Price elasticity of demand

1. PRICE
ELASTICITY OF
DEMAND

2. Definition :
“Elasticity of demand is a technical term
used by economists to describe the
degree of responsiveness of the
demand for a commodity to change in
its price.”

3. Measurement of the Price
Elasticity of Demand
Price Elasticity can be classified into 3
measures :
 Percentage Method
 Total-outlay Method
 Geometrical Method

4. Percentage Method
Marshall was the first economist who
offered a formula to measure price
elasticity of demand.
Ed = % change in Quantity Demanded
% change in Price

5. Total-outlay Method
According to total outlay method , we
measure the elasticity of demand by
tracing the behaviour of the total
expenditure of a consumer. By this
method we can only say whether a
good is elastic or inelastic , we cannot
find out the exact co-efficient of
elasticity.

6.  When the total expenditure remains
the same whatever may
be the change in the price , elasticity is
equal to one.
Price x Quantity = Total
Expenditure
Rs.5 x 100 = Rs.500
Rs.4 x 125 = Rs.500
Rs.2 x 250 = Rs.500

7. When the total expenditure varies
inversely with price , elasticity is greater
than one . In other words , elasticity of
demand is greater than one when the total
expenditure increases with fall in price.
Price x Quantity = Total
Expenditure
Rs.5 x 100 = Rs.500
Rs.4 x 150 = Rs.600
Rs.2 x 350 = Rs.700

8. When the total expenditure varies directly
with price , elasticity is less than one. It
means elasticity is less than one , when total
expenditure declines with fall in price.
Price x Quantity = Total
Expenditure
Rs.5 x 100 = Rs.500
Rs.4 x 120 = Rs.480
Rs.2 x 200 = Rs.400

9. Geometrical Representation
1. Perfectly Elastic Demand

10. 2. Perfectly Inelastic Demand

11. 3. Unitary Elasticity of Demand

12. Types of Price Elasticity
1. Zero Elasticity : Quantity demanded does not change as
price changes . It is perfectly inelastic demand . The shape
of the curve is vertical.

13. 2.Greater than zero but less than one: Quantity demanded
changes by a smaller percentage than does price. It is an
inelastic demand. The shape of the curve is steep.

14. 3. Elasticity equal to one: Quantity demanded changes by
exactly the same percentage as does price. It is an unit
elasticity. The shape of the curve is rectangular hyperbola.

15. 4. Greater than one, less than infinity: Quantity demanded
changes by a larger percentage than does price. It is
elastic in nature. The shape of the curve is flat.

16. 5. Infinity: Purchasers are pepared to buy all they can at
some price and none at all even at a slightly higher price. It
is perfectly elastic. The shape of the curve is horizontal.