Elasticity of Demand

"Prce eastcty s a concept for measurng how much the quantty

demanded responds to changng prce."
Teaching Points
3.1 Introducton
3.2 Concept of Eastcty of Demand
3.3 Types of Eastcty of Demand
3.4 Type of Prce Eastcty of Demand
3.5 Measurement of Prce Eastcty of Demand
3.6 Factors Ahectng Eastcty of Demand
3.7 Sgncance of Prce Eastcty of Demand
Teaching Objectives
To enabe the students to know and understand the concept of Eastcty of
Demand
'The best way to escape from a problem is to solve it.'
3.1 ntrod!ction
The aw of demand show that there s an nverse reaton between
prce and quantty demanded .e. when prce fas demand s more and when
prce rses demand s ess. The aw of demand does not expan the extent of
change n demand due to a change n prce. In other words the aw of
demand fas to expan quanttatve reaton between prce and demand.
Therefore, Dr. Afred Marsha expaned the concept of eastcty of demand.
3." #oncept of Elasticity of Demand
The term eastcty means responsveness or senstvty. The concept of
eastcty of demand measures the responsveness of quantty demanded to
a change n prce.
$ccording to Prof. %arshall
"Eastcty of demand s great or sma accordng to the amount
demand whch ncreases much or tte for a gven fa n prce, and quantty
demanded decreases much or tte for a gven rse n prce."
$ccording to P.$. &am!elson
"Prce eastcty s a concept for measurng how much the quantty
demanded responds to changng prce."
It s cear from the above dentons that eastcty of demand s a
technca term whch descrbes the responsveness of change n the quantty
demanded to a fa or rse n ts prce. In other words t s the rato of
percentage change n quantty. demanded of a commodty to a percentage
change n pke.
3.3 Types of Elasticity of Demand
Foowng

are three types of eastcty of demand.
1. Price Elasticity of Demand: Dr Marsha has dened prce eastcty of
demand

as beow:
"Prce eastcty of demand s a rato of proportonate changes n the
quantty demanded of a commodty to a gven proportonate change n ts
prce."
Thus, prde eastcty s responsveness of change n demand due to a
change n prce ony. Other factors such as ncome, popuaton, tastes,
habts, fashons, prces of substtute and compementary goods are assumed
to be constant. Therefore, prce eastcty of demand s wrtten as:
O = Change n quantty demanded. It s measured as the dherence between new
quantty demanded (Say O1) and od quantty demanded (O)
Thus O = O1 - O
P = Change n prce. It s measured as the dherence between new prce (P1) and
od prce (P)
Thus P = P1 - P
Prce eastcty of demand may have ve vaues nnte, zero, unt,
greater than one and ess than one.
". ncome elasticity of demand
Income eastcty of demand may be dened as the degree of
responsveness of quantty demanded to change n ncomer ony. Other
factors ncudng prce reman unchanged. It s wrtten as -
quantty demanded, Y means ncome, deta stands for a change). Income
eastcty of demand s postve, when demand ncreases wth ncreasng
ncome. Income eastcty of demand s negatve when, quantty demanded
decreases wth ncrease n ncome. In case of norma goods ncome eastcty
of demand s of nferor goods, ncome, eastcty of demand s negatve
Income eastoty of demand can be zero, one, greater than one, and ess
than one.
3. #ross elasticity of demand
Cross eastcty of demand s found n case of substtute goods as we
as compmentary goods and non-reated goods. In the case of substtute
goods change n the prce of one good, ahects the demand for another good.
For exampe, f the prce of tea rses, the demand for cohee w rse. So,
cross eastcty of demand refers to change n quantty demanded of one
commodty, due to change n the prce of another commodty. Symbocay
Proportonate change n the demand of
Ec = A/B (Here A s orgna commodty and B s prce of another

reated
substtute commodty)
3.' Types of Price Elasticity of Demand
1. n(nite ) Perfectly Elastic Demand
When a change n prce eads to nnte change n quantty demanded, t s
known as, nnte eastc demand. When demand s nnte eastc, demand
curve s horzonta straght ne parae to X axs. Symbocay Ed = ,
Perfecty eastc demand s ony a theoretca possbty.
n(nite)Perfectly Elastic Demand #!rve
". Perfectly nelastic *Demand
Irrespectve of change n prce, demand remans the same, f s caed as
perfecty neastc demand. For exampe, as shown n the gure at prce OP
demand s OD, whereas at prce OP1 (Hgher) and OP2 (Lower) the demand s
OD ony. It means demand does not change at a. When demand s perfecty
neastc the demand curve s represented by a vertca straght ne parae
to Y axs as shown n dagram. Symbocay, Ed=O.
In practce such stuaton occurs occasonay such as demand for sat.
Perfectly nclastic Demand #!rve
Fg. No. 3.6
3. +nitary Elastic Demand
When a change n prce eads to proportonate change n quantty demanded
then demand s untary eastc. For exampe, f prce fas by 50% the demand
w rse by 50%. In gure the change n prce s PP1 and change n demand s
OO1. Both the change are equa to each other. So the demand curve DD1,
shows untary eastc demand.
Symbocay, Ed- 1.
+nitary Elastic Demand #!rve
Fg. No. 3.7
When the demand curve sopes steady towards the X axs or s a
rectanguar hyperboa demand s untary eastc.
'. ,elatively Elastic Demand
When proportonate change n demand s greater than the change n prce,
the demand s sad to be reatvey eastc, for exampe, f prce fas by 50%
the demand rses by 75%. In the gure, change n demand OO1 s greater
than the change n prce PP1. Hence, the demand curve DD1 shows eastc
demand.
Symbocay, Ed >1.
,elatively Elastic Demand #!rve
Fg. No. 3.8
In

ths type the sope of demand curve s atter.
-. ,elatively nelastic Demand
When percentage change n demand s ess than percentage change n
prce, the demand s reatvey neastc. For exampe, f prce fas by 50%,
the demand w rse by 25%, .e., ess than percentage change n prce. In
the above gure, the change n prce s from OP to OP1 s greater than
change s demand from OO to OO1.
,elatively nelastic Demand #!rve
Fg. No. 3.9
Therefore, DD s the demand curve whch represents neastc demand.
Symbocay, Ed < 1.
The sope of demand curve s steeper.
3.- %eas!rement of Price Elasticity of Demand
Prce eastcty of demand s measured wth the hep of the foowng
three methods.
1. ,atio or Proportional %ethod
Ths rato method of measurng eastcty of demand s aso known as
Arthmetc or Percentage method aso. Ths method s deveoped by Dr.
Marsha. In ths method we consder percentage change n quantty
demanded and dvde t by percentage change n the prce of the commodty.
Thus
/!merical ll!stration
Table /o.3.'
,atio or Proportional %ethod
Price of 0 Demand 1+nits.
200 1000
100 1500
Prce of commodty X fas from Rs. 200/- to Rs. 100/- and quantty demanded
ncreases from 1000 unts to 1500 unts. Here percentage change n demand
s 50, whereas percentage change n prce s aso 50. Therefore, 50%, / 50%
= 1, whch, means Ed s untary or one, n ths exampe.
". Total E2pendit!re %ethod
The name of Dr. Marsha s assocated wth ths method. Ths method s aso
known as Tota Expendture Method Tota Revenue Method. In ths
method,

statstcs of tota expendture s used to nd out eastcty of
demand. Tota expendture at the orgna prce and tota expendture at the
new prce s compared wth each other, and we come to know the eastcty
of demand.
When prce fas or rses, tota expendture does not change or remans
constant, demand s untary eastc.
When prce fas, tota expendture ncreases or prce rses and tota
expendture decreases, demand s eastc or eastcty of demand s greater
than one.
When prce fas and tota expendture decreases or prce rses and tota
expendture ncreases, demand s neastc or eastcty of demand s ess
than one. Measurement of eastcty of demand wth the hep of tota,
expendture method can be better understood wth the hep of the foowng
exampe.
Table No. 3.5 - Total Expenditure Method
Price 1,s..
Demand
1+nits.
Total O!tlay
1,s..
Elasticity of
Demand
A 10 12 120 Untary or 1
8 15 120
B 10
8
12
20
120
160
Eastc or > 1
C 10
8
12
14
120
112
Ineastc or < 2
In exampe A, orgna prce s Rs. 10 per unt and demand s 12 unts.
Therefore tota expendture ncurred s Rs. 120/-. Prce fas to the eve of Rs.
8/- and demand rses up to15 unts. But tota expendture s st Rs. 120/-. In
ths

case, tota outay does not change even though there s change n prce.
Therefore, demand s untary eastc.
In exampe B, at the prce Rs. 10/-, 12 unts are demanded. So tota orgna
expendture s Rs. 120/-. Prce fas to Rs. 8/- per unt and demand rses to the
eve of 20 unts. Therefore, tota expendture ncurred on commodty rses to
Rs. 160/-. Tota expendture under ths new condton of change n prce, s
greater than orgna expendture. Hence, n ths exampe, demand s eastc
or eastcty of demand s greater than one.
In exampe C, orgna tota outay s Rs. 120/- wth a change n prce to Rs.
8/- per unt, demand expands to the extent of 14 unts. Nevertheess, tota
expendture Rs. 112/-, whch s ess than orgna expendture. Therefore, n
ths exampe demand tends to be neastc or eastcty of demand s ess
than one.
3. Point Elasticity %ethod or 3eometric %ethod
The proportona method and tota outay method enabe us to measure
eastcty of demand at a gven pont on the demand curve. Therefore, Dr.
Marsha has deveoped yet another method to measure eastcty of
demand, whch s known as Pont or Geometrc method. At any pont on
demand curve eastcty of demand s measured wth the use of the foowng
formua.
Wth the hep of the foowng exampe, we can understand how to measure
eastcty of demand at a pont on, near demand curve.
4inear Demand #!rve
Fg. No. 3.10
In the above gure DD s, demand curve and we assume that ts ength s 6
cm. At Pont P, demand s nnte eastc, whereas at pont P
4
eastcty of
demand s zero. Therefore, we have to measure eastcty of demand on
ponts, P
1
, P
2
and P
3
At pont P
1
, eastcty of demand = ower segment of the demand curve
beow the

gven pont P
2
P
4
Upper segment of the demand curve above the
pont

s P
1
P. Therefore, Ed = P
1
P
4
P
1
P. Ed>1. It means demand s eastc or
eastcty of demand s greater than one at pont.
Smary, by usng the above gven formua, we can measure eastcty of
demand at pont P
2
and P
3
. At pont P
2
, demand s untary eastc. It means
eastcty of demand s equa to one whereas at pont P
3
demand s ess than
one.
/on*4inear Demand #!rve
Fg. No 3.11
If the demand curve s non-near, then a tangent s, drawn to the
demand curve at the gven pont. The tangent shoud touch both the axes -
OX axs and OY axs. The prce eastcty s measured by the rato of ower
segment to the upper segment.
3.5 6actors Determining Elasticity of Demand
Foowng are the factors whch nuence Eastcty of Demand
1. /at!re of #ommodities: Commodtes may be ether necessares or,
uxures. Normay, eastcty of demand for necessares s neastc and for
uxurous demand tends to the eastc.
". D!rability : The demand for durabe goods s eastc, whereas the demand
for pershabe goods s neastc.
3. &!bstit!te 3oods : Avaabty of substtutes aso determne Eastcty of
Demand. The arger the number of substtutes for a commodty n the
market, demand tends to the more eastc.
'. +ses of a #ommodity : When commodty can be put to severa uses. ts
demand s eastc. The demand for eectrcty s eastc.
-. Price : Goods, whch are very hghy prced or very ow prce demand, s
normay neastc. e.g. Demand for match box s neastc.
5. 7abits : Habts nuence Eastcty of Demand. The demand, whch satsfy
the habts, s normay neastc. For nstance, the demand for cgarettes s
neastc. Aso consumpton of essenta goods cannot be postponed therefore
demand for them s neastc.
8. ncome of #ons!mer : When ncome eve s hgh demand s normay
neastc, and demand s eastc at a very ow eve of ncome.
9. Proportion of ncome &pent : When proporton of ncome spent s arge
demand for goods tend to the neastc. For nstance, demand for food grans
s neastc.
:. #omplementary 3oods : By and arge, demand for compementary goods
s neastc. Because compementary goods such as motor car and petro are
demanded |onty.
3.8 &igni(cance of Price Elasticity of Demand
1. %onopoly and Elasticity of Demand ; The ob|ectve of a seer n
monopoy market s prot maxmzaton. Snce he s a snge seer n
monopoy, market havng tota contro over suppy and prce, he can take
decsons about prce pocy and get more prot. If demand s neastc for the
product sod by monopost, he w rase the prce of that commodty and
earn more prot.
". Ta2ation Policy and Elasticity of Demand ; The concept of Prce
Eastcty of Demand s usefu to the government n the determnaton of
taxaton pocy. The nance mnster consders the Eastcty of Demand,
whe seectng goods and servces for taxaton. If government wants more
revenue, those goods w be taxed more, for whch demand s neastc.
Therefore, generay heavy taxes are mposed on goods ke cgarettes,
quors and actua goods for whch demand s neastc.
3. 6i2ation of <ages and Elasticity of Demand ; The concept of Eastcty
of Demand s usefu to trade unons n coectve barganng, for wage
determnaton. When trade unon eaders know that demand for ther product
s neastc, they w nsst for more wages to workers.
'. nternational Trade and Elasticity of Demand ; The concept of
Eastcty of Demand s usefu to determne norms and condtons n
nternatona trade. The countres exportng commodtes for whch demand
s neastc can rase ther prces. For nstance, Organzaton of Petroeum
Exportng Countres (OPEC) has ncreased the prces of o severa tmes. The
concept s aso usefu n formuatng export and mport pocy of a country.
-. P!blic +tilities : In case of pubc uttes ke raways whch have an
neastc demand, to avod consumers expotaton government can ether
subsdse or natonase them. Whch shows need of government monopoy.
=.1 6ill in the blan>s with appropriate alternative given in the brac>ets.
1. The demand for sat s .................. (eastc/neastc/nnte eastc/untary
eastc)
2. Income eastcty of demand for nferor goods s ................. (postve/
negatve/zero/greater than one).
3. Perfecty eastc demand curve s ..................... (horzonta to OX axs/
horzonta to OY axs/atter/steeper)
4. Cross eastcty of demand s appcabe to .......................... goods.
(unreated/ substtute/nferor/natura)
5. The sope of demand curve s ..................... n case of neastc demand.
(atter/steeper/horzonta/vertca)

?. %atch the following
3ro!p @$@ 3ro!p @?@
1. Car and petro a. Eastc demand
2. Pont method b. Compementary,
3. Necessary goods c. Geometrc method
d. Ineastc demand
#. &tate whether the following statements are T,+E and 6$4&E
1. Demand for uxures s eastc.
2. Perfecty neastc demand curve s parae to the X axs.
3. Tota outay s prce mutped by quantty.
4. Untary Eastc Demand rarey occurs n practce.
5. Concept of Eastcty of Demand s usefu for nance mnster.
=." $ De(ne or e2plain the following concepts;
1
A
1. Cross Eastcty Demand
2. Untary Eastc Demand
3. Income Eastcty of Demand
4. Eastc Demand
?. 3ive reasons or e2plain the following statements;
1. Demand for necessares s neastc.
2. Demand for habtua; goods s neastc.
3. Concept of Eastcty of Demand heps trade unon eaders.
4. Demand for the commodty havng mutpe uses has eastc demand.
5. Demand for goods havng snob appea has neastc demand.
=.3 $. Disting!ish between
1. Perfecty eastc demand and perfecty neastc demand.
2. Reatvey, eastc demand and reatvey neastc demand.
?. <rites short notes on;
1. Geometrc method
2. Rato method
=.' $nswer the following B!estions;
1. Expan the concept of Eastcty of Demand.
2. Expan the mportance of concept of Eastcty of Demand for nternatona
trade.
=.- &tate with reasons whether yo! agree or disagree with the
following statement.
1. Varous factors nuence Eastcty of Demand.
2. Tota outay method s one of the methods of measurng Eastcty of
Demand.
=.5 $nswer the detail;
1. Expan, Rato method and Geometrc method of measurng Eastcty of
Demand.
2. What are the types of Prce Eastcty of Demand ?
Project ;
Study the responsveness of demand for commodtes ke sat, matchboxes,
candes, teevson, foodgrans wth respect to ncome eve of ve fames.