Economics Lecture 4

Elasticity of Demands Balanced Sheets Ph : +91 9462550350 www.balancedsheets.co.in

Elasticity of demand
Change in quantity demanded with change in one of the determinants. Most common elasticity is Elasticity of Demand against price change of the commodity. Other elasticity
Elasticity to Income Elasticity to Substitutes price change Elasticity to Complements price change etc.

Determinants of Price elasticity

How elastic or inelastic is the demand of a commodity depends largely on below mentioned Determinants
1. 2. 3. 4. 5. 6. 7. Availability of substitutes Position of commodity in consumers budget Nature of need (Luxury or necessities) Number of uses: more uses more elasticity Period of adjustment. (Long Term or short term elasticity) Consumer habit Tied demand : Those goods which are tied to other goods is more inelastic (Like : Cones with Ice Cream)

Price Elasticity of Demand

Computation or Price Elasticity of Demand The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.
Pr ice Elasticity of Demand % Change in Qty. Demanded % Change in Price

Eg. : If the price of Bread increase from Rs. 20 to Rs. 25 and the qty. demanded falls from 20 packets to 16 Packets then elasticity of demand will be.

20 16
.20 20% 20 25 20 .25 25% .8 20

Types of elasticity
Based on quantum of Elasticity
Zero- no change( Perfectly inelastic)
Any price change will not effect the quantity demanded. Eg. Medicines

Greater than zero but less than one

Quantity Demanded will change with lesser percentage then Price movement

One ( unitary elastic)

Change in quantity demanded will be exactly equal to % change in price

Greater than one but less than infinity

Quantity demanded will change with higher percentage then price change

Infinity ( perfectly elastic)

Any price change will result in 0 demand

Types of elasticity
Zero Elasticity (Perfect Inelastic Demand)
Price Demand 5 4 1. An increase in price . . .

100

Quantity

2. . . . leaves the quantity demanded unchanged.

Types of elasticity
Elasticity (0-1) (Inelastic Demand)
Price

5 4 1. A 25% increase in price . . . Demand

90

100

Quantity

2. . . . leads to an 10% decrease in quantity demanded.

Types of elasticity
Unit Elasticity (Elasticity Equals to 1)
Price

5 4 1. A 25% increase in price . . . Demand

75

100

Quantity

2. . . . leads to a 25% decrease in quantity demanded.

Types of elasticity
Elasticity (>1) (Elastic Demand)
Price

4
1. A 25% increase in price . . .

Demand

50

100

Quantity

2. . . . leads to a 50% decrease in quantity demanded.

Types of elasticity
Infinite Elasticity (Perfectly Elastic Demand)
Price 1. At any price above 4, quantity demanded is zero. 4 2. At exactly 4, consumers will buy any quantity. Demand

0 3. At a price below 4, quantity demanded is infinite.

Quantity