To sustain the economy, you must know the elastic and inelastic demand of customers. In the uncertain environment and tough competitors, most of the businesses could not sustain their profitability and gone towards downfall. The keen observation related to price, demand, income, and supply makes you able to choose the right strategy for your business. This slide presentation covers Demand elasticity, price elasticity, income elasticity, its types, factors, and shapes with graphical representation.

1. Presented by Momina Riaz
Lahore School of Aviation
The University of Lahore

2. Elasticity of Demand
• Elasticity is a measure of the responsiveness of quantity
demanded or quantity supplied to a change in one of its
determinants (price)
• “Elasticity measures how much one variable
responds to changes in another variable.”

3. Types of Demand
Elasticity
• There are three main types of elasticity's:-
• Price elasticity
• Income elasticity
• Cross-price elasticity

4. Price Elasticity
• Price elasticity of demand is the percentage change in
quantity demanded given a percent change in the price.
Price elasticity is also divide into two way:-point and Arc
elasticity
• Point elasticity: - elasticity is measured for a single point.
• Arc elasticity: - computed for two points along a
demand curve

5. How do we interpret the
price elasticity of demand?
• When PED is greater than one, demand is elastic. This
can be interpreted as consumers being very sensitive to
changes in price: a 1% increase in price will lead to a
drop in quantity demanded of more than 1%. When PED
is less than one, demand is inelastic

7. Income Elasticity
• Income elasticity of demand is the ratio of percentage
change in quantity demanded of a product to percentage
change in the income level of consumer.
Income Elasticity of = % change in quantity demanded
Demand % change in Demand

8. • Income elasticity of demand indicates whether a product
is a normal good or an inferior good. An increase in
income causes an increase in demand for a normal
good. Therefore, for normal goods, income elasticity > 0.
For inferior goods, income elasticity < 0.
• Goods consumers regard as necessities tend to be
income inelastic. Examples include food, fuel, clothing,
utilities, and medical services.
• Goods consumers regard as luxuries tend to be income
elastic. Examples include sports cars, furs, and
expensive foods.
Example

9. Cross Elasticity
• Cross elasticity of demand are measures the
responsiveness in the quantity demand of one good
when a change in price takes place in another good.
This measurement is calculated by taking the
percentage change in the quantity demanded of one
good and dividing it by the percentage change in price of
the other good.
•

10. Example
• The cross elasticity of demand for substitute goods is
always positive because the demand for one good
increases if the price for the other good increases. For
example, if the price of coffee increases, the quantity
demanded for tea (a substitute beverage) increases as
consumers switch to a less expensive yet substitutable
alternative.
• Toothpaste is an example of a substitute good - if the
price of one brand of toothpaste increases, the demand
for a competitor's brand of toothpaste increases in turn.
An example of complementary goods is hot dogs and
buns.

12. Major factors affecting the
elasticity of demand
• A change in price does not always lead to the same
proportionate change in demand.
• For example, a small change in price of AC may affect its
demand to a considerable extent/whereas, large change
in price of salt may not affect its demand. So, elasticity of
demand is different for different goods

13. 1. Availability of substitutes:
• Demand for a commodity with large number of
substitutes will be more elastic. The reason is that even
a small rise in its prices will induce the buyers to go for
its substitutes.
• Example: A rise in the price of Pepsi encourages buyers
to buy Coke and vice-versa.

14. 2. Consumers
Income/Budget
• Elasticity of demand for any commodity is generally less
for higher income level groups in comparison to people
with low incomes. It happens because rich people are
not influenced much by changes in the price of goods.
But, poor people are highly affected by increase or
decrease in the price of goods.
• Example: A rich man will not curtail his consumption of
sugar even if its price rises considerably. He will continue
to purchase the same quantity as before. But a poor man
cannot do so. Hence, the demand for sugar is inelastic
for the rich, elastic for the poor.

15. 3. Number of Uses of a
commodity
• If the commodity under consideration has several uses,
then its demand will be elastic. When price of such a
commodity increases, then it is generally put to only
more urgent uses and, as a result, its demand falls.
When the prices fall, then it is used for satisfying even
less urgent needs and demand rises.
• Example: Electricity can be used for a number of
purposes, such as lighting, cooking, and various
commercial and industrial purposes. If the price of
electricity decreases, consumers may increase its usage
for various other purposes.

16. 4. Time Period
• Price elasticity of demand is always
related to a period of time. It can be
a day, a week, a month, a year or a
period of several years.Demand is
generally inelastic in the short
period. It happens because
consumers find it difficult to change
their habits, in the short period, in
order to respond to a change in the
price of the given commodity

17. Example
• If the price of petrol decreases, then it would not result in
immediate increase in its demand until consumers have
purchasing power to buy vehicles. However, over a
period of time, consumers might be able to adjust their
expenditure and consumption patterns, so that they can
purchase vehicles spurred by fall in the prices of petrol.

18. 5. Necessities versus
luxuries
• A necessity is goods, people will always buy, even when
the price increases (demand is inelastic) e.g milk.
• A luxury can easily be given up (demand is elastic) e.g
steaks.

19. Some other factors;
• Share in total expenditure
• Postponement of consumption
• Level of price

21. Shapes of Demand
elasticity
• There are five types of elasticity of demand
• Perfectly Elastic Demand (EP= ∞)
• Perfectly Inelastic Demand (EP = 0)
• Relatively Elastic Demand (EP> 1)
• Relatively Inelastic Demand (Ep< 1 )
• Unitary Elastic Demand ( Ep= 1)

22. Perfectly Elastic Demand
(EP= ∞)
• Perfectly elastic demand refers to a situation when due
to a very insignificant or small change in price the
quantity demanded changes infinitely.

23. Example
• An example of this could be agricultural
produce. If 1000 farmers all produce
wheat of same variety and grade, then
there is no need of a commercial buyer
to differentiate between them. They all
are selling same product at same price.
This means that the buyer will not buy
from any farmer who tries to sell higher
than the others. Similarly, the buyer
would buy as much as possible from
any farmer who lowered their prices at
all. In this case, the demand would be
perfectly elastic.

25. Perfectly Inelastic
Demand (EP = 0)
• This is a type of elasticity of demand which is just the
reverse of perfectly elastic demand.
• In such a situation whatever may be the change in price
the quantity demanded remains the same.

26. Example
• Suppose a person has a fatal disease and there is only
one prescribed drug produced by only one medical
company in the world. Then, in order to live (if he/she
wishes), the person has to consume that drug at the
prescribed limit, no matter how much the drug costs

28. Relatively Elastic Demand
(EP> 1)
• It refers to a situation when the percentage
change in quantity demanded is more than
percentage change in price.

29. Example
• If the price falls by 5% and the demand rises by more
than 5% (say 10%), then it is a case of elastic demand.
• The demand for luxurious goods such as car, television,
furniture, etc. is considered to be elastic

31. Relatively Inelastic Demand
(Ep< 1 )
• The demand is said to be relatively inelastic if the
percentage change in quantity demanded is less than
the percentage change in price i.e. if there is a small
change in demand with a greater change in price. It is
also called less elastic or simply inelastic demand.
• When the price falls by 10% and the demand rises by
less than 10% (say 5%), then it is the case of inelastic
demand. The demand for goods of daily consumption
such as rice, salt, kerosene, etc. is said to be inelastic

32. Example
• The most famous example of relatively inelastic
demand is that for gasoline. As the price of gasoline
increases, the quantity demanded doesn't decrease
all that much.This is because there are very few
good substitutes for gasoline and consumers are
still willing to buy it.

34. Unitary Elastic Demand (Ep= 1)
• It refers to a situation when the percentage change in
quantity demanded is equal to percentage change in
price. If price doubles the quantity demanded will
became half and vice-versa. The value of elasticity of
demand is unity (Ed = 1).

35. Example
• Person A found today the price of
rice increased 10%; from 100 to
110. Then, A reduces 10% of
consumption of her rice; from 1 kg
to 0.9 kg.