ELASTICITY
OF
DEMAND
BY: K I R T I M A L H OT R A 2 2 / 1 8 3 5
E K A G R ATA K U M A R 2 2 / 1 8 2 0
NEHA NEGI 22/1853
HARSHA 22/1823
AKSHARA 22/1808
Elasticity of demand is a degree
of responsiveness of change in
quantity demanded due to change
in its price.
E= %CHANGE IN QUANTIT Y DEMANDED/%CHANGE IN PRICE
1. Perfectly Elastic
when,
𝑦
% change in quantity with no
% change in price
10 𝐷
price here,
e=∞
quantity
2. Perfectly Inelastic
𝑦 when,
𝐷 % change in price with no
price 10 % change in quantity
5
here,
e=0
1 𝑥
quantity
3. Highly Elastic
𝑦 when,
𝐷
% change in quantity > % change
price 10 in price
9
here,
e>1
10 20 𝑥
4. Unitary Elastic
𝑦 𝑦
𝐷 𝐷
(rectangular hyperbola) 20
price price
10
𝑥 5 10 𝑥
quantity
quantity
when, % change in qty demanded = % change in price
here,
e=1
5. Highly Inelastic
𝑦 𝐷 when,
% change in qty < % change in
10
price price.
5
here,
e<1
4 5 𝑥
quantity
Three ways of
measuring
Elasticity
Percentage method or
Proportionate method
e = change in qty demanded X original price
change in price qty demanded
OR
e = % change in qty demanded/% change in price
Percentage method is a way to measure elasticity of demand by comparing the percentage
change in quantity demanded to the percentage change in price.
EXAMPLES:-
Q1. Given that at Rs.10, 40 units were demanded. When price reduced to Rs. 8, qty demanded increased to 60 units.
Ans: Original Price= 10
Original Qty Demanded= 40
Change in Price= 8-10 = -2
Change in qty demanded= 60-40= 20
e= 20 X 10 = -2.5
-2 40
Note:- the negative sign shows INVERSE relation.
Here, e>1
Q2. Given that when the price were Rs. 100, 200 units were demanded. When price reduced by 25, demand increased
to 250.
Ans: Original Price= 100
Original Qty Demanded = 200
Change in Price= 75-100= -25
Change in Qty Demanded= 250-200= 50
e= 50 X 100 = -1
-25 200
Note:- The negative sign shows INVERSE relation.
Here, e = 1
Q3. When the price was Rs 50, 100 units were demanded. When the price increased by 10, qty demanded reduced by
25.
Ans:- Original Price= 50
Original Qty Demanded= 100
Change in Price= 60-50= 10
Change in Qty Demanded= 75-100= -25
e= -25 X 50 = -1.25
10 100
Note:- The negative sign shows INVERSE relation.
Here, e>1
Total Expenditure or Total Outlay
Total Expenditure = price X qty demanded
=> Total Expenditure = Total Revenue
1.
PRICE QUANTITY TOTAL EXPENDITURE
(A) (B) (A*B)
6 10 60
5 15 75
4 20 80
When price falls, Total Expenditure rises, i.e., there is an inverse relation between price and total
expenditure.
e>1
2.
PRICE QUANTITY TOTAL EXPENDITURE
(A) (B) (A*B)
6 10 60
5 11 55
4 12 48
When price falls, Total expenditure also falls, i.e., there is a direct relation between price and total
expenditure.
e<1
3.
PRICE QUANTITY TOTAL EXPENDITURE
(A) (B) (A*B)
6 10 60
5 12 60
4 15 60
With fall or rise in price, there is no change in Total Expenditure.
e=1
Geometric or Point Method
Represent all 5 elasticities on a single line demand curve:
ⅇ=∞ e = lower segment
𝐴
ⅇ>1
𝐵
ⅇ=1 upper segment
𝐶
ⅇ<1
𝐷
ⅇ=0
𝐸
1. UNITARY 2. HIGHLY ELASTIC 3. HIGHLY 4. PERFECTLY . HIGHLY ELASTIC
ELASTIC INELASTIC ELASTIC
e= Lower segment e= Lower segment e= Lower segment e= Lower segment e= Lower segment
Upper segment Upper segment Upper segment Upper segment Upper segment
= CE/AC = BE/AB = DE/AD = AE/0 = 0/AE
But, CE=AC (since, But, BE>AB But, DE<AD Since there is no Since there is no
lower segment = upper segment. upper segment.
upper segment)
Therefore, Therefore, Therefore, Therefore, Therefore,
e=1 e>1 e<1 e=∞ e=0
Factors Affecting
Elasticity of
Demand
AVAILABILITY OF CLOSE SUBSTITUTES
If available, ELASTIC DEMAND If not available, INELASTIC DEMAND
HABITUAL NECESSITY
If it is habitual, INELASTIC DEMAND If it is not habitual, ELASTIC DEMAND
SHARE IN TOTAL EXPENDITURE
If low or very small, INELASTIC DEMAND If high or large, ELASTIC DEMAND
NATURE OF COMMODITY
If necessity, INELASTIC DEMAND If Luxury, ELASTIC DEMAND
PRICE OF COMMODITY
If high price, ELASTIC DEMAND If low price, INELASTIC DEMAND
POSTPONEMENT OF COMMODITY
If cannot be postponed, INELASTIC If can be postponed, ELASTIC DEMAND
DEMAND
DIVERSIFIED USES
If many uses, ELASTIC DEMAND If not many uses, INELASTIC DEMAND
TIME PERIOD
If short term, INELASTIC DEMAND If long term, ELASTIC DEMAND
CONCLUSION
In microeconomics, elasticity of demand is crucial for understanding consumer behavior and
market outcomes by measuring how the quantity demanded of a good or service responds to
changes in price or income. For businesses, knowing a product's elasticity helps in setting optimal
prices to maximize revenue and profit, as elastic demand allows for revenue growth through price
reductions, while inelastic demand enables price increases without significantly affecting sales
volume. For consumers, it explains how shifts in income levels influence spending on normal and
inferior goods. Overall, elasticity of demand provides valuable insights into market dynamics,
guiding both businesses and policymakers in making informed decisions that enhance economic
efficiency and responsiveness.
