The document presents information on elasticity of demand, including definitions, types, and factors affecting elasticity. It discusses: 1. Elasticity measures the responsiveness of demand to changes in other variables like price. There are different types including price, income, and cross elasticity. 2. Price elasticity measures the responsiveness of quantity demanded to a price change. Income elasticity measures the responsiveness to an income change. 3. Elasticity can be perfectly inelastic, relatively inelastic, unitary, relatively elastic, or perfectly elastic depending on the steepness of the demand curve. Necessities typically have inelastic demand while luxuries have more elastic demand.

1. PRESENTATION
ON
ELASTICITY OF DEMAND
SUBMITTED TO SUBMITTED BY
J.V. VAISHAMPAYAN SIR, ANKITA SRIVASTASVA
Hon’b Vice Chancellor Of HRISHIKESH PANDEY
C.S.J.M. University, Kanpur RAVIKANT
SHIVAM SINGH
SONALI MISHRA
1

2. ELASTICITY
Elasticity measures the extent to which demand will change according to
responsiveness of one variable to changes in another variable . Elasticity is the
concept that economists use to describe the steepness or flatness of curves or
functions.
DEMAND
Demand is defined as the consumer’s (or a group of consumers’) desire and
willingness to pay the price for particular product or service at particular time.
Holding all factors constant, the price of a product increases as its price increases and
vice-versa.
2

3. 3
TYPES OF ELASTICITY OF DEMAND
Elasticity of demand is of following types-
Price Elasticity Of Demand (PED)
Income Elasticity Of Demand (IED)
Cross Elasticity Of Demand (CED)
Advertising Elasticity(AE)
Price Elasticity Of Demand (PED)- Generally, A measure of the responsiveness of
the quantity demanded of a good to a change in the price of that good.
Formally ,The proportionate change in the quantity demanded that results from
Proportionate change in its price.
Income Elasticity Of Demand (IED)- A measure of the responsiveness of the
quantity demanded of a good to a change in the income of individual.

4. 4
IncomeinchangeateProportion
demandedquantityinchangeateProportion
=Demand(EOfElasticityIncome D)
Q
Y
Y
Q




Cross Elasticity Of Demand (CED)- When the price of any commodity changes
and due to this the quantity demanded of another commodity changes, the
measurement of this change is Cross Elasticity Of Demand.
YofpriceinchangeateProportion
XofdemandedquantityinchangeateProportion
=ED
X
Y
Y
X
Q
P
P
Q




Advertising Elasticity(AE)- It measures the response of sales to advertisement
expenditure incurred by firm. This is especially useful for managerial decision
making.
YY
QQ



YY
XX
PP
QQ



gAdvertisinoneExpenditurinchangeateProportion
SalesinchangeateProportion
=ED
AA
SS



S
A
S
A





5. 5
Price Elasticity of Demand Income Elasticity of demand
 The proportionate (percentage) change
in quantity demanded of a product due to
proportionate change in its price.
 The coefficient of Price Elasticity of
demand is always negative due to inverse
relation between price and quantities
demanded (Though it is stated as a positive
number).
 The coefficient of price elasticity shows
different degrees of price elasticity like
elastic, inelastic and unitary demand.
 The proportionate change in quantity
demanded of a product as a result of
proportionate change in income.
 The coefficient of income elasticity is
positive for basic goods, comfort goods
and luxuries due to direct relation with
the income (It is negative only for
inferior goods).
 The coefficient of income elasticity of
demand is useful in categorizing the
commodities into basic goods, comfort
goods, luxuries and inferior goods.

6. 6
Price Elasticity Of Demand
The price elasticity of demand is a units-free measure of the responsiveness
of the quantity demanded of a good to a change in its price when all other influences
on buyers’ plans remain the same. According to the law of demand, whenever the
price rises, the quantity demanded falls. Thus the price elasticity of demand is
always negative.
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.
priceinchangeateProportion
demandedquantityinchangeateProportion
=ED
PΔP
QΔQ
PPP
QQQ
)(
)(
)(EelasticityPrice
1
1
d 



Q
P
P
Q




Q
P
P
Q
Ed 




7. 7
METHODS TO FIND PRICE ELASTICITY
Thereare two methods to find Priceelasticityof demand-
1) Arc Elasticity Method
2) Point Elasticity Method
ARC ELASTICITY METHOD
Arc Elasticity method as mentioned earlier is the ratio of proportionate change
in the quantity demanded to the proportionate change in the price but the
formula needs some modification because there is a difference in the
calculated values of (Ed)as we calculate it upward and downward, It changes
with the change in the direction of change of measurement. Hence the new
formula for calculating Ed is by taking the average of the prices and quantities.
So wecan write itas-
Q
P
P
Q
Ed 




8. 8
P
Q
QQ
PP






2)(
2)(
)(E
21
21
d
P
Q
QQ
PP






)(
)(
)(E
21
21
d
This is the modified formula for calculating Price elasticity of demand.
Mathematically ‘NEGATIVE’ in nature becauseΔP orΔQ will be negative.
DEGREES OF ELASTICITY OF DEMAND
The value of Elasticity of Demand varies from ‘Zero to Infinity’. This can be divided
into five categories, called ‘Degrees Of Elasticity of Demand’
1. Ed=0 Perfectly Inelastic Demand
2. Ed<1 Relatively Inelastic Demand
3. Ed=1 Unitary Elastic Demand
4. Ed>1 Relatively Elastic Demand
5. Ed=∞ Perfectly Elastic Demand
“Perfectly Elastic and Perfectly Inelastic Demand Curves are rare”

9. 9
Perfectly Inelastic Demand- Perfectly Inelastic demand is where any price change
does not change quantity demanded at all. Consumers are willing to pay any price in
order to obtain a given quantity of a good or service. This situation can be
represented by a vertical demand curve.
Ordinary necessities of life have a Perfectly Inelastic Demand like salt,
medicines etc.

10. 10
Relatively Inelastic Demand- Relatively Inelastic Demand is that demand when any
price change brings about a relatively lower change in quantity demanded.
Those goods which are essential for our living have Relatively Inelastic
Demand.

11. 11
Unitary Elastic Demand- Unitary Elastic Demand is that demand in which
change in price brings about proportionate change in quantity demanded. (total
amount spent by consumers remains unchanged because numerator and
denominator both have proportionate change.)
The goods which are Not Essential or which are Luxurious have
normally an Elastic Demand like cars, air conditioners, cosmetics etc.

12. 12
Relatively Elastic Demand- When a very small change in price brings about a
very large change in quantity that is known as Relatively Elastic Demand.

13. 13
Perfectly Elastic Demand- When a very small change in price increases
quantity demanded infinitely, is known as Perfectly Elastic Demand. It shows a
strong response to a barely change in price. Hence quantity demanded is
extremely responsive to a change in price.

14. 14
Point Elasticity Method
In Point Elasticity Method we calculate elasticity at particular price rather than for
any definite price change. This method is considered as more accurate method of
calculating elasticity. There are two methods to find Point Elasticity-
1. Calculus Method
2. Geometrical Method
Calculas Method- This can be mentioned as-
Q
P
dP
dQ
Ed  “Where is reciprocal of slope of
demand curve”
dP
dQ
dQ is minute change in quantity and dP is minute change in price. To find the value
of We need a demand function.
Calculation- Let Demand function is QD = 50-2P. Find elasticity at price of 10
rupees.
= -2
Putting P =10 in the above demand Function we get QD = 50-(2x10)=30
dP
dQ
dP
dQD

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From the formula of elasticity,
Ed = -2 = -0.67 Ans.
Geometric Method of Calculating Point Elasticity- If the Demand Curve is a
straight line then Point Elasticity of a demand curve can be calculated as-
1. Ed=∞ At pointA
2. Ed>1 BetweenAto E
3. Ed=1 At point E
4. Ed<1 At Point E to B
5. Ed=0 At point B
Q
P
dP
dQ
Ed 
30
10

curvedemandofsegmentUpper
curvedemandofsegmentLower
=ED

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17. 17
Calculation of Point Elasticity
Price = OP=EM
Quantity = OM= PE
is the reciprocal of the slope of
demand curve
Hence,
Since ΔAPE and Δ AOB are similar
hence-
since, PE = OM
And,ΔAPE andΔEMB are similar-
OA
OB
dP
dQ
OA
OB

OM
OP
OA
OB
Ed 
OM
OP
AP
PE
Ed 
AP
EM
AP
OE
Ed 

18. 18
AE
EB
Ed 
curvedemandofsegmentUpper
curvedemandofsegmentLower
=
If Demand Curve is not a straight line- Above mentioned formula also helps in
finding point elasticity even if the demand curve is not a straight line.
For this, we draw tangent to the demand curve. “The point elasticity of this
tangent is same as the point elasticity of the given demand curve.”
In the fig. shown in previous slide, The
elasticity of demand at point E of
demand curve DD is equal to EB/EA,
When AB is tangent to the demand
curve at point E. When A1B1 is tangent
to demand curve, at point E1 the
elasticity will be equal to E1B1/E1A1.

19. 19
Sometime we Assume that Highly loped curve is Inelastic as compared to
the Flatter one. This is not correct because same sloped curve may have different
Elasticities and slopes with different slopes may have same elasticities.
Demand curves with same slopes but different Elasticities-
In this fig. we have two different
demand curves AB and A1B1
parallel to each other . At price OP
elasticity of AB will be EB/EA and
for A1B1 the elasticity will be
E1B1/E1A1. Due to parallelogram
A1ABB1, E1B1=EB but A1E1>AE.
Hence At price OP elasticity of
Demand E1 will be less than
elasticity at E.

20. 20
Demand Curves with different slopes but same Elasticities-
The Elasticity Of Demand of two curves
at price OP will be same. For AB
Elasticity of Demand will be –
(ΔAPE andΔEMB are
similar)
ForA1B1 Elasticity of Demand will be:
(ΔAPE1 andΔE1M1B1
are similar and
EM=EM1)
Hence,
Ed1=Ed
Now we can say that elasticities of two
curves with different slopes may hay same
Elasticities
AP
EM
EA
EB
Ed 
AP
ME
AE
BE
Ed
11
1
11


21. 21
Same Price and Quantity but different Elasticities- In the figure
below we can see that demand curves AB and A1B1 intersect each other at point
E. At price OP quantitydemanded for both curves is same i.e. OM.
AtAB demand curve elasticity is-
AtA1B1 demand curve elasticity is-
Since, EB1>EB and EA1<EA,
hence Ed1>Ed
Slope of demand curve is not
indicator of elasticity. Elasticity
depends upon price-quantity ratio as
well.
EA
EB
Ed 
1
1
1
EA
EB
Ed 

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FactorsAffecting Elasticity Of Demand
Generally, The Elasticity of necessities is low while that of comfort and luxuries is
high. But Elasticity is not dependent on only this factor. There are many factors
which affect elasticity. These are-
1. Nature of Commodity- Commodity can be divided into three parts according to
its purpose. These are-
a) Necessities b) Comforts c) Luxuries
Necessities are those which are essential for the life of human beings. Without
this, capabilities and efficiencies of persons are adversely affected like food and
water.
Comforts are the goods without which work capability is somewhat decreased but
not as much as that of necessities. Goods like clothing, stationary are comforts
Goods which do provide satisfaction but have nothing to do with efficiency, are
known as Luxuries. Expensive cars, Perfumes are some examples of Luxuries.
2. Money spent on commodity- Elasticity or a demand for a commodity also
depends upon the part of the consumer’s income which he is spending on that
Particular good. If small part is spent then the income will be Inelastic.

23. 23
3. Availability of Substitutes- If the Given good can be easily substituted by any
substitutory good then its elasticity will be high. Hence the demand for a
commodity is highly sensitive to the price changes if substitute goods are
available.
4. Multiple uses of commodity- If a commodity has multiple uses then this
particular commodity surely has higher elasticity as compared to others which
have single use like plastic has many uses like decoration, carry bags etc. therefore
it has more elastic demand.
5. Possibility of postponement of consumption- If the use of particular good is
postponable then at the time of price rise, consumer postpones its demand or
purchase and demand becomes relatively elastic.
6. Price Level and extent of price change- If the price of commodity is less then
price rise does not affect much to the elasticity but if price of the commodity is
already high then price rise shows a reduction in the demand of that commodity.
This is psychological tendency of a consumer.
7. Time Element- For short term elasticity is low but for long term it is high because
in short term consumption adjustment is little hard than that of long term

24. 24
Elasticity Of DemandAnd Consumer Outlays
With the help of Elasticity of Demand we are able to recognize the effect o0f price
change on consumer’s outlays.
The Outlay is equal to the multiplication of price and quantity of a
commodity,
Outlays= Price X Commodity
The table drawn below is able to show the relation among Price Chang, Elasticity of
Demand and Effect on Outlays.
Price Change Elasticity Of Demand Effect on Outlays
Increase
Decrease
>1
=1
<1
>1
=1
<1
Decrease
No effect
Increase
Decrease
No Effect
Increase

25. 25
Summary
Elasticity directly affects the humans in everyday life. It is also useful for the Firms to
recognize how would the consumers respond to any given change of price and hence
the revenue is being decided. If Product is elastic then reduction in price will be
beneficial as it will increase the total revenue and if it is inelastic, the price decrease
will be harmful by decreasing total revenue vice-versa for increase in price.
It also helps in setting price discrimination between markets for the same
product as if elasticities are different or not. Trade unions also decide the pay rise
keeping the inelastic demand of the product in mind.
The tax imposed to highly elastic product is not beneficial so government
imposes tax to relatively inelastic product for better results. The two countries
establish exchange rate through elasticity
Income elasticity indicates the impact of income on demand and cross
elasticity helps in understanding the relationship between two industries. If cross
elasticity is high, changes in one industry effect to another
So, Elasticity is not only useful for management also for marketing, but also
for finance, trade and government policies

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