ELASTICITY OF DEMAND

1. ELASTICITY OF DEMAND MR. NITIN SETIA

2. TOPIC COVERED
•MEANING OF ELASTICITY
•TYPES OF ELASTICITY
•PRICE ELASTICITY
•INCOME ELASTICITY
•CROSS ELASTICITY

3. MEANING OF ELASTICITY
Elasticity is a measure of how much buyers and sellers respond to
changes in market conditions.
Elasticity allows us to analyze supply and demand with greater
precision.
If something is elastic it is responsive, flexible, or readily changed. A
rubber band is elastic and with little force it easily stretches. A chain
on the other hand is rigid and changes very little when pulled.
In the context of price elasticity of demand, the price change is
comparable to the force applied to a rubber band or chain and the
change in quantity demanded is comparable to the stretch. When
consumers are relatively responsive to a price change, we say that
demand is elastic. When the change in quantity demanded by
consumers is relatively small in response to a price change, we say
that demand is inelastic.

4. TYPES OF ELASTICITY
TYPES OF
ELASTICITY
PRICE
ELASTICITY
INCOME
ELASTICITY
CROSS
ELASTICITY

5. PRICE ELASTICITY
According to the law of demand, when price goes up, consumers
demand fewer quantities of a product. If the price of a product falls,
quantity demanded will rise. But when the price of a product
changes, by how much more (or less) will consumers buy?
To help answer this question, we will use a measurement called the
Price Elasticity of Demand.
Price elasticity of demand is the percentage change in quantity
demanded given a percent change in the price.
It is a measure of how much the quantity demanded of a good
responds to a change in the price of that good.

6. COMPUTING THE PRICE
ELASTICITY OF DEMAND
The price elasticity of demand is computed as the percentage change
in the quantity demanded divided by the percentage change in price.
PRICE ELASTICITY OF DEMAND= PERCENTAGE CHANGE IN QTY
DEMANDED/PERCENTAGE CHANGE IN PRICE
Example: If the price of an ice cream cone increases from $2.00 to
$2.20 and the amount you buy falls from 10 to 8 cones then your
elasticity of demand would be calculated as:

7. DEGREES OF PRICE ELASTICITY OF
DEMAND
1. Perfectly Elastic Demand:-It is a situation where a little change in
price will cause an infinite change in Demand.
2.Perfectly Inelastic Demand:-It is a situation in which a change in
price produces no change in the quantity demanded.
3.Unitary Elastic Demand:-It is a situation when percentage change in
price is same as change in quantity demanded.
4. Relatively Elastic Demand:-It is a situation when percentage change
in quantity demanded is greater then percentage change in price.
5. Relatively Inelastic Demand:-It is a situation where percentage
change in quantity demanded is less than price

8. PERFECTLY ELASTIC DEMAND
Perfectly Elastic Demand:-It is a situation where a little change in
price will cause an infinite change in Demand.

9. PERFECTLY INELASTIC DEMAND
Perfectly Inelastic Demand:-It is a situation in which a change in price
produces no change in the quantity demanded.

10. UNITARY ELASTIC DEMAND
Unitary Elastic Demand:-It is a situation when percentage change in
price is same as change in quantity demanded.

11. RELATIVELY ELASTIC DEMAND
Relatively Elastic Demand:-It is a situation when percentage change in
quantity demanded is greater then percentage change in price

12. RELATIVELY INELASTIC DEMAND
Relatively Inelastic Demand:-It is a situation where percentage change
in quantity demanded is less than price

13. INCOME ELASTICITY
Income Elasticity of Demand:-
Other things, such as price of the given commodity, price of the
related goods, taste of consumer etc. remains constant
Income elasticity of demand measures how much the quantity
demanded of a good responds to a change in consumers’ income.
It is computed as the percentage change in the quantity demanded
divided by the percentage change in income.
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.

14. DEGREES OF INCOME ELASTICITY
OF DEMANDINCOME ELASTICITY OF DEMAND IS OF THREE TYPES
1) POSITIVE INCOME ELASTICITY OF DEMAND: Income elasticity of
demand for a good is positive when with an increase in the income of
a consumer his demand for the good increases and with a decrease in
the income of the consumer his demand for a good decreases.

15. DEGREES OF INCOME ELASTICITY
OF DEMAND
1) Unitary
2) Less than unitary
3) More than unitary

16. NEGATIVE INCOME ELASTICITY OF
DEMAND
2) NEGATIVE INCOME ELASTICITY OF DEMAND: Income elasticity of
demand for a good is NEGATIVE when with an increase in the income
of a consumer his demand for the good DECREASES.

17. ZERO INCOME ELASTICITY OF
DEMAND
3) ZERO INCOME ELASTICITY OF DEMAND: Income elasticity of
demand for a good is ZERO when CHANGE in the income of a
consumer evokes no change in his demand.

18. CROSS ELASTICITY
There is a mutual relationship between change in price and quantity
demanded of two related goods. Change in the price of one good can
cause change in the demand of related goods. For example. Change
in the price of tea ordinarily cause change in the demand of the
coffee.
Cross elasticity can be measured as follows:
proportionate change in demand of
product x
Cross elasticity of demand= _________________________________
proportionate change in the price of
product y

19. DEGREES OF CROSS ELASTICITY
OF DEMAND
1) Positive cross elasticity: Cross elasticity of demand is positive in
case of substitutes. In other words, when goods are substitutes of
each other, then a given percentage rise in the price of a good will
lead to a given percentage increase in the demand of the substitute
good.

20. 1) Negative cross elasticity: Cross elasticity of demand is negative in
case of complementary goods. In other words, when goods are
complementary of each other, then a given percentage rise in the
price of a good will lead to a given percentage decrease in the
demand of the complementary good.