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
∞
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