3. Elasticity
• The responsiveness of demand for a good to the
change in its determinants is called the elasticity
of demand.
• The law of demand states how demand for a
product respond to change in its price and other
determinants. It only tells about the relationship ,
it does not quantify it.
• For decision making , the degree of
responsiveness of demand to change in its
determinants is more important.
• It was introduced by Alfred Marshall.
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5. Price Elasticity of Demand
• It is defined as the degree of responsiveness of
demand for a commodity to the change in its
price.
• It is the percentage change in quantity
demanded of a commodity as a result of a
certain change in its price.
• ep = Percentage change in qty demanded
Percentage change in price
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6. Degrees
1.Perfectly Elastic (Ep = ∞) – In perfectly elastic a
small change in price , changes the demand of
product. In perfectly elastic demand, a small rise
in price results in fall in demand to zero, while a
small fall in price causes increase in demand to
infinity.
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8. Unitary Elastic
3.Unitary elastic (ep=1) -When proportionate or
percentage change in quantity demanded is
exactly equal to proportionate or percentage
change in price, then demand is said to be
unitary elastic.
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9. Elastic Demand
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4.Elastic Demand (ep>1) – Here the proportionate
change produced in demand is greater than the
proportionate change in price of a product. The
numerical value of relatively elastic demand
ranges between one to infinity.
10. Inelastic Demand
5.Inelastic Demand (ep < 1) – In Inelastic demand
the percentage change produced in demand is
less than the percentage change in the price of a
product.
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11. Cross Elasticity
• Cross elasticity of demand - It measures the
responsiveness in the quantity demanded of one
good when the price for another good changes.
• Et,c= Proportionate change in demand for commodity X
Proportionate change in demand for commodity Y
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12. Types of Cross Elasticity
• Positive Cross Elasticity - When goods are
substitute of each other then cross elasticity of
demand is positive. When an increase in the
price of Y leads to an increase in the demand of
X. Ex – Tea and Coffee
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13. Types of Cross Elasticity
• Negative Cross Elasticity - In case of complementary
goods, cross elasticity of demand is negative. A
proportionate increase in price of one commodity leads
to a proportionate fall in the demand of another
commodity because both are demanded jointly. Ex –
Bread and Butter.
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14. Types of Cross Elasticity
• Zero Cross Elasticity - Cross elasticity of demand
is zero when two goods are not related to each
other. For instance, increase in price of car does
not effect the demand of cloth. Thus, cross
elasticity of demand is zero.
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15. Income Elasticity of Demand
• Income Elasticity – The responsiveness of
demand to the change in consumers' income is
known as income elasticity of demand.
• E y = Percentage change in quantity demanded
Percentage change in income
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16. Types of Income Elasticity
• Positive Income Elasticity of Demand: When the
demand for a product increases with increase in
consumer’s income and decreases with decrease
in consumer’s income , it is called positive
income elasticity
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17. Positive Income Elasticity of Demand
• Unitary Income Elasticity of Demand (ey = 1) : when
the proportionate change in the quantity demanded
is equal to proportionate change in income.
• More than Unitary Income Elasticity of Demand
(ey>1) : when the proportionate change in the
quantity demanded is more than proportionate
change in income.
• Less than Unitary Income Elasticity of Demand
(ey<1) : when the proportionate change in, the
quantity demanded is less than proportionate
change in income.
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18. Negative Income Elasticity of Demand
• When the demand for a product decreases with
increase in consumer’s income. The income
elasticity of demand is negative for inferior
goods, also known as Giffen goods.
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19. Zero Income Elasticity of Demand
• Zero income elasticity of demand (ey = 0) - When
there is no effect of increase in consumer’s
income on the demand of product. Ex - Essential
goods ( Salt )
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21. Percentage Method
• (Ep) measures the percentage change in the
quantity of a commodity demanded resulting
from a given percentage change in its price .
• Ep = Percentage change in q
Percentage change in p
• λq/q = λq (p)
λp/p λp (q)
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22. Point Method
• Prof. Marshall devised a geometrical method for
measuring elasticity at a point on the demand
curve.
• Ep = Lower Line Segment
Upper Line Segment
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23. Arc Method
• The measure of price elasticity of demand
between two finite points on a demand curve is
known as arc elasticity. It is used when change in
price and demand are substantial.
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24. Total Expenditure Method
• Marshall evolved the total outlay, or total
revenue or total expenditure method as a
measure of elasticity. By comparing the
total expenditure of a purchaser both
before and after the change in price, it can
be known whether his demand for a good
is elastic, unity or less elastic.
• Total Outlay = Price x Quantity Demanded
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25. Total Expenditure Method
Price Total Expenditure Ep
Falls Rises >1
Rises Falls >1
Falls Unchanged =1
Rises Unchanged =1
Falls Falls <1
Rises Rises <1
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27. Estimated Price Elasticity's of Demand for Various Goods and Services
Goods Elasticity of Demand
Inelastic
Salt 0.1
Matches 0.1
Coffee 0.25
Tobacco Products 0.45
Approx Unitary Elastic
Movies 0.9
Radio and television receivers 1.2
Private education 1.1
Elastic
Foreign travel, long-run 4.0
Restaurant meals 2.3
Fresh tomatoes 4.6
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28. Important Questions
Q1. What is elasticity of demand ?
Q2. Explain the degrees of price elasticity of demand.
Q3. Explain point method of measuring elasticity.
Q4. Explain total expenditure method of measuring
elasticity.
Q5. What is income elasticity of demand ?
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