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2. PERSENTED BY :
VIJAY
MBA (F)

3. Why We Study the Elasticity of Demand ?
Law of Demand shows the Qualitative (directional) change but doesn’t shows the Quantitative
change . To find the Quantitative change We have to know the elasticity of demand

5. The Price Elasticity of Demand and Its Determinants
 Price of Commodity
 Price of Related goods
 Income of Consumer
 Taste, Preferences, custom, fashion etc.
 Expected Price
 Govt. Policies

6. Computing the Price Elasticity of Demand :-
 The price elasticity of demand is computed as the percentage change in the quantity
demanded divided by the percentage change in price.
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price

7. Computing the Price Elasticity of Demand
 Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones,
then your elasticity of demand would be calculated as:
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
( )
( . . )
.
10 8
10
100
2 20 2 00
2 00
100
20%
10%
2




 

8. Degrees of Price Elasticity of Demand
 Greater than unitary Elastic Demand or Elastic demand (Ep>1)
 Unitary Elastic Demand (Ep=1>
 Less than Unitary elastic Demand (Ep<1)
 Perfectly inelastic Demand or Zero Elastic Demand (Ep=0)
 Perfectly Elastic or Infinity Elastic Demand(Ep=∞)

9. Figure 1 The Price Elasticity of Demand
(a) Elastic Demand: Elasticity Is Greater Than 1
Demand
Quantity
4
1000
Price
$5
50
1. A 22%
increase
in price . . .
2. . . . leads to a 67% decrease in quantity demanded.

10. Figure 1 The Price Elasticity of Demand
2. . . . leads to a 22% decrease in quantity demanded.
(b) Unit Elastic Demand: Elasticity Equals 1
Quantity
4
1000
Price
$5
80
1. A 22%
increase
in price . . .
Demand

11. Figure 1 The Price Elasticity of Demand
(c) Inelastic Demand: Elasticity Is Less Than 1
Quantity0
$5
90
Demand1. A 22%
increase
in price . . .
Price
2. . . . leads to an 11% decrease in quantity demanded.
4
100

12. Figure 1 The Price Elasticity of Demand
(d) Perfectly Inelastic Demand: Elasticity Equals 0
$5
4
Quantity
Demand
1000
1. An
increase
in price . . .
2. . . . leaves the quantity demanded unchanged.
Price

13. Figure 1 The Price Elasticity of Demand
(e) Perfectly Elastic Demand: Elasticity Equals Infinity
Quantity0
Price
$4 Demand
2. At exactly $4,
consumers will
buy any quantity.
1. At any price
above $4, quantity
demanded is zero.
3. At a price below $4,
quantity demanded is infinite.

14. Total Revenue and the Price Elasticity of Demand :-
 Total revenue is the amount paid by buyers and received by sellers of a
good.
 Computed as the price of the good times the quantity sold.
QPTR 

15. Figure : Total Revenue
Demand
Quantity
Q
P
0
Price
P × Q = $400
(revenue)
$4
100
When the price is $4, consumers will demand 100 units,
and spend $400 on this good.

16. Elasticity and Total Revenue along a Linear Demand Curve :-
 With an inelastic demand curve, an increase in price leads to a decrease in
quantity that is proportionately smaller. Thus, total revenue increases.

17. Figure : How Total Revenue Changes When Price Changes:
Inelastic Demand
Demand
Quantity0
Price
Revenue = $100
Quantity0
Price
Revenue = $240
Demand
$1
100
$3
80
An Increase in price from $1
to $3 …
… leads to an Increase in total revenue from
$100 to $240

18. Elasticity of a Linear Demand Curve :-

19. 0 2 64 108 12 14
2
1
4
3
5
6
$7
Demand is elastic; demand is responsive
to changes in price.
Demand is inelastic; demand is not very responsive
to changes in price.
When price increases from $4 to $5, TR
declines from $24 to $20.
When price increases from $2 to $3, TR
increases from $20 to $24.
Elasticity is > 1 in this range.
Elasticity is < 1 in this range.
Price
Quantity
Figure 4 :- Elasticity of a Linear Demand Curve

20. Other Demand Elasticities
 Income Elasticity of Demand
 Income elasticity of demand measures how much the quantity demanded of a good
responds to a change in consumers’ income.
 It is computed as the percentage change in the quantity demanded divided by the
percentage change in income.

21. Other Demand Elasticities
 Computing Income Elasticity
Income elasticity of demand =
Percentage change
in quantity demanded
Percentage change
in income
Remember, all elasticities are measured by dividing one
percentage change by another

22. Other Demand Elasticities
 Income Elasticity
Types of Goods
Normal Goods
Inferior Goods
Higher income raises the quantity demanded for normal goods but lowers
the quantity demanded for inferior goods.

23. Other Demand Elasticities :-
 Cross-price elasticity of demand
 A measure of how much the quantity demanded of one good responds to a change in
the price of another good, computed as the percentage change in quantity demanded of
the first good divided by the percentage change in the price of the second good
2goodofpricein%change
1goodofdemandedquantityin%change
demandofelasticityprice-Cross 

24. THREE APPLICATIONS OF SUPPLY, DEMAND, AND
ELASTICITY :-
 Can good news for farming be bad news for farmers?
 What happens to wheat farmers and the market for wheat when
university agronomists discover a new wheat hybrid that is more
productive than existing varieties?

25. Can Good News for Farming Be Bad News for Farmers?
 Examine whether the supply or demand curve shifts.
 Determine the direction of the shift of the curve.
 Use the supply-and-demand diagram to see how the market equilibrium
changes.

26. Figure : An Increase in Supply in the Market for Wheat
Quantity of
Wheat
0
Price of
Wheat
3. . . . and a proportionately smaller
increase in quantity sold. As a result,
revenue falls from $300 to $220.
Demand
S1
S2
2. . . . leads
to a large fall
in price . . .
1. When demand is inelastic,
an increase in supply . . .
2
110
$3
100

27. Compute the Price Elasticity of Demand When There Is a
Change in Supply
ED 






 
100 110
100 110 2
300 2 00
300 2 00 2
0095
04
024
( ) /
. .
( . . ) /
.
.
.
Demand is inelastic.