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1. Team -3
ELASTICITY OF DEMAND
Subject : Micro Economics 106
Sajun Saha
Lecturer
Department of Human Resource Management
Jatiya Kabi Kazi Nazrul Islam University

2. Introduce To Team Members
ID No Name
20133021 Himel Saha
20133022 Sagor Ahmmed
20133023 Md. Mirajul Islam
20133024 Partho Saha
20133025 Hasibul Hossen Shanto
20133026 Kazi Mujtoba Shahria
20133027 Ausaf Al Adib
20133028 Monika Rani

3. CONTENT
1 . Meaning of Elasticity and Elasticity of Demand
2 . Elastic and Inelastic Demand
4 . Factor Determining Price Elasticity of Demand
3 . Types of Elasticity
5 . Measurement of Price Elasticity of Demand
6 . Price Elasticity and Different Curve Technique
7 . Practical Application of Elasticity of Demand
8 . Explain The Theoretical Importance of Elasticity of Demand

4. 1. Elasticity
We have seen that there is an inverse relation between demand and price.
Elasticity is the measurement of the responsiveness of an economic variable in response to a change in another
economic variable.
Elasticity is a central concept in economics, and is applied in many situations. Basic demand and supply analysis explains
that economic variables, such as price, income and demand, are causally related. Elasticity can provide important
information about the strength or weakness of such relationships.

5. Elasticity of Demand
Elasticity of demand is the measure of the responsiveness of demand to changing prices.It is primirily related to
extension or contraction of demand for a fall or rise in price.
The elasticity of demand is defined as the rate of change in quantity demanded for a given change in price.
Another precise definition is by mrs.Joan robinson thus: the elasticity of demand (at any price or at any output) is the
proportional change of amount purchased in response to a small change in price, divided by the proportional change
of price.
It may be carefully noted that elasticity depends primarily on proportional and percentage changes and not on absolute
changes in prices and quantity demanded.

6. 2. Elastic Demand
A small change in price may lead a great change in demand. In that case, we shall say that the demand is
elastic or sensitive or responsive. If a product is elastic a small change in the price will have a big impact on
the supply or demand of the product .

7. Example For Elastic Demand
If people like both coffee and tea and the price of tea goes up, people will have no problem switching over to
coffee. The demand for tea will thus fall, and the demand for coffee will increase the products are substitutes for
each other.
Nokia mobile company increase up their smartphone price level and where Samsung company give same features
smartphone half price from the Nokia mobile.So the demand of Nokia mobile will be decreased for price level

8. Inelastic Demand
A big change in price is followed only by a small change in demand it is said to be a case of inelastic demand. If a
product is inelastic a small change in the price will have not a big impact on the supply or demand of the product.
The price of a product will go up, and the consumers will still buy the same number of products.

9. Example For Inelastic Demand
You need gas to drive your car to and from work, it doesn’t matter what the price of gas is you will still fill up your
tank. Because it is necessary otherwise you cant go for work.
Rice is most important food among our food items.It dosent matter how much price of rice will increase we still
sell rice as our demand.

10. 3. Types of Elasticity
The Three Main Types Of Elasticity
I. Price Elasticity
II. Income Elasticity
III. Cross Elasticity

11. Price Elasticity
Definition and Explanation:
The concept of price elasticity of demand is commonly used in economic literature. Price elasticity of demand is the degree
of responsiveness of quantity demanded of a good to a change in its price. Precisely, it is defined as:
"The ratio of proportionate change in the quantity demanded of a good caused by a given proportionate change in price".
Formula:
The formula for measuring price elasticity of demand is:
Price Elasticity = Percentage in Quantity Demand / Percentage Change in price
Ed = Δq / p x P/Q

12. Example
Let us suppose that price of a good falls from $10 per unit to $9 per unit in a day. The decline in price causes the quantity of the
good demanded to increase from 125 units to 150 units per day. The price elasticity using the simplified formula will be:
Ed = Δq / p x P/Q
Δq = 150 - 125 = 25
Δp = 10 - 9 = 1
Original Quantity = 125
Original Price = 10
Ed = 25 / 1 x 10 / 125 = 2
The elasticity coefficient is greater than one. Therefore the demand for the good is elastic.

13. The Three Types of Price Elasticity of Demand
 Elastic
 Unitary Elasticity
 Inelastic

14. Elastic
When the percent change in quantity of a good is greater than the percent change in its price, the demand is said to be
elastic. When elasticity of demand is greater than one, a fall in price increases the total revenue (expenditure) and a rise in
price lowers the total revenue (expenditure).
Unitary Elasticity
When the percentage change in the quantity of a good demanded equals percentage in its price, the price elasticity of
demand is said to have unitary elasticity. When elasticity of demand is equal to one or unitary, a rise or fall in price leaves
total revenue unchanged.
Inelastic
When the percent change in quantity of a good demanded is less than the percentage change in its price, the demand is
called inelastic. When elasticity of demand is inelastic or less than one, a fall in price decreases total revenue and a rise in its
price increases total revenue.

15. Income Elasticity
Definition and Explanation:
Income is an important variable affecting the demand for a good. When there is a change in the level of income of a consumer,
there is a change in the quantity demanded of a good, other factors remaining the same. The degree of change or responsiveness
of quantity demanded of a good to a change in the income of a consumer is called income elasticity of demand. Income elasticity
of demand can be defined as:
"The ratio of percentage change in the quantity of a good purchased, per unit of time to a percentage change in the income of a
consumer".
Formula:
The formula for measuring the income elasticity of demand is the percentage change in demand for a good divided by the
percentage change in income. Putting this in symbol gives.
Ey = Percentage Change in Demand / Percentage Change in Income

16. Example
A simple example will show how income elasticity of demand can be calculated. Let us assume that the income of a person is $4000
per month and he purchases six CD's per month. Let us assume that the monthly income of the consumer increase to $6000 and
the quantity demanded of CD's per month rises to eight. The elasticity of demand for CD's will be calculated as under:
Δq = 8 - 6 = 2
Δp = $6000 - $4000 = $2000
Original quantity demanded = 6
Original income = $4000
Ey = Δq / Δp x P / Q = 2 / 200 x 4000 / 6 = 0.66
The income elasticity is 0.66 which is less than one.
Types:

17. Cross Elasticity
Definition and Explanation:
The concept of cross elasticity of demand is used for measuring the responsiveness of quantity demanded of a good to changes
in the price of related goods. Cross elasticity of demand is defined as:
"The percentage change in the demand of one good as a result of the percentage change in the price of another good".
Formula:
The formula for measuring, cross, elasticity of demand is:
Exy = % Change in Quantity Demanded of Good X / % Change in Price of Good Y

18. The Three Types of Cross Elasticity
 Substitute Goods
 Complementary Goods
 Unrelated Goods

19. Substitute Goods
When two goods are substitute of each other, such as coke and Pepsi, an increase in the price of one good will
lead to an increase in demand for the other good. The numerical value of goods is positive.
For example there are two goods. Coke and Pepsi which are close substitutes. If there is increase in the price of
Pepsi called good y by 10% and it increases the demand for Coke called good X by 5%, the cross elasticity of
demand would be:
Exy = %Δqx / %Δpy
Exy = 10% / 5% = 0.2
Since Exy is positive (E > 0), therefore, Coke and Pepsi are close substitutes.

20. Complementary Goods
However, in case of complementary goods such as car and petrol, cricket bat and ball, a rise in the price of one good say
cricket bat by 7% will bring a fall in the demand for the balls (say by 6%). The cross elasticity of demand which are
complementary to each other is, therefore, 6% / 7% = 0.85 (negative).

21. Unrelated Goods
The two goods which a re unrelated to each other, say apples and pens, if the price of apple rises in the market, it is unlikely
to result in a change in quantity demanded of pens. The elasticity is zero of unrelated goods.

22. 4. Factor Determining Price Elasticity of Demand
I. Nature of Commodities
II. Demand for Luxuries is Elastic
III. Proportion of Total Expenditure
IV. Substitutes
V. Number of Uses of a Good
VI. Joint Demand
VII. Goods, the use of which can be postponed
VIII. Income Level
IX. Level of price
X. Market Imperfections
XI. Technology Factors
XII. Conclusion

23. 5. Measurement of Price Elasticity of Demand
 Perfectly Inelastic Demand
 Perfectly Elastic Demand
 Unit Elasticity Of Demand
 Relatively Inelastice Demand
 Relatively Elastic Demand

24. Perfectly Inelastic Demand

25. Perfectly Elastic Demand

26. Unit Elasticity Of Demand

27. Relatively Inelastice Demand

28. Relatively Elastic Demand

29. 6. Price Elasticity and Indifference Curve Technique
Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of A
product in relation to its price change expressed mathematically.
An indifference curve, with respect to two commodities, is a graph showing those combinations of the
commodities that leave the consumer equally well off or qually statisfied- hence indifference- in having any
combinations on the curve

30. 1. When the price consumption curve slopes downward, the price elasticity of the demand is greater then unity or
one i.e demand is elastic.

31. 2. When the shape of the price consumption curve is a horizontal straight line, the price elasticity of demand is unity or
one i.e. its constant

32. 3. When the price consumption is curve is upward sloping, then the then the price elasticity of demand is less than the unity
i.e. the demand is inelastic.

33. 7. Practical Application of Elasticity of demand
1. Taxation: The tax will no doubt raises the prices but the demand being inelastic.
2. Monopoly price: The businessman, especially if he is a monopolist, will have to consider the nature of demand while fixing his
price.
3. Joint products: In such cases separate costs are not ascertainable the producers will be guided mostly by demand and its
nature fixing his price.
4. Increasing returns: When an industry is subject to increasing returns the manufacturer lowers the price.
5. Output: Elasticity of demand affects industrial output.
6. Wages: Easticity of demand also exerts its influence on wages.
7. Effect on the economy: The working of the economy in general is affected by the nature of consumer demand.
8. Economies policies: Modern governments regulate output and prices. The government can create public utilities where
demand is inelastic and monopoly element is present.
9. International trade: The nature of demand for the internationally traded goods is helpful in determining the quantum.
10. Price determination: The concept of elasticity of demand is used in explaining the determination of price under various market
conditions.

34. 11. Rate of foreign exchange: With fixing the rate of exchange, the government has to consider the elasticity.
12. Boundary between industries: Cross elasticity of demand is also useful in indicating boundaries between industries.
13. Market forms: The concept of cross elasticity helps to understand different market forms.
14. Classification of goods as substitutes and complements: Goods are classified as substitutes on the basis of cross elasticity.

35. 8. Explain The Theoretical Importance of Elasticity of Demand
Apart from the practical importance of the elasticity of demand, the concept play a crucial role in economic theory and is
extensively used as a tool of economic analysis. The following point highlight the main areas of the theorical importance of
elasticity of demand.
I. Price determination
II. Price discrimination
III. Measuring yhe degree of monopoly power
IV. Classification of goods as substitute and complements
V. Boundary between industry

36. VI. Incidents of taxes
VII .Market forms
VII. .Theory of distribution
IX. The relation between price elasticity, average revenue and
marginal revenue.
The formula which explain this .

37. Questions

38. THANK YOU