Elasticity of Demand and its Implications

1. Elasticity of
Demand

2. due to % Change
in
% Change
in
Demand
Any determinants
of demand
• Elasticity of demand is defined as the ratio of % change in
demand to the % change in one of the determinants of demand.
• Demand for a commodity is elastic when a change in
determinants
leads to change in demand.
Elasticity of
Demand

3. due to % Change
in
% Change
in
Demand
Price
The % change in the quantity demanded of a
commodity
due to a % change in its price
Price Elasticity of
Demand

4. due to % Change
in
% Change
in
Demand
Income
The % change in the quantity demanded of a
commodity
due to a % change in income
Income Elasticity of
Demand

5. due to % Change
in
% Change
in
Demand of
commodity
X
Price of
commodity Y
The % change in the quantity demanded of a
commodity X
due to a % change in its price of commodity Y
Cross Elasticity of
Demand

6. Types of Elasticity of Demand
Elasticity of demand classified as:
1) Price elasticity of demand
2) Income elasticity of demand
3) Cross elasticity of demand

7. Price Elasticity Of
Demand
• Price elasticity of demand is the ratio of the percentage change in the
quantity demanded of a commodity due to a percentage change in its
price.
• In other words it measures the degree of change of demand in
response to change in price.
• Change in demand due to change in Price

8. Price Elasticity
Of Demand

10. Degree or kinds of price elasticity of demand
1. Perfectly Elastic Demand
2. Perfectly Inelastic Demand
3. Elasticity Equal to Unity
4. Elastic Demand (More Elastic Demand)
5. Inelastic Demand (Less Elastic Demand)

11. Price
Quantity demanded
• Demand for a commodity is said to be perfectly elastic when a
slight change in price leads to infinite change in quantity
demanded.
• Elasticity = Infinite
Y
X
Demand
0
1
0
Perfectly Elastic Demand

12. Price
Quantity Demanded
Y
X
Demand
Perfectly Inelastic Demand
 Quantity demanded of a commodity remains the same irrespective
of any rise or fall in price.
 Elasticity = 0
 Example: Common salt which
is used for cooking

13. Elasticity Equal to
Unity
Pric
e
Quantity
Demanded
X
0
1
0
• When a given increase or decrease in price is making an equivalent
increase or decrease in quantity demanded.
• The % change in both the price and quantity demanded is the same.
• Example: A fall in price by 10% leads to an increase in demand by 10%
• Elasticity = 1
Y
20
Demand
1
0
1
5

14. Elastic Demand (More Elastic
Demand)
• Demand for a commodity is said to more elastic when a small
change in price brings about a proportionately larger change in
quantity demanded.
• Elasticity: Greater Than One (Ep>1).
Pric
e
Quantity
Demanded
X
Deman
d
0
0
8
Y
1
0
1
0
2
0

15. Inelastic Demand (Less Elastic
Demand)
• When A given change in price leads to A proportionately
smaller change in quantity demand.
• Elasticity: Less Than One (Ep<1)
Pric
e
X
Deman
d
0
0
4
Y
1
0
10 12
Quantity
Demanded

16. Price
Y
X
Quantity
Demanded
Deman
d
0
1
0
Quantity
Demande
d
Y
X
Deman
d
0
0
5
1
5
Price
Quantity Demanded
X
Deman
d
0 1
0
2
0
Quantity Demanded
X
Deman
d
0
0
8
Y
1
0
1
0
2
0
X
0
Y
1
0
10 12
Quantity Demanded
Perfectly Elastic Demand PerfectlyInelastic Demand ElasticityEqual to Unity
Price
more Elastic Demand
Less Elastic Demand
Price
Price

17. Income Elasticity of
Demand
• The rate of change in quantity demanded due to change in the
income of the consumer is known as “income elasticity”.
• “income elasticity of demand means the ratio of the percentage
change in the quantity demanded to the percentage change in
income”. by Watson

18. Income Elasticity Of
Demand
• Example: If a 10% increase in income, the quantity of a
good demanded increased by 20% , the income elasticity
of demand would be 20%/10%= 2

19. Cross Elasticity Of Demand
• Shows the relationship between the demand for one commodity and
price of another commodity
• The percentage change in the quantity demanded of a product in
response to a change in the price of another product
• Price of some related product also causes a variation in the demand
for a commodity
• Example: When the price of diesel car increases , the demand for
petrol car increases, this type of goods is called substitute goods.
• When the price of diesel increases, the demand for diesel car
decreases, this types of goods is called complements goods.

21. Cross Elasticity Of Demand

22. Elasticity of Demand
– Price Elasticity of
Demand
• Perfectly elastic
• Perfectly Inelastic
• Unitary Elastic
• More Elastic
• Less Elastic
– Income Elasticity
• Positive and
Negative
– Cross Elasticity