Chapter.3.

Elasticity of Demand Meaning and concept. Degrees of elasticity of demand1. Perfectly elastic demand.

2. Perfectly inelastic demand.

3. High/more elastic demand.

4. Less elastic demand and

5. 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.

2. Perfectly inelastic demand.

3. High/more elastic demand.

4. Less elastic demand.

5. Unitary elastic demand.

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

Y

X0

5

10

10 20 30

..D L

P

Q

Here the quantity is effected not by price but by other factors such as change in income, taste, price of substitute etc.

a b

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.

Y

X0 1 2 3 4

500

400

300

200

100

●

●

●

●

D

L

Price of flour per bag

Quantity of flour

200 3

300 3

400 3

500 3

Here the quantity demanded of flour is fixed at different price

levels which shows that demand for flour is inelastic.

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

370 70

0 10 20 30 40 50 60 70 X

Y

400

300

200

a

b

Here a very small change of 30 rupees in price brought about a big change of 30 units in quantity.

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 Quantity

10 4

6 5

Y

X0 1 2 3 4 5

10

8

6

4

2

D

L

a

b

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.

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.

Price Quantity

20 10

40 5

Y

X

40

30

20

10

1 2 3 4 5 6 7 8 9 100

a

b

D

L

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.

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 =

the above given formula is used for price elasticity of demand only such as, more, less and unitary elastic demand.

∆p×

p

q

Measurement. 1

Price Quantity

p 20 10

12 q12Ed = ∆q × p ∆p q

Ed = 2 × 20 = 10 = .4 8 12 24

Here elasticity of demand is less than 1 which shows that demand is less elastic.

Measurement. 2

Price Quantity

p100 10

90 q18

Ed = ∆q × p

∆p q

Ed = 8 × 100 = 800 = 4.4 10 18 180

Here the elasticity of demand is greater than 1 which shows that demand is more or high elastic.

Measurement. 3

Price Quantity

100 10

50 20Ed = ∆q × p

∆p q

Ed = 10 × 100 = 1000 = 1

50 20 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 elasticity1. Price elasticity of demand

2. Income elasticity of demand and

3. Cross elasticity of demand.

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.

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

Pd = %∆q %∆p

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