This report discusses elasticity of demand, including definitions, types, measurements, and factors affecting elasticity. It defines elasticity of demand as the responsiveness of quantity demanded to changes in price, income, or the price of related goods. The three main types are price elasticity, income elasticity, and cross elasticity. Price elasticity is classified based on the ratio of percentage changes. Factors like availability of substitutes and nature of the good impact elasticity. Elasticity is important for business and policy decisions regarding pricing, taxation, trade, and more. A case study analyzes health clubs and finds their demand is relatively inelastic to price changes but more elastic to income changes.

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Report On Elasticity Of
Demand
Submitted to: Submitted by:
Dr. Sangeeta Yadav Rishav Pandey(322)
Priyanka Jain(319)
Rahul Gusain(325)
Raman Verma(321)
Rishabh Rawat(320)
Rohit Gera(318)
Priyabrat Dehury(324)

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Executive Summary:-
1. What is Elasticity of Demand?
 Measure of the relationship between a change in the quantity
demanded of a particular good and a change in its price
2. What are the types of Elasticity of Demand?
 Price Elasticity of Demand
 Income Elasticity of Demand
 Cross Elasticity of Demand
3. What are the degrees of Elasticity of Demand?
 Perfectly inelastic demand
 Perfectly elastic demand
 Unitary elastic demand
 Elasticity less than 1
 Elasticity greater than 1
4. What are the measurements of Elasticity of Demand?
 Point Method
 Arc Method
5. What are the factors affecting the Elasticity of Demand?
 Availability of substitutes
 Nature of the commodity’
 Habit of the consumer
 Postponement of the consumption
 The number of uses of the commodity
6. What is the importance of Elasticity of Demand?
 Business Decision
 Importance to Monopolist
 Importance to International Trade
 Incidence of Taxation
7. Case Study on Health Club Goers

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Index:-
Serial
No
Topic Page
No.
1 Definition 4
2 Types of Elasticity of Demand 4
2.1 Price Elasticity of Demand 4-5
2.1.1 Classification of Price Elasticity of
Demand
5-8
2.1.2 Measurement of Elasticity of
Demand
8-9
2.1.3 Methods Of Measurement Of
Elasticity Of Demand
9-13
2.2 Income Elasticity of Demand 14
2.2.1 Classification Of Income Elasticity
Of Demand
14-15
2.3 Cross Elasticity of Demand 16
2.3.1 Types Of Cross Elasticity Of
Demand
16-17
3 Factors Affecting Elasticity Of
Demand
17-18
4 Importance of elasticity of Demand 18-19
5 Case Study 20-21
6 Bibliography 22

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1.Definition:-
Elasticity of demand refers to the degree of responsiveness of quantity
demanded of a commodity to a change in any of its determinants, viz.,
price of the commodity, price of the other commodities and income of
the consumers. It is a measure of how sensitive the quantity demanded
of a commodity is to change in any of the factors influencing demand.
2.Types Of Elasticity Of Demand:-
There are many different types of elasticity of demand as they are
types of economic variables determining demand. However, there are
three main types of elasticity of demand:
 Price elasticity of demand
 Cross elasticity of demand
 Income elasticity of demand
It is calculated by using the following formula:
2.1 Price Elasticity Of Demand
The price elasticity of demand is a measure of how much the quantity
demanded changes when the price changes. Price elasticity of demand
may be defined as the degree of responsiveness of quantity demanded
of a commodity in response to change in its price. By degree here we
mean the rate of change. Therefore, more precisely, price elasticity of

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demand refers to the ratio of percentage change in the quantity
demanded of a commodity to a given percentage change in its price.
Thus, here ep denotes price elasticity of demand.
2.1.1 Classification Of Price Elasticity:-
There are five different kinds of price elasticity of demand:
 Perfectly inelastic demand
 Perfectly elastic demand
 Unitary elastic demand
 Elastic demand
 Inelastic demand
1.Perfectly inelasticdemand– when quantity demanded of a
commodity does not respond to change in its price, then the elasticity
of demand is zero.
The quantity demanded remains the same, irrespective of any rise or
fall in the price of the commodity. No matter what the price, the same

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quantity is demanded. It is a case of perfectly inelastic demand. A
demand curve of zero elasticity is known as perfectly or completely
inelastic demand curve.
Cases of perfectly inelastic demand are very rare even in the cases of
basic necessities of life like food because even demand for basic
necessities changes because of change in price.
2.Perfectly elasticdemand– when consumers are prepared to
purchase all that they can get at a particular price but nothing at all at a
slightly higher price, then the price elasticity of demand for a
commodity is said to be infinite.
In this case, a very small fall in price causes the demand to increase to
infinity(∞). A demand curve of infinite elasticity is known as perfectly
or completely elastic demand curve. In this case, demand curve is
perfectly elastic. Cases of perfectly elastic demand is extreme rare.

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3.Unitary elastic demand – when a given percentage change price
of commodity causes an equivalent percentage change in the quantity
demanded, then the elasticity of demand is said to be unity (or one).
For example, if a fall in the price of a commodity by 10% causes an
increase in the amount purchased by 10%, the elasticity of demand is
equal to one.
4. ElasticDemand– when the percentage change in quantity
demanded of a commodity exceeds the percentage change in its price,

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the elasticity of demand is greater than unity. Demand is said to be
relatively elastic here. For example, if a fall in the price of a
commodity by 10% causes an increase in amount demanded by 15%,
the demand is said to be elastic.
5. Inelasticdemand – Demand is inelastic when the percentage
change in the quantity demanded of a commodity is less than the
percentage change in its price.
The elasticity of demand here is less than unity. We say that demand
for that good is relatively inelastic. For instance, if a fall in price of a
commodity by 10% leads to an increase in quantity demanded by 8%,
the demand is inelastic.
2.1.2 Measurement Of Elasticity Of Demand:-
Elasticity of demand for different goods is different. It is important to
measure elasticity of demand in order to compare elasticity of demand
for different goods. The measurement of elasticity of demand can be
looked to from two viewpoints:-
 Point elasticity
 Arc elasticity

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Pointelasticity– when price elasticity of demand is measured at a
point on a demand curve, it is called point elasticity.
Arc elasticity– when elasticity of demand is measured over a finite
range or ‘arc’ of demand curve, it is called price elasticity of demand.
2.1.3 Methods Of Measurement Of Elasticity Of
Demand:-
There are three methods of measurement of price elasticity of
demand:-
 Percentage or proportionate method
 Total expenditure method
 Point or geometric method

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1. Percentageor proportionatemethod– In this method, price
elasticity of demand is measured by the ratio of percentage change in
quantity demanded to percentage change in price of the commodity.
2. Total expenditure method – According to expenditure method,
elasticity of demand can be measured by considering the change in
total expenditure as a result of change in the price of the commodity
By using this method, we can categorise three types of elasticities:

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 Elastic demand
 Inelastic demand
 Unitary elastic
Elasticdemand– when a fall in the price of the commodity results
in an increase in total expenditure and a rise in the price leads to
decrease in total expenditure, elasticity of demand will be greater than
one.

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Inelasticdemand– when a fall in price of a commodity reduces
total expenditure and a rise in price increases it, price elasticity of
demand will be less than one.

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Unitary elastic– when total expenditure does not change with
change in price of the commodity, the elasticity of demand is equal to
unity.

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2.2 Income Elasticity Of Demand:-
Income elasticity of demand measures the degree of responsiveness of
quantity demanded of a commodity to changes in income of the
consumers. More precisely, income elasticity of demand may be
defined as the ratio of proportionate change in income of the
consumers.
Income elasticity of demand can be measured with the help of
following formula:
2.2.1 Classification Of Income Elasticity Of Demand:-
Income elasticity of demand can be of three types:
 Positive income elasticity
 Negative income elasticity
 Zero income elasticity
1.Positive income elasticity– income elasticity of demand is said
to be positive when with increase in income of the consumers’, the
amount purchased of a commodity increases and vice-versa. For
most of the commodities income elasticity of demand is positive
because an increase in income leads to an increase in quantity
demanded.

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We can classify income elasticity into three categories:
a.Income elastic – if the percentage change in quantity demanded of a
commodity is greater than the percentage change in income, ey will
exceed unity. The demand for the commodity is said to be income
elastic.
b.Income inelastic – if the percentage change in quantity demanded is
smaller than the percentage change in income, ey will be less than
unity. The demand for the commodity is said to be income inelastic.
c. Unit income elasticity– if the percentage in the quantity
demanded is equal to percentage change in the income, ey will be equal
to unity.
2. Negativeincome elasticity– income elasticity of demand is said
to be negative when increase in income of the consumers leads to fall in
the amount purchased of a commodity and vice-versa.
3. Zero income elasticity– income elasticity of demand may be zero
in some exceptional in some cases. Zero income elasticity of demand for
a good implies that a rise in income leaves quantity demanded
unchanged. For instance, income elasticity of demand for salt may be
zero because an increase in income beyond a certain level may not bring
about a change in demand for inexpensive goods of necessities like salt.

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2.3 Cross Elasticity Of Demand
The degree of responsiveness of quantity demanded of one
commodity to change in the price of another commodity is called
cross- elasticity of demand. More precisely, cross-elasticity of demand
is defined as the percentage change in quantity demanded of a
commodity with respect to the change in the price of its related
commodity.
Cross elasticity of demand can be measured with the help of the
following formula:
2.3.1 Types Of Cross Elasticity Of Demand:-
Cross elasticity of demand is of three types as below:
1. Positivecross elasticity– cross elasticity of demand is said to be
positive, when increase in price of the commodity (Y) leads to an
increase in the demand for the other commodity (X). When two goods
are substitutes for each other, cross elasticity will be positive because
increase in price of one increases the demand for the other. For
example, tea and coffee are substitutes.
2. Negativecross elasticity– cross elasticity of demand is said to
be negative when increase in price of Y leads to a fall in the demand
for X. Complementary goods have negative cross elasticity.

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3. Zero cross elasticity– cross elasticity of demand is said to be
zero when a change in the price of one commodity (Y) does not affect
the demand for another commodity (X).
3. Factors Affecting Elasticity Of Demand:-
There are many factors that determine the elasticity of demand. The
main factors are:
1. Availabilityof substitutes – The most important determinant of
the price elasticity of demand is the number and kind of substitutes
available for a commodity. If a commodity has many close substitutes,
its demand is likely to be elastic. Even a small fall in the price will
induce more people to buy this commodity rather than its substitutes
2. Nature of the commodity– Another determinant of elasticity of
demand is the nature of the commodity, i.e., whether the commodity is
a ‘necessity’ or a ‘luxury’ or a ‘comfort’. Demand for necessity like
food is generally inelastic as it is essential for life. On the other hand,
‘luxury’ and ‘comforts’ are not essential for life and their consumption
can be postponed, thus, their demand is generally elastic. Hence, the
demand for necessities is inelastic and the demand for luxuries and
comforts is elastic.
3. Habits of the consumer – Price elasticity of demand depends
also upon whether or not the consumers are habitual of using a
commodity. If consumers are habitual of consuming some
commodities, they will continue to consume them even at higher
prices.

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4. Postponementof consumption – Elasticity of demand depends
on the possibility of postponement of consumption as well. The
consumption of clothing may be postponed and, therefore, a rise in its
price may lead to a large fall in its demand. Hence, the demand for
clothing may be elastic. But the consumption of food items cannot be
postponed; therefore, their demand is inelastic.
5. The number of uses of a commodity – Elasticity of demand
depends also upon the number of uses of a commodity can be put to.
The greater is the number of uses to which a commodity can be put to,
the greater will be its price elasticity of demand. If the price of the
commodity is very high, consumer will purchase this commodity for
the most important use only and, hence, the demand will be small.
4. Importance of elasticity of Demand
The importance of concept of elasticity of demand is as follows:
1. Business decision– The concept of elasticity of demand plays an
important role in taking various decisions regarding prices and output.
For instance, in deciding whether to increase the price or not, the firm
should have an idea about price elasticity of demand for the products
and its substitutes and its complements.
2. Importance to monopolist – A monopolist normally pursues
the policy of price discrimination, i.e., charging different prices from
different consumers. An idea of price elasticity of demand for his
product by different consumers would be of great use to him. He
would charge higher price from those consumers who have inelastic
demand and lower prices from those consumers who elastic demand
for the goods sold by the monopolist.

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3. Importance in the internationaltrade – The concept of
elasticity of demand is also important in the field of international
trade. It is of great importance in determining the terms of trade (the
rate at which the exports and imports are exchanged) and
consequently gains from international trade, in determining the
impacts of export and import and thereby on the balance of payment.
4. Incidence of taxation – Incidence of taxes refers to the persons
who ultimately bear the burden of taxes, i.e., the person who
ultimately pay the taxes. Whether the incidence of taxes is on the
buyers or the sellers depends on the elasticity of demand. Higher is the
elasticity of demand, more is the incidence of taxes on sellers. On the
other hand, more inelastic is the demand, more is the burden on the
buyers of the commodities.

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5. Case Study: Health Clubs
Elasticity of Demand for Health Clubs
The health club market provides an interesting case study in using the concepts
of price elasticity of demand and income elasticity of demand
Price Elasticity of Demand
Price elasticity of demand measures the responsiveness of
demand to a change in the own price of a good or service.
When demand is inelastic (e.g. demand curve D1 in the
diagram above), consumer demand is relatively insensitive to
changes in price.
Elasticity tends to be low when the product is viewed by the
consumer as a necessity, or when it takes up a small
percentage of total income. Elasticity is low when there are
few close substitutes and when the consumer has developed a
strong sense of brand loyalty.
A relatively elastic demand curve is shown by D2 in the same
diagram.

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What of the price elasticity of demand for health club
memberships?
Regular gym users regard their health club visits as an
important feature of their weekly exercise regime. They are
unlikely to cancel a membership if fees rise from time to time.
The majority of gym members pay their subscriptions using
direct debit. They may take some time to realize that their
monthly charge has changed. And, for most consumers,
having made the decision to commit themselves to a
membership of between $25-$50 per month, a small rise in
fees is unlikely to lead to a cancelled membership.
Some towns and cities are well served by health clubs in both
the premium and economy segments of the market. When
there is genuine market competition, price elasticity of
demand should be higher.
Income Elasticity of Demand
Income elasticity measures the responsiveness of demand to a
change in consumers' real income. Although some fitness
fanatics may regard their membership as a necessity (giving a
low but positive value for income elasticity), for many
consumers, an individual or family membership is often seen
as a luxury item in their annual budget.
Normal luxury products have a highly positive income
elasticity of demand. When the economy is strong, and
incomes and employment are rising, we expect to see strong
growth in market demand for health and fitness activities.
This encompasses health clubs together with other activities
(including sports-based holidays).