the elasticity of demand and supply

1. ELASTICITY OF DEMAND
AND SUPPLY
By Advance Saraswati Prakashan Pvt. Ltd
Sankhamul, 01-4780359
2.2

2. Learning Objectives
After comprehensive studying of this chapter, learners will be
able to:
 define the price elasticity of demand and its types.
 describe the factors that determine the price elasticity of demand.
 describe the meaning and types of fulfillment elasticity.
 solve simple numerical problems.
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3. Elasticity of Demand
The law of demand states that the quantity demanded increases with a fall in price and
diminishes with a rise in price. This shows that there is an inverse relationship between
price and quantity demanded for a commodity.
In order to measure the extent of change in demand, Prof. Dr. Alfred Marshall
developed the concept of elasticity of demand. He used the concept of elasticity only
with reference to the change in price. Therefore, elasticity of demand generally refers to
price elasticity of demand.
According to Alfred Marshall "The elasticity (or responsiveness) of demand in a market is
great or small according as the amount demanded increases much or little for a given fall in price
and diminishes much or little for a given rise in price".
Types of Elasticity of Demand
Marshall used the concept of elasticity only in relation to price changes. However,
economists have now extended the application of this concept to several other things..
Here we consider the following types of elasticity of demand.
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand

4. Price Elasticity of Demand (EP)
Price elasticity of demand measures the change in quantity demanded due to the change
in price of the commodity. It may be defined as the ratio of percentage change in
quantity demanded to the percentage change in price of the same commodity. It is
expressed as:

5. Types (Degrees) of Price Elasticity of Demand
The value of price elasticity of demand ranges from 0 to ∞. These values can be divided into five
different groups. As such, there are five types of price elasticity of demand. They are as follows:
1. Perfectly Elastic Demand (EP = )
Demand is said to be perfectly elastic if negligible change in price causes infinitely large
change in the quantity demanded. Visibly there is no change in price. Perfectly elastic
demand is theoretical concept and rarely found in the real life situation. It can be shown by
the figure.
P
O
Y
Quantity Demanded
Price
X
EP = ∞
D
Q1 Q2 Q3
As shown in the figure, perfectly elastic demand curve is a horizontal straight line parallel to
the x-axis. As shown in the figure, the quantity demanded may be OQ1 or OQ2 or OQ3 at the
same price OP.

6. Contd...
2. Perfectly Inelastic Demand (EP = )
Demand is said to be perfectly inelastic if the change in price causes no change in quantity
demanded. This type of elasticity is found in case of very essential commodities like
medicine. It is shown by the figure.
Q
P2
O
Y
Quantity Demanded
Pri
ce
X
D
EP = 0
P3
P1
As shown in the figure, perfectly inelastic demand curve is a vertical straight line parallel to the
Y-axis. It implies that the consumers purchase the same amount of the commodity at different
prices. As shown in the figure, the quantity demanded remains constant (i.e., OQ) at different
prices OP1, OP2 or OP3.

7. Contd...
3. Unitary Elastic Demand (EP = )
Demand is said to be unitary elastic if the percentage change in quantity demanded is equal to
the percentage change in price. For example, if a 20 percent change in price causes exactly 20
percent change in demand, it is the case of unitary elastic demand. It is shown in figure.
Q Q1
P
O
Y
Quantity Demanded
Price
X
D
EP = 1
P1
D
20%
20%
As shown in the figure, DD is the unitary elastic demand curve. The figure shows that the fall in
price from OP to OP1 causes the increase in quantity demanded from OQ to OQ1, i.e., the
percentage change in price is equal to the percentage change in quantity demanded.

8. Contd...
4. Relatively Elastic Demand (EP > )
Demand is said to be relatively elastic if the percentage change in the quantity demanded for a
commodity is more than percentage change in its price. For example, if a 20 percent change in
price causes 40 percent change in quantity demanded, it is the case of relatively elastic
demand. This type of elasticity is found in case of luxury goods like car, television, sports
bikes, etc.
Q Q1
P
O
Y
Quantity Demanded
Price
X
D
EP > 1
P1
D
20%
40%
In the figure, the demand curve DD represents relatively elastic demand. It is a flatter demand
curve. When price falls from OP to OP1, the quantity demanded increases from OQ to OQ1. This
implies that the percentage change in quantity demanded is more than the percentage change in
price.

9. Contd...
5. Relatively Inelastic Demand (EP < )
Demand is said to be relatively inelastic if the percentage change in quantity demanded for a
commodity is less than the percentage change in its price. For example, if a 40 percent change in
price causes 20 percent change in quantity demanded, it is the case of relatively elastic demand.
This type of elasticity is found in case of basic necessities like bread, pulses, clothes, etc.
Q Q1
P
O
Y
Quantity demanded
Price
X
D
EP < 1
P1
D
40%
20%
In the figure, the demand curve DD represents relatively inelastic demand. It is a steeper demand curve. When
price falls from OP to OP1, the quantity demanded increases from OQ to OQ1. This implies that the percentage
change in quantity demanded is less than the percentage change in price.

10. Income Elasticity of Demand (Ey)
Income elasticity of demand measures the degree of responsiveness of demand for a
commodity due to the change in the income of the consumer. It may be defined as the
percentage change in quantity demanded divided by the percentage change in income of
the consumer. Thus,

11. Types of Income Elasticity of Demand
There are three types of income elasticity of demand as explained below:
1. Positive Income Elasticity of Demand (EY > 0)
If demand for a commodity increases with the increase in income of the consumer and vice
versa, it is said to be positive income elasticity of demand. Here, income of the consumer and
demand for the commodity move along the same direction. Positive income elasticity can be
classified into three types:
a. Income Elasticity of Demand Greater than Unity (EY > 1): If the percentage change in
quantity demanded for a commodity is greater than the percentage change in income of the
consumer, it is said to be income elasticity of demand greater than unity. This type of income
elasticity of demand is found in case of luxurious goods.
Q1 Q2
Y2
O
Y
Quantity demanded
Income
X
D
EY > 1
Y1
D
20 %
40 %
In the figure, DD is the income demand curve.
It is upward sloping which indicates positive
relationship between income and quantity
demanded. In addition, the demand curve is
flatter which implies that the percentage change
in demand is greater than the percentage
change in income of the consumer.

12. Contd...
b. Income Elasticity of Demand less than Unity (EY < 1): If the percentage change in
quantity demanded for a commodity is less than the percentage change in income of
the consumer, it is said to be income elasticity of demand less than unity. This type of
income elasticity of demand is found in case of necessary goods.
Y2
O
Y
Quantity demanded
Income
X
D
EY < 1
Y1
D
10 %
20 %
Q1 Q2
In the figure, upward slope of DD demand curve shows positive relationship
between income and quantity demanded. When income increases by 20 percent,
from OY1 to OY2, the quantity demanded increases by 10 percent from OQ1 to OQ2.

13. Contd...
2. Zero Income Elasticity of Demand (EY = 0)
If demand for a commodity remains constant with any rise or fall in income of the consumer, it
is said to be zero income elasticity of demand. Here, demand for the commodity does not show
any response to the change in income of the consumer. This type of income elasticity of demand
is found in case of neutral goods like salt, match box, etc.
Q1
Q
Y2
O
Y
Quantity demanded
Income
X
D
EY = 0
Y3
Y1
In the figure, the demand curve is a vertical straight line parallel to the Y-axis. It implies
that the consumers purchase the same amount of the commodity at different level of
incomes. As shown in the figure, the quantity demanded remains constant (i.e., OQ1) at
different level of incomes OY1, OY2 or OY3.

14. Contd...
3. Negative Income Elasticity of Demand (EY < 0)
If demand for a commodity decreases with the increase in income of the consumer and vice
versa, it is said to be negative income elasticity of demand. Here, income of the consumer and
demand for the commodity move in the opposite direction. This type of income elasticity of
demand is found in case of inferior goods like low quality clothes, coarse rice, etc.
Q1
Y2
O
Y
Quantity demanded
Income
X
D
EY < 0
Y1
D
Q2
In the figure, DD is a income demand curve for inferior goods. Downward slope of the demand
curve indicates inverse relationship between income and quantity demanded. When the income
increase from OY1 to OY2, the quantity demand decreases from OQ1 to OQ2.

15. Cross Elasticity of Demand (EC)
Cross elasticity of demand measures the degree of responsiveness of demand for a
commodity (say X) due to the change in price of another commodity (say Y). It may be
defined as the percentage change in quantity demanded for a commodity divided by the
percentage change in price of another commodity. Thus,

16. Types of Cross Elasticity of Demand
There are three types of cross elasticity of demand. They are:
1. Positive Cross Elasticity of Demand (EC > 0)
If demand for a commodity increases with the rise in price of another commodity and vice-
versa, it is said to be positive cross elasticity of demand. On the other hand, if the price of Coke
decreases then the quantity demanded for Pepsi also decreases. Positive cross elasticity of
demand is explained by the help of the figure.
Q1
Q2
P2
O
Y
Quantity of good X
Price
of
good
Y
X
D
EC > 0
P1
D
In the figure, quantity demanded for good X (Pepsi) and price of good Y (Coke) are measured
along the X-axis and Y-axis respectively. The upward sloping demand curve DD shows the
positive relationship between price of Coke and demand for Pepsi.

17. Contd...
2. Negative Cross Elasticity of Demand (EC < 0)
If demand for a commodity decreases with the rise in price of another commodity and
vice-versa, it is said to be negative cross elasticity of demand. Here, price of one
commodity and demand for another commodity move in the opposite direction.
Negative cross elasticity of demand is explained by the help of the figure.
Q1 Q2
O
Y
Quantity of good X
Price
of
good
Y
X
D
EC < 0
P2
D
P1
In the figure, quantity demanded for good X (Car) and price of good Y (Petrol) are
measured along the X-axis and Y-axis respectively. The downward sloping demand
curve DD shows the negative relationship between price of Petrol and demand for Car.
When the price of petrol falls from OP1 to OP2, the demand for Car increases from OQ1
to OQ .

18. Contd...
3. Zero Cross Elasticity of Demand (EC = 0)
If demand for a commodity remains unchanged with the rise or fall in price of another
commodity, it is said to be zero cross elasticity of demand. Here, demand for one
commodity does not show any response to the change in price of another commodity.
Zero cross elasticity of demand is explained by the help of the figure.
Q
P1
O
Y
Quantity of good X
Price
of
good
Y
X
D
EC = 0
P2
In the figure, quantity demanded for good X (shoes) and price of good Y (book) are
measured along the X-axis and Y-axis respectively. The vertical demand curve DD shows
that there is no change in demand for shoes with the change in price of book. When the
price of book rises from OP1 to OP2, the demand for shoes remains constant at OQ.

19. Determinants of Price Elasticity of Demand
There are several determinants or factors influencing price elasticity of demand. Some of them are
explained below:
1. Nature of the Commodity: Commodities are broadly divided into two groups: luxuries and
necessities. Luxuries have more-elastic demand while necessities have less elastic demand.
2. Availability of Substitutes: If a commodity has close substitute available in the market at a
reasonable price, the demand for the commodity is more elastic.
3. Possibility of Postponement: If we can postpone the purchase of a commodity to the future
date, then the demand for the commodity is more elastic.
4. Influence of Habit: When the consumption of a commodity becomes habit of the consumer,
the demand for it is less elastic. For example, consumption of alcohol, tobacco, cigarettes, etc.
may be the habit of the consumer.
5. Consumer’s Income: Price elasticity of demand for a commodity also depends upon the
income of the consumer.
6. Uses of the Commodity: The demand for commodities having a several uses is more elastic.
For example, electricity has many uses.
7. Price Level: High-priced commodities such as diamonds and low-priced commodities such as
salt have less elastic demand.

20. Price Elasticity of Supply (ES)
Price elasticity of supply measures the change in quantity supplied due to the
change in price of the commodity. It may be defined as the ratio of percentage
change in quantity supplied to the percentage change in price of the same
commodity. It is expressed as:

21. Types (Degrees) of Price Elasticity of Supply
The value of price elasticity of supply ranges from 0 to ∞. These values can be divided into
five different groups. As such, there are five types of price elasticity of supply. They are as
follows:
1. Perfectly Elastic Supply (ES = )
Supply is said to be perfectly elastic if negligible change in price causes infinitely large
change in the quantity supplied.
Perfectly elastic supply is theoretical concept and rarely found in the real life situation. It
can be shown by the figure.
Q1 Q2 Q3
P1
O
Y
Quantity Supplied
Price
X
S
ES = ∞
As shown in the figure, perfectly elastic supply curve
is a horizontal straight line parallel to the x-axis. It
implies that the firms can sell any amount of the
commodity at the same price. As shown in the figure,
the quantity supplied may be OQ1 or OQ2 or OQ3 at
the same price OP1.

22. Contd...
2. Perfectly Inelastic Supply (ES = )
Supply is said to be perfectly inelastic if the change in price causes no change in
quantity supplied. It is shown by the figure.
Q1
P2
O
Y
Quantity Supplied
Price
X
S
ES = 0
P2
P1
As shown in the figure, perfectly inelastic supply curve is a vertical straight line
parallel to the Y-axis. It implies that the firms sell the same amount of the
commodity at different prices. As shown in the figure, the quantity supplied
remains constant (i.e., OQ1) at different prices OP1, OP2 or OP3.

23. Contd...
3. Unitary Elastic Supply (ES = )
Supply is said to be unitary elastic if the percentage change in quantity supplied is equal to the
percentage change in price. For example, if a 20% change in price causes 20% change in
quantity supplied, it is the case of unitary elastic supply. It is shown in figure.
Q1 Q2
O
Y
Quantity Supplied
Price
X
S
ES = 1
P1
20%
P2
S
20%
As shown in the figure, unitary elastic supply curve SS is upward sloping. The fall in price
from OP1 to OP2 causes the increase in quantity supplied from OQ1 to OQ2, i.e., the percentage
change in price is equal to the percentage change in quantity supplied.

24. Contd...
4. Relatively Elastic Supply (ES > )
Supply is said to be relatively elastic if the percentage change in the quantity supplied for a
commodity is more than percentage change in its price. For example, if a 20 percent change
in price causes 40 percent change in quantity supplied, it is the case of relatively elastic
supply. It is shown in the figure.
Q1 Q2
O
Y
Quantity Supplied
Price
X
S
ES > 1
P1
20%
P2
S 40%
In the figure, the supply curve SS represents relatively elastic supply. It is a flatter supply curve.
When price rises from OP1 to OP2, the quantity supplied increases from OQ1 to OQ2.

25. Contd...
5. Relatively Inelastic Supply (ES < )
Supply is said to be relatively inelastic if the percentage change in quantity supplied for a
commodity is less than the percentage change in its price. For example, if a 40 percent change
in price causes 20 percent change in quantity supplied, it is the case of relatively elastic
supply. It is shown in the figure.
Q1 Q2
O
Y
Quantity Supplied
Price
X
S
ES < 1
P1
40%
P2
S
20%
In the figure, the supply curve SS represents relatively inelastic supply. It is a steeper supply
curve. When price rises from OP1 to OP2, the quantity supplied increases from OQ1 to OQ2.
This implies that the percentage change in quantity supplied is less than the percentage
change in price.

26. Numerical Illustrations
Find the cross elasticity of demand between tea (x) and coffee (y) and between Tea (x)
and sugar (z) from the data given below:
Commodity
Before After
Price Rs./Unit
Quantity demand
(Units)
Price Rs./Unit
Quantity demand
(Unit)
Coffee (Y) 30 300 20 400
Tea (X) 10 150 10 100
Sugar (Z) 15 100 20 90
Tea (X) 10 150 10 120
Solution:

27. Assignment
 Very short Answer Questions
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1. Define price elasticity of demand.
2. State the degrees or types of price elasticity of demand.
3. Write down any four factors determining price elasticity of demand.
4. Define income elasticity of demand.
5. Define cross elasticity of demand.
1. Explain the various types of price elasticity of demand.
2. Explain the degrees or types of income elasticity of demand.
3. Define cross elasticity of demand. Explain its types.
1. Define price elasticity of demand. Explain its types.
2. What is income elasticity of demand? Explain its types.
3. Define cross elasticity of demand. Explain its type.
 Long Answer Questions
 Short Answer Questions

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