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OF DEMAND
ELASTICITY OF
DEMAND
Definition:
Elasticity of demand is the measurement of the change in demand in response to a given change in the priceof a commodity
1. INCOME
ELASTICITY OF DEMAND
Formula: Ey = prop. Change in demand prop. Change in income
EXAMPLE:
Income 100 200 Demand 10 20
200 income
100
10 quantity 20
income
quantity
D income
D
income D quantity
E. HIGHILY
INELASTICITY OF DEMAND
income D quantity
2. CROSS
ELASTICITY OF DEMAND
Formula:
prop. Change in the
Ec
SUBSTITUTE GOODS:
Y
D 5 4
price 3
D
X
30 40 50
quantity
Y
D
price
D
price
D
price
D
quantity
DEMAND
HIGHILY INELASTICITY OF
price
X quantity Perfect elasticity of demand
COMPLIMENTARY GOODS:
Y
D
price
5 4 3 D
10
20
30
quantity
Y
D
price
D
price
D
price
D
HIGHILY INELASTICITY
OF DEMAND
quantity
Y
D
price
price
Perfectly Inelastic Demand Perfectly Elastic Demand Highly Inelastic Demand Highly Elastic Demand Unitary elastic demand
Perfectly inelastic demand is one in which a change in price produce no change in demand
Price
Ep = 0
Q Quantity Demand
Perfectly elastic demand is one in which a little change in price will cause an infinite change in demand
Ep = Price
P D
O Quantity Demand
Y
D
Ep < 1
P
Price
P1
D O
Q1
Quantity Demand
Ep > 1
D Price
P P1
D
Q1
Quantity Demand
Ep = 1
P
P1 D
O
Q1
Quantity Demand
METHODS
TOTAL OUTLAY METHOD
Value of price elasticity
Ep >1
Y
A (Ep > 1)
Price
B
(Ep =1) C D
Ep < 1
Ep = 1
(Ep < 1)
O X Total Expenditure(Rs.)
Ep =
POINT METHOD
Linear demand curve Non-linear Demand Curve
Y C D
Y A
Ep = Ep > 1
Ep = 1
Price
Ep < 1
Price
A D E
Ep = 0
Quantity Demand X
O Quantity Demand
ARC METHOD
Price
P
P1
A B
Ep =
O Q Q1 X Quantity Demand
QA QA + Q1B PA PA + P1B