Elasticity measures the responsiveness of demand to changes in price, income, and the prices of related goods. Price elasticity of demand compares the percentage change in quantity demanded to a percentage change in price. Demand is elastic if the percentage change in quantity is greater than the percentage change in price, inelastic if less than. Cross elasticity measures the responsiveness of demand for one good to price changes in another. Income elasticity measures the responsiveness of demand to changes in consumer income. Factors like availability of substitutes, nature of the good, and time for adjustment impact elasticity.

1. ElasticityElasticity
Module: 2 (contd.)Module: 2 (contd.)

2. What is elasticity ?What is elasticity ?
 Degree ofDegree of responsiveness of demandresponsiveness of demand
to its determinantsto its determinants
– Own priceOwn price
– Cross priceCross price
– IncomeIncome

3. Price Elasticity of DemandPrice Elasticity of Demand
 Measures the percentage change inMeasures the percentage change in
thethe quantity demandedquantity demanded resultingresulting
from a percent change infrom a percent change in priceprice
Q
P
P
Q
P/P
Q/Q
P%
Q%
EP
∆
∆
=
∆
∆
=
∆
∆
=

4. Price Elasticity of DemandPrice Elasticity of Demand
 Elastic DemandElastic Demand
– EEpp is greater than than 1 in absoluteis greater than than 1 in absolute
valuevalue
– Quantity demanded is relativelyQuantity demanded is relatively
responsive to a change in priceresponsive to a change in price
– |%|%∆∆Q| > |%Q| > |%∆∆P|P|
– Total expenditure/Total Revenue (PxQ)Total expenditure/Total Revenue (PxQ)
decreases when price increasesdecreases when price increases

5. Price Elasticity of DemandPrice Elasticity of Demand
 Inelastic DemandInelastic Demand
– EEpp is less than 1 in absolute valueis less than 1 in absolute value
– Quantity demanded is relativelyQuantity demanded is relatively
unresponsive to a change in priceunresponsive to a change in price
– |%|%∆∆Q| < |%Q| < |%∆∆P|P|
– Total expenditure/Total Revenue (PxQ)Total expenditure/Total Revenue (PxQ)
increases when price increasesincreases when price increases

6. Price Elasticity andPrice Elasticity and
Total Expenditure/RevenueTotal Expenditure/Revenue

7. Factors on which elasticity dependsFactors on which elasticity depends
 Availability of substitutesAvailability of substitutes
 Nature of the commodityNature of the commodity
 Weightage in total consumptionWeightage in total consumption
 Time period of adjustmentTime period of adjustment

8. Cross Elasticity of DemandCross Elasticity of Demand
 Measures theMeasures the percentage change in thepercentage change in the
quantity demandedquantity demanded of a commodity resultingof a commodity resulting
from afrom a percent change in price of itspercent change in price of its
substitutes or complementssubstitutes or complements
Exy = %∆Qx/ %∆Py
Exy = ∆Qx/ Qx
∆Py/ Py

9. Income Elasticity of demandIncome Elasticity of demand
 Measures the percentage change inMeasures the percentage change in
thethe quantity demandedquantity demanded of a commodityof a commodity
resulting from a percent change inresulting from a percent change in incomeincome
Exy = %∆Qx/ %∆M
Exy = ∆Qx/ Qx
∆M/ M

10. Income Elasticity of demandIncome Elasticity of demand
 Measures the percentage change inMeasures the percentage change in
thethe quantity demandedquantity demanded of a commodityof a commodity
resulting from a percent change inresulting from a percent change in incomeincome
Exy = %∆Qx/ %∆M
Exy = ∆Qx/ Qx
∆M/ M