This document defines and explains the concept of elasticity of demand. It discusses price elasticity of demand, income elasticity of demand, cross elasticity of demand, advertising elasticity of demand, and elasticity of substitution. It provides formulas for calculating each type and discusses factors that affect elasticity. Price elasticity measures responsiveness of demand to price changes. Income elasticity measures responsiveness of demand to changes in consumer income. Cross elasticity measures responsiveness of one good's demand to price changes in another good. Advertising elasticity measures responsiveness of demand to changes in advertising expenditures. Elasticity of substitution measures how easily one good can be substituted for another.

1. ELASTICITY OF DEMAND

2. ELASTICITY – the concept
 The responsiveness of one variable to changes in
another
 When price rises, what happens
to demand? - Demand falls
 BUT! How much does demand fall?

3. MEANING
 Elasticity of demand is defined as the responsiveness
of the quantity demanded of a good to changes in one
of the variables on which demand depends.
 It may be defined as “Percentage Change in Quantity
demanded over percentage change in price”

4. DEFINITION
In the words of Cairncross, “the elasticity of
demand for a commodity is the rate at which
the quantity bought changes as the price
changes.”

5. FORMULAE
Ed = % Change in Quantity Demanded
% Change in Price
Or
∆Q x P
∆P Q
Where :
∆Q = Change in Quantity Demanded
∆P = Change in Price
P = Original Price
Q = Original Quantity

6. FACTORS AFFECTING ELASTICITY
OF DEMAND
1. Nature of the commodity (necessity vs. luxury;
durability/reparability eg., shoes)
2. Availability of substitutes
3. Different uses of the commodity (paper vs. ink)
4. Price level (very costly & very cheap goods: inelastic)
5. Proportion of expenditure (needles: inelastic; TV:
elastic)
6. Postponement of demand

7. 7. Joint demand
8. Time period (elastic in the long term)
9. Government control
10. Change in income (necessaries: inelastic; milk and
fruit for a rich man)
11. Habits
12. Distribution of income
13. Future expectation about price change

8. TYPES OF ELASTICITY OF DEMAND
There are 5 types of Elasticity of Demand:
1. Price elasticity of demand
a) Perfectly Elastic
b) Perfectly Inelastic
c) Unitary Elastic
d) Relatively more elastic
e) Relatively less elastic
2. Income elasticity of demand
3. Cross elasticity
4. Advertisement Elasticity
5. Elasticity of Substitution

9. 1. PRICE ELASTICITY OF DEMAND
Elasticity
slide
9
 Measures the responsiveness of quantity
demanded to changes in a good’s own price.
 The price elasticity of demand is the percent
change in quantity demanded divided by the
percent change in price that caused the
change in quantity demanded.

10.  The responsiveness of demand to changes in price
 Where % change in demand is greater than %
change in price – elastic
 Where % change in demand is less than % change in
price - inelastic

11. FORMULAE
It is the ratio of the percentage change in quantity
demanded to the percentage change in price.
Ed =
% Change in Quantity Demanded
___________________________
% Change in Price
If answer is between 0 and -1: the relationship is inelastic
If the answer is between -1 and infinity: the relationship is elastic
Note: ED has – sign in front of it; because as price rises
demand falls and vice-versa (inverse relationship between
price and demand) Its value is always negative, but stated in
absolute terms.

12. 2. INCOME ELASTICITY OF DEMAND
Is the degree of responsiveness of quantity
demanded of a good to a small change in the income
of the consumer.
income elasticity of demand
% change in quantity demanded
change in income

%
Normal Good – demand rises as income rises and vice versa
Inferior Good – demand falls as income rises and vice versa
A positive sign denotes a normal good
A negative sign denotes an inferior good

13. • If the proportion of income spent on a good remains the
same as income increases, then income elasticity for the
good is equal to one.
• If the proportion spent on a good increases, then the
income elasticity for the good is greater than one.
• If the proportion decreases as income rises, then income
elasticity for the good is less than one.

14. TYPES OF INCOME ELASTICITY OF
DEMAND
 Positive Income elasticity of demand
 Negative Income elasticity of
demand
 Zero Income elasticity of demand

15. Positive Income elasticity of demand
Y
P
A
D
D
B SO
X

16. Positive Income elasticity of
demand
 Income Elasticity Equal to Unity or
One
 Income Elasticity Greater Than Unity
Or One
 Income Elasticity Less Than Unity or
One

17. NEGATIVE INCOME ELASTICITY OF DEMAND
P
B
A
S
D
D
X
Y

18. ZERO INCOME ELASTICITY OF DEMAND
Y
XO
D
D

19. MEASUREMENT OF INCOME ELASTICITY
OF DEMAND
Ei = ∆Q x I
∆I Q
Where,
Ei = Income Elasticity of Demand
∆Q = Change in the quantity demanded.
Q = Original quantity demanded.
∆I = Change in income.
I = Original income.
For e.g. ,when Income of the consumer = 2,500/- , he purchases 20 units of X,
when income = 3,000/- he purchases 25 units of X

20. Thus
Income Elasticity of Demand
=
= (5/20) ÷ (500/2500)
= 1.5
therefore here the Ei is 1.5 which is more than
one.
∆Q
Q I
∆ I
÷

21. 3. CROSS ELASTICITY OF DEMAND
A measure of the response of the quantity of one
good demanded to a change in the price of another
good. (Either a substitute or a complementary good)
cross- price elasticity of demand
% change in quantity of demanded
change in price of

Y
X%

22. TYPES OF CROSS ELASTICITY OF
DEMAND
 Cross Elasticity of Demand Equal to
Unity or One
 Cross Elasticity of Demand Greater
than Unity or one
 Cross Elasticity of demand less than
unity or one

23. MEASUREMENT CROSS ELASTICITY OF
DEMAND
Proportionate change in
Demand for product X
Proportionate change in Price
of product Y
∆qx
Qx Py
∆p y
÷
Cross Elasticity of Demand
Cross Elasticity of
Demand

24. CROSS ELASTICITY OF DEMAND FOR
SUBSTITUTES
O
Y
X
D
D

25. CROSS ELASTICITY OF DEMAND FOR
COMPLEMENTARY PRODUCTS
O
Y
X
D
D

26. CROSS ELASTICITY OF DEMAND FOR NEUTRAL
PRODUCTS
O
Y
X
D

27. ELASTICITY
 Goods which are complements:
Cross Elasticity will have negative sign (inverse
relationship between the two)
 Goods which are substitutes:
Cross Elasticity will have a positive sign (positive
relationship between the two)

28. RELATIONSHIP
 If two goods are perfect substitutes for each
other cross elasticity is infinite
 if the two goods are totally unrelated, cross
elasticity between them is zero.
 Goods between which cross elasticity is
positive can be called Substitutes,

29.  Goods between which cross elasticity is
negative can be called complementary
 the good between which the cross elasticity
is negative are not always complementary
as this is found when the income effect on
the price change is very strong.

30. 4. ADVERTISING ELASTICITY OF DEMAND
 Advertising elasticity of demand is the
measure of the rate of change in demand
due to change in advertising expenditure
 The amount of change in demand of goods due to
advertisement is known as Advertisement
Elasticity of Demand .

31. ADVERTISING ELASTICITY OF DEMAND
Proportionate change in
Demand for product
Proportionate change in
Advertising expenditure
∆Q
Q A
∆A
÷
Advertising Elasticity of
Demand
Advertising Elasticity of
Demand

32. RELATIONSHIP BETWEEN ADVERTISING
EXPENDITURE AND SALES
O
X
Y
S
S

33. FACTORS AFFECTING ADVERTISING
ELASTICITY OF DEMAND
1. The stage of the Product’s Market
Development .
2. Reaction of market Rival Firms.
3. Cumulative Effect of Past Advertisement.
4. Influence of Other Factors.

34. 5. ELASTICITY OF SUBSTITUTION
 The selection between two product or thing is
called substitution.
 So Elasticity of Substitution measures the rate at
which the particular product is substituted .
 Thus Es is the degree to which one product could
be substituted in context of price and proportion

35. ELASTICITY OF SUBSTITUTION
Elasticity of Substitution =
Proportionate change in the quantity ratios of
goods x & y
Proportionate change in the price ratios of goods
x & y.

36. TYPES OF ELASTICITY OF
SUBSTITUTION
1. Zero Elasticity of Substitution.
2. Infinite Elasticity Of Substitution
3. Elasticity of Substitution greater than unity or 1
4. Elasticity of Substitution is equal to one
5. Elasticity of Substitution is less than one

37. PRACTICAL IMPORTANCE OF THE CONCEPT OF
PRICE ELASTICITY OF DEMAND
1. In the theory of price determination
i. Under monopoly
ii. Discriminating monopoly
iii. Equilibrium
iv. Joint supply
2. In the theory of distribution
3. Importance in international trade

38. 4. Importance in the allocation of resources
5. Importance in the advertisement expenditure
6. Importance for government
i. Helpful in the formulation of economic policies
ii. Helpful in the determination of public utilities
iii. Helpful in the determination of taxation policies
iv. Helpful in the studying of incidence of tax

39. 7. Importance in transportation industry
8. Importance in the determination of rate of exchange
9. Helpful in explaining the paradox of poverty amidst
plenty