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NATIONAL UNIVERSITY OF MODERN

LANGUAGES
MANAGEMENT & SCIENCES

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Presented By:

SUPERIORS

Humayun Sabir
Zahid Rafique

Faisal Maqsood
Junaid Qazi
Aman Ullah Khan
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 A general concept used to quantify the
response in one variable when another
variable changes

 A standardized measure of the

sensitivity of one (dependent) variable
to changes in another variable

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Degree of sensitivity or responsiveness
of demand to changes in any of the
factors affecting it

%∆ Q
E =
∆Z

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1. Unitary elasticity of demand
ED = 1
2. Relative inelasticity of demand ED < 1
3. Relative elasticity of demand
ED > 1
4. Perfect elasticity
ED = ∞
5. Perfect inelasticity
ED = 0

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 Percentage change in demand is same
as percentage change in price

Price
D

O
Quantity

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Percentage change in demand is less
than percentage change in price

Price

O
Quantity

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Percentage change in demand exceeds percentage change
in price

Price

O
Quantity

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Change in demand but price is constant

Price
D

Quantity

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No change in demand due change in price

D
Price

Quantity

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 Price elasticity of Demand
 Income elasticity of Demand
 Cross elasticity of Demand
 Price elasticity of demand
 Arc elasticity of demand
 Elasticity of Supply

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 Price elasticity of demand is a measure of how
much the quantity demanded of a good responds
to a change in the price of that good.

 Price elasticity of demand is the percentage

change in quantity demanded given a percent
change in the price.

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 Percentage/ Proportionate method

 Graphical method

 Total outlay method

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 The price elasticity of demand is computed as the percentage
change in the quantity demanded divided by the percentage
change in price.

P e r c c h e q a n und t a age g nme e t

P r t i i c c d e i et =e y m l a o a s f n d
P e r c c h e p a n rn t i a g c g

Q p
Ed=
p Q
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 P e r c e c n h t a ng q ge u e a d in ne t im t y a n d
P r i c te i c e i l t da y es om =f a n d
P e r c e c n h t a ng p ge r e i c i e n
Example: If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones, then your elasticity of demand would be
calculated as:

( 1 −0 8 )
×1 0 0 2 0 %
1 0 = = 2
( 2 . 2 −0 2 . 0 ) 0
× 1 0 01 0 %
2 .0 0
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%AGE CHANGE %AGE ELASTICITY OF DEMAND
IN PRICE CHANDE IN E=% CHANE IN P
QD %CHANGE IN QD

20 20 E=1 unity
20 30 E=1.5 more elastic
20 10 E=0.5 less elastic
20 0 E=0 in elastic
NO CHANGE 20 INFINITY in finite elastic

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Elasticity
differs
along a
linear
demand
curve

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 lower portion of the demand curve
Elasticity =
Upper portion of the demand curve

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 PRICE of Quantity Total Ed
Commodity Demanded Expenditure

↓10 50 500 E=1

5 100↑ 500

↓10 50 500 E<1

5 150↑ 750

↓10 50 500 E>1

5 75↑ 375
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 10 A E=1
Price 5 B

50 100

Quantity

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 A
E<1
10

Price B
5

O 50 75

Quantity

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 E>1

A
Price 10
B
5

50 150
Quantity

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 Income elasticity of demand measures
how much the quantity demanded of a
good responds to a change in
consumers’ income.
 It is computed as the percentage
change in the quantity demanded
divided by the percentage change in
income.

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 P e r c e c n h t aa ng
i n q yu a d n e t mi t a
I n c o sm t i e c i e dt yl e a mo = f a n d
P e r c e c n h t aa ng
i n i n c o m

Q y
Ed=
y Q
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%AGE CHANGE%AGE ELASTICITY OF DEMAND
IN INCOME CHANDE IN E=% CHANE IN P
QD %CHANGE IN
INCOME

20 20 E=1 unity
20 30 E=1.5 more elastic

20 10 E=0.5 less elastic

20 0 E=0 in elastic
NO CHANGE 20 INFINITY in finite
elastic

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INCOME ELASTICITY OF DIFFERENT CONSUMER GOODS

COMMODITIES COEFFICIENT OF IMPACT ON

INCOME EXPENDITURE
ELASTICITY OF
DEMAND

Necessities 0<E≤1 Less than proportionate

(Inelastic demand) change in income

Inferior E<0 Increase in income

associated with decline in
quantity demanded
Superior/ Luxuries E>1 More than proportionate
(Elastic demand) change in income

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 A measure of the degree of
responsiveness of the demand for
one good (X) to a change in the
price of another good (Y)

Proportionate change in quantity demanded of commodity X

Cross Elasticity=
Proportionate change in price of commodity Y

+
Substitutes
-
Complements
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 d
% ∆Q X PY
EQ X , PY = × d
% ∆PY Q X
where
Qx = Quantity demanded for product “x”
∆ Qx= Change in Qx
Py = Price of product “y”
∆ Py = Change in Py

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 Pa Qa Qb Pb

12 90 100 10

12 140 50 20

 ∆ Qa = 140 – 90 = 50
 ∆ Pb = 20 – 10 = 10
 Qa = 90 , Pb = 10
 Ec = 50/10 x 10/90
= 5/9 > 0
 Pa Qa Qb Pb

10 100 100 20

10 50 50 40

 ∆ Qa = 40 – 20 = 20
 ∆ Pb = 50 – 100 = -50
 Qa = 100 , Pb = 20
 Ec = -50/20 x 20/100
= -1/2 < 0
 elasticity at a particular point on demand curve
 It can measure in two ways:

No.1

Q p
Ed=
p Q

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 No.2

lower portion of the demand curve

Elasticity =
Upper portion of the demand curve

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 At two different point or average elasticity over a segment
of demand curve

Q2 − Q1 P2 − P1
Es = ÷
(Q1 + Q2 ) / 2 ( P1 + P2 ) / 2

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 A Arc elasticity

Price B

O Quantity

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ELASTICITY OF
SUPPLY

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Percentage change in quantity supplied as a result of the percentage change in price

% ∆Quantity supplied
ES =
% ∆ Price

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 Es = ∞ Perfectly elastic

1 < Es < ∞ Relatively elastic

Es = 1 Unitary elastic
0 < Es < 1 Relatively inelastic

Es = 0 Perfectly inelastic

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 Y

PRICE
S

O X

QUANTITY SUPLIED

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 Y

S
PRICE

O X

QUANTITY SUPLIED

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 Y
S
PRICE

O X

QUANTITY SUPLIED

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 Y
S
PRICE

O X

QUANTITY SUPLIED

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 Y S

PRICE

O X

QUANTITY SUPLIED

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Firm XYZ supplies 2000 pens at a price of
Rs 8 per pen. When price increases to Rs
10, the supply increases to 3000 pens.
Find the elasticity of supply of pens.

Answer: 2

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