elasticity of demand curves

1. Elasticity
of
Demand
Shakeel Ahmed Qureshi

2. Elasticity of Demand
• Percentage change in the Quantity demanded of a good due to percentage
change in the price of the good is called elasticity of demand.
Or
• Degree of responsiveness or sensitivity of quantity demand of a good due to
change in the price of the good is called price elasticity of demand.
ηd= 𝐸 𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑

3. Methods to Measure Elasticity of Demand
Methods to
measure Elasticity
of Demand
Total Outlay
Method
Percentage
method
Point Elasticity
Arc Elasticity
Geometric
Method

4. Total Outlay (Expenditure) Method
Under this method total expenditure made on the good before change in price and
after change price are compared.
If Total Expenditure remain Same then Elasticity of demand is equal to one.
If Total Expenditure increases, then Elasticity of demand is Greater than one.
If Total Expenditure decreases, then Elasticity of demand is less than one.
Ed =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑎𝑓𝑡𝑒𝑟 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑇𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
According to this method, by comparing the total expenditures of the consumer both
before and after change in price of a product, it can be known whether demand
elasticity for product is one, less than one or more than one.

5. Price Qd Total
Expenditure
40 6 240
20 8 160
Price Qd Total
Expenditure
40 6 240
20 18 360
ηd = 1 ηd < 1 ηd > 1
Price Qd Total
Expenditure
40 6 240
20 12 240
Total Outlay (Expenditure) Method

6. The Demand Curve having
Elasticity equal to one. (=1)
D
D
40
20
126 Qd
P
As the price decreases from 40 to
20 The quantity increases from 6
units to 12 units.
The Change in the quantity is
proportional to change in the price.
0
Price Qd Total
Expenditure
40 6 240
20 12 240
ηd = 1

7. The Demand Curve having
Elasticity less than one. (<1)
D
D
40
20
86 Qd
P
As the price decreases from 40 to
20, The quantity increases from
6 to 8 units.
The percentage Change in the
quantity is less than percentage
change in the price.
0
Price Qd Total
Expenditure
40 6 240
20 8 160
ηd < 1

8. The Demand Curve having Elasticity
greater than one. (>1)
D
D
40
20
186 Qd
P
As the price decreases from 40 to 20,
The quantity demanded increases
from 6 to 18.
The percentage Change in the quantity
is greater than percentage change in
the price.
Price Qd Total
Expenditure
40 6 240
20 18 360

9. 6 Qd
D
D
40
20
12
P
0
ηd = 1
D
D
40
20
86 Qd
P
0
ηd < 1
D
D
40
20
186 Qd
P
ηd > 1
Total Outlay (Expenditure) Method
ηd = 1 Vs ηd < 1 Vs ηd > 1

10. Percentage Method
(Formula / Priori / Mathematical/ Arithmetical / Proportionate )
ηd= 𝐸𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑
Percentage change in the Quantity demanded of a good due to
percentage change in the price of the good is called elasticity of demand.
Percentage
method
Point
Elasticity
Arc
Elasticity

11. Percentage Method
(Formula / Priori / Mathematical/ Arithmetical / Proportionate )
Percentage change in the Quantity demanded of a good due to very small change
in the price of the good. Such that apparently there is only one point on the
demand curve, is called point elasticity of demand.
Point Elasticity of Demand
D
D
P1
P2
Q2Q1
Qd
P
0

12. Percentage Method
(Formula / Priori / Mathematical/ Arithmetical / Proportionate )
=
𝑄2 − 𝑄1
𝑄
𝑃2 − 𝑃1
𝑃
=
∆𝑄
𝑄
∆𝑃
𝑃
=
∆𝑄
𝑄
×
𝑃
∆𝑃
=
∆𝑄
∆𝑃
×
𝑃
𝑄
Percentage change in the Quantity demanded of a good due to very small change
in the price of the good. Such that apparently there is only one point on the
demand curve, is called point elasticity of demand.
Point Elasticity of Demand
ηd= 𝐸𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑
=
𝑄2 −𝑄1
𝑄
×100
𝑃2 −𝑃1
𝑃
×100
D
D
P1
P2
Q1 Q
P
0 Q2

13. Percentage Method
(Formula / Priori / Mathematical/ Arithmetical / Proportionate )
=
𝑄2 − 𝑄1
𝑄2 + 𝑄1
2
𝑃2 − 𝑃1
𝑃2 + 𝑃1
2
=
∆𝑄
𝑄2 + 𝑄1
∆𝑃
𝑃2 + 𝑃1
=
∆𝑄
𝑄2 + 𝑄1
×
𝑃2 + 𝑃1
∆𝑃
=
∆𝑄
∆𝑃
×
𝑃2 + 𝑃1
𝑄2 + 𝑄1
Percentage change in the Quantity demanded of a good due to comparatively
significant large change in the price of the good. Such that there appear two
distinct points on the demand curve, is called Arc elasticity of demand.
Arc Elasticity of Demand
ηd= 𝐸𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑
=
𝑄2 −𝑄1
𝑄2+𝑄1
2
×100
𝑃2 −𝑃1
𝑃2+𝑃1
2
×100
D
D
P1
P2
Q2Q1 Qd
P
0
A
B

14. Geometric Method
Geometric method was suggested by
Prof. Marshall and is used to measure the
elasticity at a point on the demand curve. When
there are infinitely small changes in price and
demand, then the ‘Geometric Method’ is used.
This method is also known as ‘Graphic
Method’ or ‘Point Method’ or ‘Arc Method’.
Elasticity of demand (Ed) is different at
different points on the same straight line
demand curve.
In order to measure Ed at any
particular point, lower portion of the curve
from that point is divided by the upper portion
of the curve from the same point.
𝐸𝑑 =
Lower segment of demand curve (LS)
Upper segment of demand curve (US)
P
Q Quantity
Demand
Price
0
N

15. ηd= 𝐸𝑑 =
Lower segment of demand curve (LS)
Upper segment of demand curve (US)
E
D Quantity Demand
Price
0
B
A
C
Ed = 1
Ed < 1
Ed > 1
Ed = ∞
Ed = 0
Geometric Method

16. Two Extremes of Elasticity of Demand
1 Perfectly inelastic demand: The Demand Curve having
Elasticity equal to zero (=0)
2 Perfectly Elastic Demand: The Demand Curve having
Elasticity equal to infinity (=)

17. The Demand Curve having
Elasticity equal to zero (=0)
As the price decreases from
P1 to P2 The quantity do not
change.
There is no Change in the
quantity as price changes from
P1 to P2.
Perfectly inelastic demand
D
D
Price
P1
Q
0
P2
Quantity
Demand

18. The Demand Curve having Elasticity
equal to infinity (=)
D D
P
Q1Q Quantity
Demanded
Price
At a certain price the quantity increases
from Q to Q1.
There is no change in the price while there
is change in the quantity from Q to Q1.
Perfectly elastic demand

19. Income Elasticity of demand
Percentage change in the Quantity demanded of a good due to percentage change
in the income of the consumer is called Income elasticity of demand.
=
𝑄2 − 𝑄1
𝑄2 + 𝑄1
2
𝑌2 − 𝑌1
𝑌2 + 𝑌1
2
=
∆𝑄
𝑄2 + 𝑄1
∆𝑌
𝑌2 + 𝑌1
=
∆𝑄
𝑄2 + 𝑄1
×
𝑌2 + 𝑌1
∆𝑌
=
∆𝑄
∆𝑌
×
𝑌2 + 𝑌1
𝑄2 + 𝑄1
ηY= 𝐸 𝑌 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑔𝑜𝑜𝑑
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑡ℎ𝑒 𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟
=
𝑄2 −𝑄1
𝑄2+𝑄1
2
×100
𝑌2 −𝑌1
𝑌2+𝑌1
2
×100

20. Cross Elasticity of demand
Percentage change in the Quantity demanded of a good due to percentage change in
the price of its substitute or complementary good is called cross elasticity of demand.
ηX= 𝐸 𝑋 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝐴
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝐵
=
𝑄2𝐴 − 𝑄1𝐴
𝑄2𝐴 + 𝑄1𝐴
𝑃2𝐵 − 𝑃1𝐵
𝑃2𝐵 + 𝑃1𝐵
=
∆𝑄𝐴
𝑄2𝐴 + 𝑄𝐴
∆𝑃𝐵
𝑃2𝐵 + 𝑃1𝐵
=
∆𝑄𝐴
𝑄2𝐴 + 𝑄1𝐴
×
𝑃2𝐵 + 𝑃1𝐵
∆𝑃𝐵
=
∆𝑄𝐴
∆𝑃𝐵
×
𝑃2𝐵+𝑃1𝐵
𝑄2𝐴+𝑄1𝐵
=
𝑄2𝐴 − 𝑄1𝐴
𝑄2𝐴 + 𝑄1𝐴
2
× 100
𝑃2𝐵 − 𝑃1𝐵
𝑃2𝐵 + 𝑃1𝐵
2
× 100

21. 0 < E < (for absolute values of elasticity)
Unit ElasticPerfectly Inelastic Perfectly Elastic
ElasticInelastic
E = 1
E = 0
E < 1
E >1
E = ∞
P
Qd
Qd
Qd
Qd
Qd
P
P
P
P

22. Elasticity
of
Demand
Shakeel Ahmed Qureshi