Download Elasticity of Demand

Chapter.3.
Elasticity of Demand


1.
2.
3.
4.
5.


Meaning and concept.
Degrees of elasticity of demand
Perfectly elastic demand.
Perfectly inelastic demand.
High/more elastic demand.
Less elastic demand and
Unitary elastic demand.
Measurement of demand elasticity.
Types of demand elasticity.
Meaning and concept

Elasticity . The term elasticity refers to extension and contraction
quality of a good. For example, rubber, Spring, plastic, metals etc.
And a good which has no quality of extension and contraction is
known as inelasticity or inelastic good. For instance, stone, paper
etc.

Demand elasticity.
The LOD expresses only inverse
relationship b/w price and quantity demanded but it does not show
that how much quantity is influenced by change in price. Only
elasticity of demand makes us able to know about that how much
quantity is effected by change in price.
Thus demand elasticity is the degree of responsiveness of
quantity demanded to change in price. In other words, a percentage
change in quantity divided by a percentage change in price is called
demand elasticity. Mathematically it is written as
Ed =
percentage change in Qd
Percentage change in P
Or
Ed
=
%∆ in Qd
%∆ in P
DEGREES OF ELASTICITY OF
DEMAND.

There are five degrees of demand elasticity which
show different level of responsiveness of quantity
demanded to change in price these are given as
1.
Perfectly elastic demand.
Perfectly inelastic demand.
High/more elastic demand.
Less elastic demand.
Unitary elastic demand.
2.
3.
4.
5.
Explanation to the degrees of demand
elasticity.


Perfectly elastic demand. A demand is said to
be perfectly elastic when the quantity is increasing
or decreasing with no change in price, here in this
degree price is constant whereas quantity is
variable.
Quantity is influenced by other factors rather than
price such as, change in income, taste, price of
substitutes etc
Schedule and graph for PED.
price
quantity
10
20
10
30
Here the quantity is effected
not by price but by other
factors such as change in
income, taste, price of
substitute etc.
Y
. .
D
P
10
a
b
20
Q
30
L
5
0
10
X
Perfectly inelastic demand

Perfectly inelastic demand refers to no
change in quantity with any change in price,
whatever the price is the quantity remain
unchanged or fixed. The demand for
necessary items is perfectly inelastic such as
food, medicine etc.
Schedule and graph.
Price of flour
per bag
200
300
400
500
Quantity of
flour
3
3
3
3
Here the quantity demanded of
flour is fixed at different price
levels which shows that demand
for flour is inelastic.
L
Y
500
●
400
●
300
●
200
●
100
D
0
1
2
3
4
X
High/more elastic demand

When a small percentage change in price brings
about a big percentage change in quantity
demanded the demand is said to be more or high
elastic means quantity is more responsive to a small
change in price for example, the demand for luxury
items is more elastic.
Schedule and graph for HED.
price
Quantity
400
20
Y
370
70
400
a
b
300
Here a very small change of 30
rupees in price brought about a
big change of 30 units in
quantity.
200
0
10
20
30 40
X
50 60 70
Less elastic demand

When a big percentage change in price brings about
a small percentage in quantity demanded the
demand is said to be less elastic mean the is less
responsiveness to change in price for example, the
demand for inferior goods is less elastic such as salt
match box etc.
Schedule and graph for LED.
Price
D
Quantity
10
4
6
5
Y
a
10
8
b
6
Here a big change of 4 rupees
in price leads to a small
change of 1 unit in quantity
which shows that the quantity
is less sensitive to change in
price or the demand for this
product is less elastic.
4
L
2
0
1
2
3
4
5
X
Unitary elastic demand.


When the quantity demanded of a good changes by
exactly the same percentage as price, the demand is
said to be unitary elastic or the quantity demanded is
equally responsive to change in price.
For example when 20 percent change in price leads
to 20 percent change in quantity the elasticity will be
equal to 1 that is why it is known as unitary elastic
demand.
Schedule and graph for UED.
Y
D
Price
20
Quantity
10
a
40
30
40
5
20
b
L
10
Here the quantity demanded is
changed exactly by the same
percentage as the price. The
change in quantity is equal to
the change in price that is why
it is known as unitary elastic
demand.
0
1 2 3 4 5 6 7 8 9 10 X
Measurement of demand elasticity.


To measure the elasticity of demand economists use 1 or unit
for hundred percent change in quantity to change in price. If
the elasticity of demand for a good is lees than 1 the demand
is said to be less elastic and if the elasticity of demand is
greater than 1 then the demand is said to be more elastic.
When the elasticity is exactly equal to 1 then the demand is
said to be unitary elastic.
Now to find these degrees of demand elasticity, a
mathematical formula is given as under.
Formula for demand elasticity.

The elasticity of demand is to be measured
with the help of given formula.
∆q



Ed
=
∆p
×
p
q
the above given formula is used for price
elasticity of demand only such as, more, less
and unitary elastic demand.
Measurement. 1
= ∆q
∆p
×
p
q
Ed = 2
×
20
12
Ed
8
Price
p 20
12
Quantity
10
q12
= 10 = .4
24
Here elasticity of demand is less than 1 which shows
that demand is less elastic.
Measurement. 2
×
Ed = ∆q
∆p
Ed =
8
10
p
q
×
Price
Quantity
p100
10
90
q18
100 = 800 = 4.4
18
180
Here the elasticity of demand is greater than 1 which shows
that demand is more or high elastic.
Measurement. 3
Ed
= ∆q
×
∆p
Ed
= 10
50
p
Price
Quantity
100
10
50
20
q
×
100
20
= 1000
= 1
1000
Here elasticity of demand is exactly equal to 1 which shows
that demand is unitary elastic.
Types of elasticity of demand

There are three types of elasticity
1.
Price elasticity of demand
Income elasticity of demand and
Cross elasticity of demand.
2.
3.
these types are explained now one by one.
Explanation to the types of demand elasticity.

Price elasticity of demand. when the quantity demanded is
sensitive or responsive to change in price then the demand is said to
be price elastic or the elasticity of demand is known as price
elasticity of demand. Mathematically it can be written as.
Pd = %∆q
%∆p

Income elasticity. When the quantity demanded is influenced not by
change in price but by change in income then the elasticity of
demand said to be income elasticity of demand. Mathematically it
can be written as
Id = %∆q
%∆i

Cross elasticity of demand. When the quantity demanded is
responsive to change in the price of other product, the elasticity is
said to be cross elasticity of demand, for example, there are two
products A and B, whereas product B is the substitute of A. When
the change in price of B leads to the change in the quantity
demanded of A, then quantity demanded of A is responsive to
change in the price of B. Thus here the elasticity of demand for A is
said to be cross elasticity of demand. Because the quantity
demanded of A is changed by the change in the price of B.
Mathematically it can be written as


Ed
= %∆ qA
%∆ pB
The end