[ Elasticity of Demand

Elasticity of demand is known as degree of responsiveness of quantity demanded to the change in

determinants of it. It means elasticity of demand refers to the percentage change in demand for a
commodity with respect to percentage change in any of the factors affecting demand for the commodity.
There are 3 types of elasticity demand.
(i) Price elasticity
(ii) Income elasticity
(iii) cross elasticity
Price elasticity: - The responsiveness of quantity demanded of a commodity to change in its price is
known as price elasticity of demand. It establishes a quantitative relationship between quantity demanded
of the commodity and its price while other factors remaining constant.

Ed = % change in quantity demanded

% change in price

Degrees of price elasticity of demand:

Perfectly inelastic demand: - When there is no change in the quantity demanded of a commodity with
the change in price of it is known as perfectly inelastic demand. The Demand Curve in this case will be a
vertical straight line parallel to Y- axis & elasticity of demand will he zero. It can happen in the case of
necessity without which the survival is difficult. But most of the economists consider it an imaginary
situation.
Y D

PRICE P1

P ed = O

P2

O Q X

(ii) Perfectly elastic demand :- When quantity demanded changes without any change in the price of the
commodity and a little increase in the price brings the quantity demanded to zero. Demand Curve in this
case will be horizontal straight line parallel to x- axis & elasticity of demand will be infinite It is an
imaginary situation. Y

Price Ed = ∞

P D D

O Q Q1 Q2 X

(ii) Highly elastic or Relatively elastic or More than unitary elastic :- When percentage
change in quantity demanded is more than percentage change in price it is known as highly

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 elastic demand. Demand Curve in this case will be downward sloping & flatter & elasticity of
demand will be > 1. eg. Luxuries.
Y
D
Price
P Ed > 1

P1 D

O Q Q1 X Qty

(iii) Less elastic or Relatively inelastic or less than unitary elastic: When percentage change
in quantity. demanded is les than percentage change in price it is known as less elastic
demand. Demand Curve in this case will be downward sloping but steep &demand will be <
1. It is an example of necessities.
Y

Price d
P Ed < 1

P1

O Q Q1 X Qty

(iv) Unitary elastic demand :- When percentage change in quantity demanded is equal to
percentage change in price, it is known unitary elastic. Demand Curve in this case will be
rectangular hyperbola & elasticity of demand will be = 1
(Rectangular hyperbola is curve under which all rectangular areas will be the same) Y
D
Price
P Ed = 1

10%
P1 D

10%

O Q Q1 X Qty

Measurement of elasticity of Demand.

These are two methods of measuring elasticity of demand :

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 i) Arc Method: - we measure the elasticity of demand of a finite range given on the
demand curve. There are two methods:
a) Total expenditure method
b) Percentage method

ii) Point method / geometric method: - In the point method we measure the elasticity
of demand of a particular point given on the demand curve. It is purely a geometric
method

I. Percentage Methods:- In this methods price elasticity of demand is measured by the ratio
of percentage change in quantity demanded to percentage change in price of the
commodity thus :

Ed = Percentage change in quantity demanded

Percentage change in price X100

Ed = Change in qty demanded

Initial demand X 100

Change in price x 100

Initial price

= ∆ Q/Q X P/∆ P

∆ P/P X100 = ∆ Q/∆ P X P/Q

Percentage methods does not depend on units of measurement of quantity demanded . it is unit
free measurement because it uses percentage change in price and quantity demanded. While
calculating price elasticity of demand by percentage methods we ignore the negative signs it
means we should only take absolute values and not their signs.

Total expenditure method: - It is given by professor Marshall In this method; we measure the
elasticity with the help of change in total expenditure due to change in price.

Price Demand T. exp. (P X D)

1 10 10 Ed < 1
2 9 18 TP is increasing
3 8 24 Ed < 1
4 7 28
5 6 30 TP is constant
6 5 30 Ed = 1
7 4 28 TP is decreasing
8 3 24 Ed > 1
9 2 18
10 1 10

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 X <d>1
Price P1

P2

P3 ed = 1

P4

P5
Ed < 1

O Y Qty

There are 3 observations related to total expenditure method

(i) When price and Total expenditure both move in same direction. Either both are increasing or
decreasing the elasticity in this case will be less than 1.
(ii) With the change in price the total expenditure does not change( remains constant). The Ed = 1
(iii) When price and total expenditure move in opposite direction. When price increases
expenditure decreases and vise versa the elasticity of demand will be greater than 1.

Total expenditure method does not give the exact magnitude of the elasticity it only give us general measure
.By this method we only know whether the elasticity is equal to one ,greater than one or less than
one.

iii) Point method / geometric method: - In point method we measure the elasticity of demand
of a particular point given on the demand curve. It is purely a geometric method
Ed = Lower line segment
Upper line segment

Linear demand curve

Y D Ed = ∞

C Ed > 1

A ed = 1

B ed < 1

E ed = 0
● D
●

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 Non Leaner demand curve

A
Y

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 the chosen point and measure the elasticity of the tangent at this
point as the ratio of the lower line segment to the upper line segment.

FACTORS AFFECTING ELASTICITY OF DEMAND:-Elasticity of demand differs from commodity to

commodity. Not only that, elasticity of demand of the same commodity may be different for different
persons

1.Level of the income of the consumer: In case of very high level of income as well as very low level of income
elasticity of demand will be low in comparison to middle income people.

2.Price Range: - commodities which have very high or low price will have inelastic demand & the
commodities with moderate price we have elastic demand.

3. Availability of Substitutes: The demand for a commodity will be very elastic if some other
commodities can be used for it. A small rise in the price of such a commodity will induce consumers to use
its substitutes. For example, gas, kerosene oil, coal etc. will be used more as fuel if the price of wood
increases. On the other hand, the demand of such commodities is inelastic which have no substitutes such
as salt.
4. Time period: Longer is the time period more elastic is the demand. In the short period if price of a
commodity like petrol is increased, its demand will not fall immediately and hence it would be inelastic or
less elastic. But if period is longer alternative sources of energy can be developed and hence demand
would be elastic.
5. Proportion of total expenditure spent on the product: If a small proportion of total
expenditure is spent on a commodity, its demand will be inelastic such as demand for salt. On the other
hand, if a major portion of total expenditure is spent on a commodity, its demand will be more or highly
elastic such as demand for luxuries.
6. Habits:Some products which are not essential for some individuals are essential for others. If
individuals are habituated of some commodities the demand for such commodities will be usually
inelastic, because they will use them even when their prices go up. A smoker generally does not smoke less
when the price of cigarette goes up.
7. Nature of the commodities: Generally, the demand for necessaries is inelastic and that for comforts
and luxuries of life elastic. This is so because certain goods which are essential to life will be demanded at
any price, whereas goods meant for luxuries and comforts can be dispensed with easily if they appear to
be costly.
8. Various uses:Generally, a commodity which has several uses will have an elastic demand such as
milk, wood etc. On the other hand, a commodity having only one use will have inelastic demand.

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 9. Postponement: Usually the demand for such commodities whose use can be postponed for some
time is elastic. For example, the demand for LED is elastic because its use can be postponed for some
time if its price goes up, but the demand for rice and wheat is inelastic because their use cannot be
postponed when their prices increase.

Income elasticity of Demand: - is a degree of responsiveness of quantity demanded of a commodity

to a change in the income of the consumer. Thus

Ey = % change of quantity demanded

% change in the income of the consumer

There are different (3) types of income elasticity of demand:

1. Positive income elasticity: - When quantity demanded & income of the consumer move in
the same direction, it is said to be positive income elasticity
eg :- With increase in the income of the consumer if there is increase in the quantity demanded of a
commodity. It is said to be positive relationship. It happens in the case of normal goods.
Y D

Income
I1

I2

O Q2 Q Q1 X Qty

2. Negative income elasticity: - is said to be negative when increase in the income of the consumer
leads to fall in the quantity demanded of a commodity. It means income & Demand both will be
moving in opposite direction. It happens in the case of inferior goods.

Y
D
Income
I1

I2

O Q1 Q Q2 X Qty

3. Zero income elasticity: -Elasticity is said to be zero when there is change in the income of
the consumer, but it does not bring any change in the demand of the commodity. It is an
exceptional case which is possible only in the case of necessities .eg. Salt.

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 Y

I1 D

I Ey = 0

I1
D
O Q X Qty

Cross elasticity of demand: - The degree of responsiveness of quantity demanded of one

commodity to the change in price of the other commodity is known as cross elasticity of demand.
Exy = % change in quantity demanded of X commodity
% change in the price of Y commodity

Types of cross elasticity of demand: -

1. Positive cross elasticity of demand: - When increase in price of one commodity leads to
increase in quantity demanded of other commodity is known as positive cross elasticity of
demand. It happens in the case of substitute goods.

Y D

Price of tea
P1

P2

O Q2 Q Q1 X
Demand of coffee

2. Negative cross elasticity: - When the increase in the price of 1 commodity Leads to decrease in
the demand of other commodity is known as negative cross elasticity of demand. It happens in
the case of complementary goods. E.g.: Pen & ink, car & petrol etc.

Price of ink D

P1

P2

O Q1 Q Q2 X Qty

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 3. Zero cross elasticity: - When change in the price of one commodity does not bring any
change in the quantity demanded of other commodity is called zero cross elasticity. It
happens in the case of non-related goods. e.g.: Books & table

p1 D
Price of book

P E xy = 0

p1
D
O Q X
Demand of table

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