ELASTICITY OF DEMAND

Degree of responsiveness of demand to change in any of its

determinants is called elasticity of demand

We have three different concepts of elasticity of demand

• Price elasticity of demand

• Cross elasticity of demand and

• Income elasticity of demand

Price elasticity of demand

• Price elasticity of demand or elasticity of demand, is the degree of responsiveness of the demand for commodity to a change in its price.

• Ed=Percentage change in quantity demanded

• Percentage change in price

Ed=

Value of Elasticity Coefficients and their Description

Value of Elasticity coefficient

Type of elasticity Description

Ed=0 Perfectly Inelastic Quantity demanded does not change with price at all

Ed<1 Inelastic or less than unit elastic

% change in demand is less than % change in price

Ed=1 Unit elastic

% change in demand is equal to % change in price

Ed>1 Elastic or more than unit elastic

% change in demand is more than % change in price

Ed=∞ Perfectly elastic

Purchasers are prepared to buy all they can obtain at some price and none at all at an even slightly higher price.

Perfectly Inelastic

Q

price

Perfectly Elastic

quantity

Price

Unit Elastic

Inelastic

quantity

Price

Elastic

quantity

price

Flat and steep curve

• More generally we can say that elasticity of demand at a common point will be more on a flatter curve than on a steeper curve.

quantity

price

d

d

d,

D,

R

A BC

Methods of Measurement of Price Elasticity of Demand

• Total Outlay Method or Total Expenditure Method

• Point Method and

• Arc Method

Total out lay Method

Sugar

Cloth

Cheese

P Q TQ P Q TQ P Q TQ

18 10 180 18 10 180 18 10 180

15 11 165 15 12 180 15 14 210

12 12 144 12 15 180 12 20 240

Point Method

• Measurement of elasticity on demand curve at a point is known as point elasticity of demand.

• Ed= Lower segment of the demand curve

– Lower segment of the demand curve

Point Method

Quantity

priceEd=1

Ed=1

Ed<1

Ed

Ed>1

Ed=

=0

∞