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Elasticity of demand curves

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Shakeel Ahmed
Shakeel Ahmed

elasticity of demand curves

Economy & Finance
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Elasticity of Demand Shakeel Ahmed Qureshi
Elasticity of Demand โ€ข Percentage change in the Quantity demanded of a good due to percentage change in the price of the good is called elasticity of demand. Or โ€ข Degree of responsiveness or sensitivity of quantity demand of a good due to change in the price of the good is called price elasticity of demand. ฮทd= ๐ธ ๐‘‘ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘
Methods to Measure Elasticity of Demand Methods to measure Elasticity of Demand Total Outlay Method Percentage method Point Elasticity Arc Elasticity Geometric Method
Total Outlay (Expenditure) Method Under this method total expenditure made on the good before change in price and after change price are compared. If Total Expenditure remain Same then Elasticity of demand is equal to one. If Total Expenditure increases, then Elasticity of demand is Greater than one. If Total Expenditure decreases, then Elasticity of demand is less than one. Ed = ๐‘‡๐‘œ๐‘ก๐‘Ž๐‘™ ๐ธ๐‘ฅ๐‘๐‘’๐‘›๐‘‘๐‘–๐‘ก๐‘ข๐‘Ÿ๐‘’ ๐‘Ž๐‘“๐‘ก๐‘’๐‘Ÿ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘‡๐‘œ๐‘ก๐‘Ž๐‘™ ๐‘’๐‘ฅ๐‘๐‘’๐‘›๐‘‘๐‘–๐‘ก๐‘ข๐‘Ÿ๐‘’ ๐‘๐‘’๐‘“๐‘œ๐‘Ÿ๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘๐‘Ÿ๐‘–๐‘๐‘’ According to this method, by comparing the total expenditures of the consumer both before and after change in price of a product, it can be known whether demand elasticity for product is one, less than one or more than one.
Price Qd Total Expenditure 40 6 240 20 8 160 Price Qd Total Expenditure 40 6 240 20 18 360 ฮทd = 1 ฮทd < 1 ฮทd > 1 Price Qd Total Expenditure 40 6 240 20 12 240 Total Outlay (Expenditure) Method
The Demand Curve having Elasticity equal to one. (๏จ=1) D D 40 20 126 Qd P As the price decreases from 40 to 20 The quantity increases from 6 units to 12 units. The Change in the quantity is proportional to change in the price. 0 Price Qd Total Expenditure 40 6 240 20 12 240 ฮทd = 1
The Demand Curve having Elasticity less than one. (๏จ<1) D D 40 20 86 Qd P As the price decreases from 40 to 20, The quantity increases from 6 to 8 units. The percentage Change in the quantity is less than percentage change in the price. 0 Price Qd Total Expenditure 40 6 240 20 8 160 ฮทd < 1
The Demand Curve having Elasticity greater than one. (๏จ>1) D D 40 20 186 Qd P As the price decreases from 40 to 20, The quantity demanded increases from 6 to 18. The percentage Change in the quantity is greater than percentage change in the price. Price Qd Total Expenditure 40 6 240 20 18 360
6 Qd D D 40 20 12 P 0 ฮทd = 1 D D 40 20 86 Qd P 0 ฮทd < 1 D D 40 20 186 Qd P ฮทd > 1 Total Outlay (Expenditure) Method ฮทd = 1 Vs ฮทd < 1 Vs ฮทd > 1
Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) ฮทd= ๐ธ๐‘‘ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ Percentage change in the Quantity demanded of a good due to percentage change in the price of the good is called elasticity of demand. Percentage method Point Elasticity Arc Elasticity
Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) Percentage change in the Quantity demanded of a good due to very small change in the price of the good. Such that apparently there is only one point on the demand curve, is called point elasticity of demand. Point Elasticity of Demand D D P1 P2 Q2Q1 Qd P 0
Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) = ๐‘„2 โˆ’ ๐‘„1 ๐‘„ ๐‘ƒ2 โˆ’ ๐‘ƒ1 ๐‘ƒ = โˆ†๐‘„ ๐‘„ โˆ†๐‘ƒ ๐‘ƒ = โˆ†๐‘„ ๐‘„ ร— ๐‘ƒ โˆ†๐‘ƒ = โˆ†๐‘„ โˆ†๐‘ƒ ร— ๐‘ƒ ๐‘„ Percentage change in the Quantity demanded of a good due to very small change in the price of the good. Such that apparently there is only one point on the demand curve, is called point elasticity of demand. Point Elasticity of Demand ฮทd= ๐ธ๐‘‘ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ = ๐‘„2 โˆ’๐‘„1 ๐‘„ ร—100 ๐‘ƒ2 โˆ’๐‘ƒ1 ๐‘ƒ ร—100 D D P1 P2 Q1 Q P 0 Q2
Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) = ๐‘„2 โˆ’ ๐‘„1 ๐‘„2 + ๐‘„1 2 ๐‘ƒ2 โˆ’ ๐‘ƒ1 ๐‘ƒ2 + ๐‘ƒ1 2 = โˆ†๐‘„ ๐‘„2 + ๐‘„1 โˆ†๐‘ƒ ๐‘ƒ2 + ๐‘ƒ1 = โˆ†๐‘„ ๐‘„2 + ๐‘„1 ร— ๐‘ƒ2 + ๐‘ƒ1 โˆ†๐‘ƒ = โˆ†๐‘„ โˆ†๐‘ƒ ร— ๐‘ƒ2 + ๐‘ƒ1 ๐‘„2 + ๐‘„1 Percentage change in the Quantity demanded of a good due to comparatively significant large change in the price of the good. Such that there appear two distinct points on the demand curve, is called Arc elasticity of demand. Arc Elasticity of Demand ฮทd= ๐ธ๐‘‘ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ = ๐‘„2 โˆ’๐‘„1 ๐‘„2+๐‘„1 2 ร—100 ๐‘ƒ2 โˆ’๐‘ƒ1 ๐‘ƒ2+๐‘ƒ1 2 ร—100 D D P1 P2 Q2Q1 Qd P 0 A B
Geometric Method Geometric method was suggested by Prof. Marshall and is used to measure the elasticity at a point on the demand curve. When there are infinitely small changes in price and demand, then the โ€˜Geometric Methodโ€™ is used. This method is also known as โ€˜Graphic Methodโ€™ or โ€˜Point Methodโ€™ or โ€˜Arc Methodโ€™. Elasticity of demand (Ed) is different at different points on the same straight line demand curve. In order to measure Ed at any particular point, lower portion of the curve from that point is divided by the upper portion of the curve from the same point. ๐ธ๐‘‘ = Lower segment of demand curve (LS) Upper segment of demand curve (US) P Q Quantity Demand Price 0 N
ฮทd= ๐ธ๐‘‘ = Lower segment of demand curve (LS) Upper segment of demand curve (US) E D Quantity Demand Price 0 B A C Ed = 1 Ed < 1 Ed > 1 Ed = โˆž Ed = 0 Geometric Method
Two Extremes of Elasticity of Demand 1 Perfectly inelastic demand: The Demand Curve having Elasticity equal to zero (๏จ=0) 2 Perfectly Elastic Demand: The Demand Curve having Elasticity equal to infinity (๏จ=๏‚ฅ)
The Demand Curve having Elasticity equal to zero (๏จ=0) As the price decreases from P1 to P2 The quantity do not change. There is no Change in the quantity as price changes from P1 to P2. Perfectly inelastic demand D D Price P1 Q 0 P2 Quantity Demand
The Demand Curve having Elasticity equal to infinity (๏จ=๏‚ฅ) D D P Q1Q Quantity Demanded Price At a certain price the quantity increases from Q to Q1. There is no change in the price while there is change in the quantity from Q to Q1. Perfectly elastic demand
Income Elasticity of demand Percentage change in the Quantity demanded of a good due to percentage change in the income of the consumer is called Income elasticity of demand. = ๐‘„2 โˆ’ ๐‘„1 ๐‘„2 + ๐‘„1 2 ๐‘Œ2 โˆ’ ๐‘Œ1 ๐‘Œ2 + ๐‘Œ1 2 = โˆ†๐‘„ ๐‘„2 + ๐‘„1 โˆ†๐‘Œ ๐‘Œ2 + ๐‘Œ1 = โˆ†๐‘„ ๐‘„2 + ๐‘„1 ร— ๐‘Œ2 + ๐‘Œ1 โˆ†๐‘Œ = โˆ†๐‘„ โˆ†๐‘Œ ร— ๐‘Œ2 + ๐‘Œ1 ๐‘„2 + ๐‘„1 ฮทY= ๐ธ ๐‘Œ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐ผ๐‘›๐‘๐‘œ๐‘š๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐ถ๐‘œ๐‘›๐‘ ๐‘ข๐‘š๐‘’๐‘Ÿ = ๐‘„2 โˆ’๐‘„1 ๐‘„2+๐‘„1 2 ร—100 ๐‘Œ2 โˆ’๐‘Œ1 ๐‘Œ2+๐‘Œ1 2 ร—100
Cross Elasticity of demand Percentage change in the Quantity demanded of a good due to percentage change in the price of its substitute or complementary good is called cross elasticity of demand. ฮทX= ๐ธ ๐‘‹ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘”๐‘œ๐‘œ๐‘‘ ๐ด ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘”๐‘œ๐‘œ๐‘‘ ๐ต = ๐‘„2๐ด โˆ’ ๐‘„1๐ด ๐‘„2๐ด + ๐‘„1๐ด ๐‘ƒ2๐ต โˆ’ ๐‘ƒ1๐ต ๐‘ƒ2๐ต + ๐‘ƒ1๐ต = โˆ†๐‘„๐ด ๐‘„2๐ด + ๐‘„๐ด โˆ†๐‘ƒ๐ต ๐‘ƒ2๐ต + ๐‘ƒ1๐ต = โˆ†๐‘„๐ด ๐‘„2๐ด + ๐‘„1๐ด ร— ๐‘ƒ2๐ต + ๐‘ƒ1๐ต โˆ†๐‘ƒ๐ต = โˆ†๐‘„๐ด โˆ†๐‘ƒ๐ต ร— ๐‘ƒ2๐ต+๐‘ƒ1๐ต ๐‘„2๐ด+๐‘„1๐ต = ๐‘„2๐ด โˆ’ ๐‘„1๐ด ๐‘„2๐ด + ๐‘„1๐ด 2 ร— 100 ๐‘ƒ2๐ต โˆ’ ๐‘ƒ1๐ต ๐‘ƒ2๐ต + ๐‘ƒ1๐ต 2 ร— 100
0 < E < (for absolute values of elasticity) Unit ElasticPerfectly Inelastic Perfectly Elastic ElasticInelastic E = 1 E = 0 E < 1 E >1 E = โˆž P Qd Qd Qd Qd Qd P P P P
Elasticity of Demand Shakeel Ahmed Qureshi

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Elasticity of demand curves

  • 2. Elasticity of Demand โ€ข Percentage change in the Quantity demanded of a good due to percentage change in the price of the good is called elasticity of demand. Or โ€ข Degree of responsiveness or sensitivity of quantity demand of a good due to change in the price of the good is called price elasticity of demand. ฮทd= ๐ธ ๐‘‘ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘
  • 3. Methods to Measure Elasticity of Demand Methods to measure Elasticity of Demand Total Outlay Method Percentage method Point Elasticity Arc Elasticity Geometric Method
  • 4. Total Outlay (Expenditure) Method Under this method total expenditure made on the good before change in price and after change price are compared. If Total Expenditure remain Same then Elasticity of demand is equal to one. If Total Expenditure increases, then Elasticity of demand is Greater than one. If Total Expenditure decreases, then Elasticity of demand is less than one. Ed = ๐‘‡๐‘œ๐‘ก๐‘Ž๐‘™ ๐ธ๐‘ฅ๐‘๐‘’๐‘›๐‘‘๐‘–๐‘ก๐‘ข๐‘Ÿ๐‘’ ๐‘Ž๐‘“๐‘ก๐‘’๐‘Ÿ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘‡๐‘œ๐‘ก๐‘Ž๐‘™ ๐‘’๐‘ฅ๐‘๐‘’๐‘›๐‘‘๐‘–๐‘ก๐‘ข๐‘Ÿ๐‘’ ๐‘๐‘’๐‘“๐‘œ๐‘Ÿ๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘๐‘Ÿ๐‘–๐‘๐‘’ According to this method, by comparing the total expenditures of the consumer both before and after change in price of a product, it can be known whether demand elasticity for product is one, less than one or more than one.
  • 5. Price Qd Total Expenditure 40 6 240 20 8 160 Price Qd Total Expenditure 40 6 240 20 18 360 ฮทd = 1 ฮทd < 1 ฮทd > 1 Price Qd Total Expenditure 40 6 240 20 12 240 Total Outlay (Expenditure) Method
  • 6. The Demand Curve having Elasticity equal to one. (๏จ=1) D D 40 20 126 Qd P As the price decreases from 40 to 20 The quantity increases from 6 units to 12 units. The Change in the quantity is proportional to change in the price. 0 Price Qd Total Expenditure 40 6 240 20 12 240 ฮทd = 1
  • 7. The Demand Curve having Elasticity less than one. (๏จ<1) D D 40 20 86 Qd P As the price decreases from 40 to 20, The quantity increases from 6 to 8 units. The percentage Change in the quantity is less than percentage change in the price. 0 Price Qd Total Expenditure 40 6 240 20 8 160 ฮทd < 1
  • 8. The Demand Curve having Elasticity greater than one. (๏จ>1) D D 40 20 186 Qd P As the price decreases from 40 to 20, The quantity demanded increases from 6 to 18. The percentage Change in the quantity is greater than percentage change in the price. Price Qd Total Expenditure 40 6 240 20 18 360
  • 9. 6 Qd D D 40 20 12 P 0 ฮทd = 1 D D 40 20 86 Qd P 0 ฮทd < 1 D D 40 20 186 Qd P ฮทd > 1 Total Outlay (Expenditure) Method ฮทd = 1 Vs ฮทd < 1 Vs ฮทd > 1
  • 10. Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) ฮทd= ๐ธ๐‘‘ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ Percentage change in the Quantity demanded of a good due to percentage change in the price of the good is called elasticity of demand. Percentage method Point Elasticity Arc Elasticity
  • 11. Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) Percentage change in the Quantity demanded of a good due to very small change in the price of the good. Such that apparently there is only one point on the demand curve, is called point elasticity of demand. Point Elasticity of Demand D D P1 P2 Q2Q1 Qd P 0
  • 12. Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) = ๐‘„2 โˆ’ ๐‘„1 ๐‘„ ๐‘ƒ2 โˆ’ ๐‘ƒ1 ๐‘ƒ = โˆ†๐‘„ ๐‘„ โˆ†๐‘ƒ ๐‘ƒ = โˆ†๐‘„ ๐‘„ ร— ๐‘ƒ โˆ†๐‘ƒ = โˆ†๐‘„ โˆ†๐‘ƒ ร— ๐‘ƒ ๐‘„ Percentage change in the Quantity demanded of a good due to very small change in the price of the good. Such that apparently there is only one point on the demand curve, is called point elasticity of demand. Point Elasticity of Demand ฮทd= ๐ธ๐‘‘ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ = ๐‘„2 โˆ’๐‘„1 ๐‘„ ร—100 ๐‘ƒ2 โˆ’๐‘ƒ1 ๐‘ƒ ร—100 D D P1 P2 Q1 Q P 0 Q2
  • 13. Percentage Method (Formula / Priori / Mathematical/ Arithmetical / Proportionate ) = ๐‘„2 โˆ’ ๐‘„1 ๐‘„2 + ๐‘„1 2 ๐‘ƒ2 โˆ’ ๐‘ƒ1 ๐‘ƒ2 + ๐‘ƒ1 2 = โˆ†๐‘„ ๐‘„2 + ๐‘„1 โˆ†๐‘ƒ ๐‘ƒ2 + ๐‘ƒ1 = โˆ†๐‘„ ๐‘„2 + ๐‘„1 ร— ๐‘ƒ2 + ๐‘ƒ1 โˆ†๐‘ƒ = โˆ†๐‘„ โˆ†๐‘ƒ ร— ๐‘ƒ2 + ๐‘ƒ1 ๐‘„2 + ๐‘„1 Percentage change in the Quantity demanded of a good due to comparatively significant large change in the price of the good. Such that there appear two distinct points on the demand curve, is called Arc elasticity of demand. Arc Elasticity of Demand ฮทd= ๐ธ๐‘‘ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ = ๐‘„2 โˆ’๐‘„1 ๐‘„2+๐‘„1 2 ร—100 ๐‘ƒ2 โˆ’๐‘ƒ1 ๐‘ƒ2+๐‘ƒ1 2 ร—100 D D P1 P2 Q2Q1 Qd P 0 A B
  • 14. Geometric Method Geometric method was suggested by Prof. Marshall and is used to measure the elasticity at a point on the demand curve. When there are infinitely small changes in price and demand, then the โ€˜Geometric Methodโ€™ is used. This method is also known as โ€˜Graphic Methodโ€™ or โ€˜Point Methodโ€™ or โ€˜Arc Methodโ€™. Elasticity of demand (Ed) is different at different points on the same straight line demand curve. In order to measure Ed at any particular point, lower portion of the curve from that point is divided by the upper portion of the curve from the same point. ๐ธ๐‘‘ = Lower segment of demand curve (LS) Upper segment of demand curve (US) P Q Quantity Demand Price 0 N
  • 15. ฮทd= ๐ธ๐‘‘ = Lower segment of demand curve (LS) Upper segment of demand curve (US) E D Quantity Demand Price 0 B A C Ed = 1 Ed < 1 Ed > 1 Ed = โˆž Ed = 0 Geometric Method
  • 16. Two Extremes of Elasticity of Demand 1 Perfectly inelastic demand: The Demand Curve having Elasticity equal to zero (๏จ=0) 2 Perfectly Elastic Demand: The Demand Curve having Elasticity equal to infinity (๏จ=๏‚ฅ)
  • 17. The Demand Curve having Elasticity equal to zero (๏จ=0) As the price decreases from P1 to P2 The quantity do not change. There is no Change in the quantity as price changes from P1 to P2. Perfectly inelastic demand D D Price P1 Q 0 P2 Quantity Demand
  • 18. The Demand Curve having Elasticity equal to infinity (๏จ=๏‚ฅ) D D P Q1Q Quantity Demanded Price At a certain price the quantity increases from Q to Q1. There is no change in the price while there is change in the quantity from Q to Q1. Perfectly elastic demand
  • 19. Income Elasticity of demand Percentage change in the Quantity demanded of a good due to percentage change in the income of the consumer is called Income elasticity of demand. = ๐‘„2 โˆ’ ๐‘„1 ๐‘„2 + ๐‘„1 2 ๐‘Œ2 โˆ’ ๐‘Œ1 ๐‘Œ2 + ๐‘Œ1 2 = โˆ†๐‘„ ๐‘„2 + ๐‘„1 โˆ†๐‘Œ ๐‘Œ2 + ๐‘Œ1 = โˆ†๐‘„ ๐‘„2 + ๐‘„1 ร— ๐‘Œ2 + ๐‘Œ1 โˆ†๐‘Œ = โˆ†๐‘„ โˆ†๐‘Œ ร— ๐‘Œ2 + ๐‘Œ1 ๐‘„2 + ๐‘„1 ฮทY= ๐ธ ๐‘Œ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐‘”๐‘œ๐‘œ๐‘‘ ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐ผ๐‘›๐‘๐‘œ๐‘š๐‘’ ๐‘œ๐‘“ ๐‘กโ„Ž๐‘’ ๐ถ๐‘œ๐‘›๐‘ ๐‘ข๐‘š๐‘’๐‘Ÿ = ๐‘„2 โˆ’๐‘„1 ๐‘„2+๐‘„1 2 ร—100 ๐‘Œ2 โˆ’๐‘Œ1 ๐‘Œ2+๐‘Œ1 2 ร—100
  • 20. Cross Elasticity of demand Percentage change in the Quantity demanded of a good due to percentage change in the price of its substitute or complementary good is called cross elasticity of demand. ฮทX= ๐ธ ๐‘‹ = ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘ž๐‘ข๐‘Ž๐‘›๐‘ก๐‘–๐‘ก๐‘ฆ ๐‘‘๐‘’๐‘š๐‘Ž๐‘›๐‘‘ ๐‘œ๐‘“ ๐‘”๐‘œ๐‘œ๐‘‘ ๐ด ๐‘ƒ๐‘’๐‘Ÿ๐‘๐‘’๐‘›๐‘ก๐‘Ž๐‘”๐‘’ ๐‘โ„Ž๐‘Ž๐‘›๐‘”๐‘’ ๐‘–๐‘› ๐‘กโ„Ž๐‘’ ๐‘๐‘Ÿ๐‘–๐‘๐‘’ ๐‘œ๐‘“ ๐‘”๐‘œ๐‘œ๐‘‘ ๐ต = ๐‘„2๐ด โˆ’ ๐‘„1๐ด ๐‘„2๐ด + ๐‘„1๐ด ๐‘ƒ2๐ต โˆ’ ๐‘ƒ1๐ต ๐‘ƒ2๐ต + ๐‘ƒ1๐ต = โˆ†๐‘„๐ด ๐‘„2๐ด + ๐‘„๐ด โˆ†๐‘ƒ๐ต ๐‘ƒ2๐ต + ๐‘ƒ1๐ต = โˆ†๐‘„๐ด ๐‘„2๐ด + ๐‘„1๐ด ร— ๐‘ƒ2๐ต + ๐‘ƒ1๐ต โˆ†๐‘ƒ๐ต = โˆ†๐‘„๐ด โˆ†๐‘ƒ๐ต ร— ๐‘ƒ2๐ต+๐‘ƒ1๐ต ๐‘„2๐ด+๐‘„1๐ต = ๐‘„2๐ด โˆ’ ๐‘„1๐ด ๐‘„2๐ด + ๐‘„1๐ด 2 ร— 100 ๐‘ƒ2๐ต โˆ’ ๐‘ƒ1๐ต ๐‘ƒ2๐ต + ๐‘ƒ1๐ต 2 ร— 100
  • 21. 0 < E < (for absolute values of elasticity) Unit ElasticPerfectly Inelastic Perfectly Elastic ElasticInelastic E = 1 E = 0 E < 1 E >1 E = โˆž P Qd Qd Qd Qd Qd P P P P