Describes the concept elasticity of demand.

1. ECONOMIC ANALYSIS (PART-III)
Compiled by
Dr.S.Vigneswaran.,M.A.,Ph.D.,(NET, SET)
Assistant Professor of Economics,
Mannar Thirumalai Naicker College, Madurai-04.

2. TOPICS COVERED
 Elasticity of Demand
Meaning – Types of Elasticity of Demand – Degrees
of Price Elasticity of Demand – Methods of
Measuring Price Elasticity of Demand : - Point
method – Percentage method – Arc method-
Factors determining Elasticity of Demand –
Importance of Elasticity of Demand.

3. MEANING OF ELASTICITY OF DEMAND
 The rate of change in demand due to change in
price or income or price of related goods.
 Symbolically
% Change in Demand
η = ---------------------------------------
% Change in ∆P; ∆I; ∆PR

4. TYPES OF ELASTICITY OF DEMAND
There are three types:
 Price Elasticity of Demand.
 Income Elasticity of Demand .
 Cross Elasticity of Demand.

5. PRICE ELASTICITY OF DEMAND
 The rate of change in demand due to change in
price.
 Symbolically
% Change in Demand
η = --------------------------------
% Change in price

6. INCOME ELASTICITY OF DEMAND
 The rate of change in demand due to change in
consumer’s income.
 Symbolically
% Change in Demand
η = --------------------------------
% Change in Income

7. CROSS ELASTICITY OF DEMAND
 The rate of change in demand due to change in
price of related goods.
 Symbolically
% Change in Demand
η = ----------------------------------------------------
% Change in price of related goods

8. DEGREES OF PRICE ELASTICITY OF DEMAND
 Price elasticity of demand is generally classified
into five. They are:

11. METHODS OF MEASURING PRICE ELASTICITY
OF DEMAND:
 Point method
 Percentage method
 Arc method

12. POINT METHOD
 Straight line demand curve is taken to measure the
elasticity between two points.
 Not suitable for large changes.
 Ed = (dQ/dP) X (P/Q)

13. PERCENTAGE METHOD

14. CALCULATE PRICE ELASTICITY OF DEMAND
S.No Price (P1) QD(Q1) Price(P2) QD(Q2) PED
1 5 10 6 10 η =
2 5 10 6 18 η =
3 5 10 6 12 η =
4 5 10 6 11 η =
5 5 10 6 50 η =

15. ARC METHOD
 The most accurate method.
 Distance between two points are taken (Known as
‘Arc’)
 Formula:
Change in QD/ Original QD + New QD
PED = -----------------------------------------------------
Change in P / Original P + New P

16. FACTORS DETERMINING ELASTICITY OF DEMAND
1. Nature of the commodity:
Elasticity of demand depends on goods like necessaries,
comforts and luxuries.
Greater the degree of necessity, demand will be inelastic.
2.Proportion of Expenditure:
Small expenditure items have less elastic than large
expenditure items.
3. Several uses of the commodity
Larger the number of uses, greater will be elasticity of
demand.

17. 4. Availability of substitutes:
More substitutes - more elastic; No substitutes – inelastic.
5. Habit
Habitual practice is generally inelastic.
6. Time
Less elastic in short period; More elastic in long period.
7. Complementary goods
The demand for complementary goods is less elastic.

18. 8. Consumer’s Income:
High income groups – Less elastic demand.
Low Income group – More elastic demand.
9. Recurrence of demand
Recurring nature – high elastic.
Non-recurring – Less elastic.

19. USES OR IMPORTANCE OR SIGNIFICANCE OF
ELASTICITY OF DEMAND
 Importance in price fixation under imperfect
competition and monopoly.
 Importance in fiscal policy.
 Significance in determining the rewards for various
factors of production.
 Helps to measure the terms of trade.
 Use in the determination of foreign exchange rate.
 Helps to explain the paradox of plenty.

20. Thank You.