respect to a change in its price, income of consumer or price of related
goods.
DEFINITION:
In the words of Dooley, “The elasticity of demand measures the responsiveness of the
quantity demanded of a good due to change in its price, the price of other goods and change in
consumer’s income”.

POINT 2: TYPES OF ELASTICITY OF DEMAND

i)PRICE ELASTICITY OF DEMAND,
ii)INCOME ELASTICITY OF DEMAND and
iii)CROSS ELASTICITY OF DEMAND

POINT 3: PRICE ELASTICITY OF DEMAND

It can be defined as a percentage change in the quantity demanded of a commodity due to
percentage change in the price of that commodity.

I. MEASUREMENT OF PRICE ELASTICITY OF DEMAND

There are three methods of measuring price elasticity of demand.
(A) Percentage or Proportionate Method,
(B) Geometric or Point Method and
(C) Total Expenditure Method.

(A) PRECENTAGE OR PROPORTIONTE METHOD:

Under this method, the elasticity of demand is measured by the ratio of its proportionate
change in the quantity demanded due to the proportionate change in price.

DERIVATION:
ED = % Change in Quantity Demanded
% Change in Price

∆Q
X 100 %
Q0
= (-) ∆P
X 100 %
P0
Q1−Q0
Q0
= (-) P1−P
0
P0
∆𝑄 𝑃0
= (-) ∆𝑃 X 𝑄
0
Here, ∆Q = Change in Quantity Demanded, ∆P = Change in Price,
P0 = Initial Price, Q0 = Initial Quantity Demanded
P1 = New Price, Q1 = New Quantity Demanded.
NOTE: We will ignore the negative sign in our calculation. We will assume negative sign as
prefix to the formula.

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 CLASS XII ECONOMICS
ELASTICITY OF
DEMAND
2
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

(B) GEOMETRIC OR POINT METHOD:

Under this method, elasticity of demand is measured at different points on the demand curve.
PRICE
M (ED=∞)

A (ED>1)

P (ED=1)

B(ED<1)

N(ED=0)

O QUANTITY DEMANDED

ED = Lower Segment On Demand Curve from a Point

Upper Segment On Demand Curve From a Point

For e.g., ED(p) = Lower Segment From P =PN =1 [჻ PN = PM]

Upper segment From P PM
Therefore, we can see at different points of the demand curve; Elasticity of Demand can be
equal to 1, more than 1, less than 1, zero, not defined.
(i) Ed(P)= 1, Unitary Elastic
(ii) Ed(B) < 1, Inelastic or Less Elastic
(iii) Ed(N)= 0, Perfectly Inelastic
(iv) Ed(A)> 1, High Elastic or More Elastic
(v) Ed(M) = not defined. Perfectly Elastic

(C)TOTAL EXPENDITURE METHOD:

Under this method, to measure elasticity of demand one finds out how much and in what
direction total expenditure changes as a result of change in the price of the commodity.

SCHEDULE:
PRICE QUANTITY TOTAL EXPENNDITURE ELASTICITY OF
(In Rs) DEMANDED (In Rs) DEMAND
1 8 8 TE α P
2 7 4 Ed <1
3 6 18
4 5 20 TE is constant
5 4 20 Ed = 1
6 3 8 TE α 1
7 2 14 P
8 1 8 Ed > 1

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 CLASS XII ECONOMICS
ELASTICITY OF
DEMAND
3
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

DIAGRAMMATIC REPRESENTATION:

PRICE TE CURVE

TE α 1 :Ed >1
P4 P

P3
TE is Constant :Ed = 1

P2

P1 TE α P :Ed < 1

O TOTAL EXPENDITURE

II. DEGREE OF PRICE ELASTICITY OF DEMAND/TYPES OF PRICE ELASTICITY OF

DEMAND:

TYPES DIAGRAM
(a) PERFECTLY INELASTIC DEMAND OR
ZERO ELASTIC DEMAND: PRICE
The change of price does not affect the demand of P3 ED=0
certain commodities, the demand of these
commodities remain almost constant. The demand P2
for these commodities are known as Perfectly
Inelastic. E. g., medicines, salt, etc. Demand curve P1
is parallel to Y-axis.
O Q1
QUANTITY DEMANDED

(b) PERFECTLY ELASTIC OR INFINITE PRICE

ELASTICITY:
Demand for a commodity is said to be perfectly ED=∞
elastic, when the demand for it may increase or
P
decrease to any extent irrespective of any change
in price, or a very small change in price. It is purely
imaginary concept. Here, elasticity of demand is
infinite (α), and demand curve becomes parallel to
X-axis. O Q1 Q2 Q3
QUANTITY DEMANDED

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 CLASS XII ECONOMICS
ELASTICITY OF
DEMAND
4
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

(c) UNITARY ELASTIC DEMAND: PRICE

Demand for a commodity is said to be unitary D
elastic if the percentage change in the quantity ED=1
demanded is equal to the percentage change in P1
price. For e.g., clothes etc. P2
[Demand curve takes the shape of rectangular
hyperbola. Here, area under the demand curve will D
always be equal].
O Q1 Q2
QUANTITY DEMANDED

(d)INELASTIC DEMAND OR LESS ELASTIC PRICE

DEMAND: D
When a considerable change in price does not lead
to much change in demand, the demand is said to
P1 ED<1 [Steep Slope]
be less elastic or inelastic. E.g., sugar.
P2 D

O Q1 Q2
QUANTITY DEMANDED

PRICE
(e) ELASTIC DEMAND OR MORE THAN UNIT
ELASTIC DEMAND:
When a small change in price leads to greater
change in demand, the demand is said to be elastic ED>1 [Flat Slope]
or more elastic. E.g., petrol. P1 D
P2 D

O Q1 Q2
QUANTITY DEMANDED

POINT 4: INCOME ELASTICITY OF DEMAND

It measures the degree of responsiveness of quantity demanded of a commodity due to
change in the income of the consumer.

ED = % Change in Quantity Demanded

% Change in Income

= ∆Q X Y
∆Y Q

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 CLASS XII ECONOMICS
ELASTICITY OF
DEMAND
5
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

POINT 5: CROSS ELASTICITY OF DEMAND

It measures the degree of responsiveness of quantity demanded of a commodity due to
change in the price of its related commodities.

EDXY = % Change in Quantity Demanded of X

% Change in Price of Y

= ∆ Qx X P Y
∆ PY QX

POINT 6: FACTORS AFFECTING ELASTICITY OF

DEMAND
i) AVAILABILITY OF SUBSTITUTE GOODS:
The demand of a commodity having substitute is very elastic, because if there is an increase
in the price of the commodity, people will start using other commodities.

ii) POSTPONMENT OF CONSUMPTION:

The demand of a commodity whose consumption can be postponed for sometime have
elastic demand just as a demand of LED TVs, it can be postponed for sometime if prices are higher.
The demand for necessaries such as food grains are inelastic because their use cannot be
postponed.

iii) NATURE OF THE COMMODITY:

The demand of necessities is inelastic and those of comforts and luxuries of life are elastic.

iv) HABITS:
If consumers are habituated of some commodities, the demand for such commodities will
usually be inelastic, because they will use them even when their prices go up. A smoker, generally
does not smoke less when the price of cigarettes goes up.

v) DIFFERENT USES OF THE COMMODITY:

Generally a commodity which has several uses will have an elastic demand. On the other
hand, a commodity only having one use will have inelastic demand. E.g., the demand for paper
increases very much when it becomes cheap. However, this argument will not hold true for ink.

vi) TIME PERIOD:

The demand for commodity is always related for some period of time, say, a day, a week,
month, year, etc. Elasticity of demand varies with the time period. Generally, longer the duration of
time period, greater would be the elasticity of demand, and vice versa. This is so because in the
short period, generally demand does not change immediately due to price changes. However, it is
true in the long period.

vii) JOINT DEMAND:

In the event of the commodity being demanded jointly such as car and petrol, its elasticity will
be directly governed by the elasticity of the other commodities. E.g., if demand for car is inelastic,
the demand for petrol will also be inelastic.

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 CLASS XII ECONOMICS
ELASTICITY OF
DEMAND
6
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

viii) DISTRIBUTION OF INCOME:

The elasticity of demand also depends on the fact as to what is the nature of distribution of
income in the society. If the distribution of income is not equal, the poor people will only buy the
necessity things of life and the demand will be inelastic.

ix) PRICE LEVEL:

Generally, the demands for very costly and very cheap goods are inelastic. E.g., gold and
salt.

x) PROPORTION OF EXPENDITURE:
The elasticity of demand for a commodity also depends on the pact as to how much part of
the income is spent on that commodity. The demand for such commodity, where a small part of
income is spent, is generally inelastic. Eg., ink button, matches box, needle, etc.

POINT 7: USES OR IMPORTANCE OF PRICE ELASTICITY

OF DEMAND
i) IMPORTANCE TO MONOPOLIST:
It is useful to monopolists. It helps the monopolist in maximizing his profit.

ii) IMPORTANCE TO FINANCE MINISTER:

If the demand for a commodity is inelastic, its price can be raised. It is useful even for the
finance minister; he can impose tax on the commodity whose demand is inelastic without fear of its
demand being reduced.

iii) IMPORTANGE FOR INTERNATIONAL TRADE:

In case of international trade, terms and conditions of trade are always in favour of those
countries whose import demands are elastic and export demand are inelastic.

iv) HELPFUL IN DECIDING REMUNERATION TO FACTORS:

If the demand for labour is inelastic, labour unions are successful in increasing their wages
and salaries.

v) BUSINESS DECISIONS:
The businessmen usually fix high price for the commodities, the demand of which is inelastic.
They can also take the decision to increase or decrease the production of different commodities,
depending upon the elastic of demand.

vi) IMPORTANCE OF FORMULATION OF GOVERNMENT POLICY:

The government decides its policies of collecting taxes or revenue keeping in view the
elasticity of demand of various commodities. The taxes (or prices) on those commodities are usually
increased for which the demand is inelastic. For example, matchboxes, electricity, cigarettes etc.

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 CLASS XII ECONOMICS
ELASTICITY OF
DEMAND
7
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

POINT 8: EXTRA INNINGS

CALCULATION OF ELASTICITY OF DEMAND ON A NON-LINEAR DEMAND CURVE

Under Geometric Method, on a Non Linear Demand Curve, in order to calculate price elasticity of
demand at any point on a curved demand curve, we have to draw a tangent to the demand curve
through a chosen point and measure the elasticity of tangent at this point as the ratio of the lower
line segment to upper line segment.
PRICE
M
D

N
O QUANTITY DEMANDED

Elasticity Of Demand At Point T (ED) = Lower Segment Of Tangent from T = TN

Upper Segment Of Tangent from T TM

QUESTION BANK
1/2 Mark Questions

1)Why is coefficient of price elasticity of demand negative?

2)If two negatively sloped straight line demand curves cross each other, will price elasticity demand
be equal at the point of intersection?
3)When is demand for the commodity called perfectly inelastic?
4)What is the value of elasticity of demand on a rectangular hyperbola demand curve?

3/4 Mark Questions

1)How does the Expenditure Method of measuring price elasticity of demand of a commodity. When
the demand is said to be inelastic?
OR
How does the Expenditure Method tell us about elasticity of demand?
2)Draw a straight line demand curve. Choose any three points on it and compare the point
elasticities at these three points.
OR
Explain with the help of a diagram the geometric method of measuring price elasticity of demand.
3)Which of the following commodities have inelastic demand:
i) salt ii) a particular brand of lipstick, iii) medicines, iv) mobile phone and v) school uniform.
4)Is the demand for the following elastic, moderate elastic, highly elastic or completely inelastic?
Give reasons in support of your answer.

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 CLASS XII ECONOMICS
ELASTICITY OF
DEMAND
8
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

i)demand for needles ii) demand for petrol iii)demand for cars iv)demand for textbooks v)demand
for fridge
vi)demand for seasonal vegetables vii)demand for milk.
5)Demand of a product is elastic. Its price falls. What will be its effect on total expenditure on the
product? Give a numerical example.

6 Marks Questions
1)Explain the various degrees of price elasticity of demand. Use diagram.
2)Express mathematically the relationship between elasticity, change in price and change in
expenditure on a good.
OR
What is the relationship between elasticity of demand and change in expenditure on a good?
3)What are the factors affecting Price Elasticity of Demand?

NUMERICALS
1)Suppose that, originally, a product was selling for ` 10 and the quantity demanded was 1000 units.
Thee product price changes to Rs14 and as a result the quantity demanded changes to 500 units.
Calculate the price elasticity. [Ans 1.25]
2) A dentist was charging Rs300 for a standard cleaning job and per month it used to generate total
revenue equal to Rs30,000. She has since last month increased the price of dental cleaning to
Rs350. As a result, fewer customers are now coming for dental cleaning, but the total revenue is
now for Rs33,250. From this, what can we conclude about the elasticity of demand for such a
demand services.
3)A customer buys 70units of a good at a price of Rs7 per unit. When price falls to Rs6 per unit, he
buys 90 units. Use total expenditure method to find whether the demand for the good is elastic or
inelastic.
4)A customer buys 20units of a good at Rs10 per unit. The price elasticity of demand of this good is
(-1). Calculate the quantity demanded by the customer when the price falls to Rs8 per unit.
[Ans 24units]
5)The Market Demand for a good at Rs4 per unit is 100 units. The price rises and as a result its
market demand falls to 75 units. Find out the new price if the price elasticity of demand of that good
is (-1). [Ans Rs5 ]
6)A consumer buys 1000 units of a good at a price of Rs10 per unit . When the price falls he buys
1,400 units. If price elasticity of demand is -2, what is the new price? [Ans Rs8 ]
7)The market price of the good changes from Rs5 to Rs4. As a result , the quantity demanded rises
by 12 units. The price elasticity of demand is (-) 1.5. Find the initial and final quantity demanded.
[Ans 40 and 52 units]
8) At a price of Rs20 per unit, the quantity demanded of a commodity is 300 units. If the price falls
by 10%, its quantity demanded rises by 60units. Calculate its price elasticity. [Ans 2]
9) Price of a good rises from Rs10 per unit to Rs11 per unit. As a result, quantity demanded of that
good falls by 10%. Calculate its price elasticity of demand. [Ans 2]
10)A consumer buys 50 units of a good at a price of Rs10 per unit. When price falls to Rs5 per unit
he buys 100 units. Find out Price Elasticity of Demand by the Total Expenditure Method.
11)As a result of 10% fall in the price of a good, its demand rises from 100 units to 120 units. Find
out the Price Elasticity of Demand. Is its demand elastic? [Ans 2]
12) With the rise in price by Rs5, the quantity demanded changes from 100 units to 95 units. The
Price Elasticity of Demand is (-)1.2. Find out the price before change. [Ans Rs120 ]
13)A customer spends Rs250 on a good when its price is Rs5 per unit . When the price rises to Rs6
per unit, he spends Rs240. Calculate the price elasticity by percentage method. [Ans 1]

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 CLASS XII ECONOMICS
ELASTICITY OF
DEMAND
9
By CS Chandan Gupta
BCOM(St. Xavier’s Calcutta),B.Ed, MCOM, MA (Eco), PGDIBO, NET, Company Secretaries, CA (Finalist)

14) The quantity demanded of a commodity at a price of Rs08 per unit is 600 units. Its price falls by
25% and the quantity demanded rises by 120 units. Calculate its price elasticity of demand. Is its
demand elastic? Give reason for your answer. [Ans 0.8]
15)Price elasticity of demand of a good is -2. 40 units of this good are bought at a price of Rs10 per
unit. How many units will be bought at a price of Rs11 per unit? [Ans 32units]
16) Price Elasticity of demand of a good is -2. 80 units of this good are bought at a price of Rs05 per
unit. Calculate the price at which 112 units of it will be bought. [Ans Rs04 ]
17)Consider the demand curve D(p)=10-3p. What is elasticity at price 5/3. [Ans 1]
18)The Price Elasticity is 2. The percentage change in price is equal to 5. Find the percentage
change in quantity. [Ans 10%]
19)Suppose the price elasticity for a good is -0.2. If there is a 5% increase in the price of the good,
by what percentage will the demand for the good go down. [Ans 1%]
20)Suppose the price elasticity for a good is -0.2. How will the expenditure on the good be affected
if there is a 10% increase in the price of the good? [Ans Expenditure will increase]
21) At a price of Rs50 per unit, the quantity demanded of a commodity is 1000 units. When its price
falls by 10%, its quantity demanded rises to 1080 units. Calculate its price elasticity of demand. Is its
demand inelastic? Give reasons for your answer. [Ans 0.8]
22)Suppose there was 4% decrease in the price of the good and as result, the expenditure on the
good increased by 2%. What can you say about elasticity of demand? [Ans more than 1]
23)A consumer buys 5 units of a good at a price of Rs4 per unit. When price falls to Rs03 per unit
he buys 10 units. Calculate Price Elasticity of Demand. [Ans 4]

THE END
INTROSPECTION TIME

 The best way to predict the future is to Create it.

 The Difference between Ordinary and Extraordinary is that little

Extra.

 Build Your Own Dreams, Or Someone Else will hire You To Build
Theirs.

 If You Want to Have The Fruit, You must “Climb” The Tree.

 Don’t Go Where the Path may Lead Go instead and Be a Trail

Blazer.

 Never Give Up.

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