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2. In This Lecture…
Types -Price Elasticity of
Demand, Income Elasticity
of Demand, Cross Elasticity
of Demand
Determinants of Elasticity of
Demand
Measurement of Elasticity of
Demand

3. In This Lecture…
Types - Elasticity of Supply
Determinants of Elasticity of
Supply
Measurement of Elasticity of
Supply

4. Elasticity of Demand
Elasticity of Demand measures the
responsiveness of the quantity demanded
of a good, to change in its price, price of
other goods and changes in consumer’s
income.

5. Types of Elasticity of Demand
• Price Elasticity of Demand
• Cross Elasticity of Demand
• Income Elasticity of Demand

6. Price Elasticity of Demand
A measure of the responsiveness of
quantity demanded to changes in price.
%Δ P → %Δ Q

7. Factors Determining Price Elasticity of
Demand
- Availability of close substitute
- Consumer’s loyalty
- Necessities versus luxuries
- Proportion of income spent on the
product
- Postponement of the Use
- Time

8. Elastic vs Inelastic
Elastic – when change in price has greater
effect on demand
Inelastic – when change in price has lesser
effect on demand

9. Availability of Close Substitutes
The demand for a good is price elastic which have
substitutes like tea and coffee, orange juice and lime juice.
It is because when the price of a commodity falls in
relation to its substitutes, the consumers will go on for it
and demand increases. Goods having no substitutes like
Cigarettes, liquor etc. have inelastic demand.

10. Consumer’s Loyalty
The demand for a good is price inelastic if
consumers are habituated in buying that
good and are unwilling to use substitutes
– eg. Cigarettes, tobacco, coffee, liquor etc.
- and vice versa if the good is price elastic

11. Necessities versus luxuries
Generally, the more that a good is
considered a luxury (a good that we can
do without) rather than a necessity (a
good that we can’t do without), the higher
the price elasticity of demand.

12. Proportion of Income spent on the
product
The demand for a good is price inelastic if
the good takes only small proportion of
income and the consumers will not react
significantly – eg. Boot-polish, needles,
newspapers etc. - and vice versa if the good
is price elastic.

13. Postponement of the Use
The demand for a good is price inelastic if
the goods whose demand cannot be
postponed – eg. Education, health services
- and vice versa (constructing a house).

14. Time
The longer the time period the more elastic
is the demand and vice versa. It is because
in the long run a consumer can change his
habits more conveniently than in short
period.

15. Measurement of Price Elasticity of Demand
Percentage / Proportionate Method
Total Expenditure Method
Point Method
Arc Method

16. Percentage / Proportionate Method
Percentage / Proportionate Method :
It refers to the price elasticity as the
ratio of percentage change in quantity
demanded to the percentage change
in price.

17. Percentage / Proportionate Method
Symbolically,
eD = - Percentage Change in quantity demanded
Percentage in price
ΔQ
eD = - ----------
P
X ----------
ΔP
Q
The absolute value of the coefficient of elasticity of
demand ranges from zero to infinity ( 0≤ eD ≤ ∞)

18. “-” sign in the formula for ed
Since there is inverse relationship between
price and quantity demanded, elasticity of
demand is ought to be negative like -1, -2,
-3 etc. However, mathematically, -3 is
lesser than -2 but in the context of
elasticity of demand -3 shows higher
elasticity than -2 . Therefore, in order to
avoid this complexity – sign is prefixed in
the formula for elasticity of demand.

19. Five Coefficient of Price Elasticity of
Demand
- Perfectly Inelastic Demand (eD = 0)
- Inelastic / Less than Unit Elastic
Demand (eD < 1)
- Unitary Elastic Demand (eD = 1)
- Elastic / More than Unit Elastic
Demand (eD > 1)
- Perfectly Elastic Demand (eD = ∞)

20. Graphical Representation of Perfectly
Price Inelastic Demand (eD = 0)
Quantity demanded
does not change
as price changes.

21. Graphical Representation of Price
Inelastic / Less than Unit Demand (eD < 1)
The percentage change
in quantity demanded is
less than the percentage
change in price.
Quantity demanded
changes proportionately
less than price changes.
Applicable in necessary
goods like salt, kerosene.

22. Graphical Representation of Price
Unitary Elastic Demand (eD = 1)
The percentage
change in quantity
demanded is equal to
the percentage change
in price.
Quantity demanded
changes
proportionately to
price changes.

23. Graphical Representation of
Price Elastic/More than unit Elastic
Demand (eD > 1)
The percentage change
in quantity demanded is
greater than the %age
change in price.
Quantity demanded
changes proportionately
more than price changes.
Applicable in luxuries
like AC, costly furniture
etc

24. Graphical Representation of Perfectly
Elastic Demand (eD = ∞)
A small percentage
change in price causes
an extremely large
percentage (infinite)
change in quantity
demanded (from
buying all to buying
nothing).

25. Price Elasticity of Demand
Summary

26. Price Elasticity and Total Revenue
Total revenue (TR) of a seller equals the
price of a good times the quantity of the
good sold (P x Q).

27. Total Expenditure / Revenue Method
• This is also known as Total Outlay Method
propounded by Alfred Marshall
• How much and in what direction total
expenditure/ revenue changes determines
the Price Elasticity of Demand of a
commodity.

28. Total Expenditure Method (contd.)
Situation
Price
$
Quantit Total
y
Expen
lb
diture
Effect on Total
Expenditure
Elasticity of
Demand
A
2
1
4
8
8
8
Same Total
Expenditure
Unitary Elastic
Ed = 1
B
2
1
4
10
8
10
Total
Expenditure
Increases
Greater than
Unitary
Ed > 1
C
2
1
3
4
6
4
Total
Expenditure
Decreases
Less than Unitary
Ed < 1

29. Elastic Demand and Total Revenue I
If demand is elastic, the percentage change
in quantity demanded is greater than the
percentage change in price.
Elastic (Ed >1)
%ΔQ > %ΔP;
P↑→TR↓
P↓→ TR↑

30. Elastic Demand and Total Revenue
(Contd.)
Demand is elastic between
points A and B.
A fall in price, from P1 to P2,
will increase the size of the
total revenue rectangle from
0P1AQ1 to 0P2BQ2.
A rise in price, from P2 to P1,
will decrease the size of the
total revenue rectangle from
0P2BQ2 to 0P1AQ1.
In other words, when demand
is elastic, price and total
revenue are inversely

31. Inelastic Demand and Total Revenue
(Contd.)
If demand is inelastic, the percentage change in
quantity demanded is less than the percentage
change in price.
Inelastic (Ed < 1)
%ΔQ < %ΔP;
P↓→TR↓
P↑→ TR↑

32. Inelastic Demand and Total Revenue (Contd.)
Demand is inelastic between
points A and B.
A fall in price, from P1 to P2, will
decrease the size of the total
revenue rectangle from
0P1AQ1 to 0P2BQ 2.
A rise in price, from P2 to P1, will
increase the size of the total
revenue rectangle from 0P2BQ2
to 0P1AQ1.
In other words, when demand is
inelastic, price and total
revenue are directly related.

33. Unit Elastic Demand and Total Revenue
If demand is unit elastic, the percentage
change in quantity demanded is equal to
the percentage change in price.
Unit Elastic (Ed =1)
%ΔQ = %ΔP;
P↑→TR
___
P↓→TR

34. Unit elastic Demand and Total Revenue
Demand is unit elastic between
points A and B.
A fall in price, from P1 to P2,
will not change the size of the
total revenue rectangle from
0P1AQ1 to 0P2BQ 2.
A rise in price, from P2 to P1,
will not change the size of the
total revenue rectangle from
0P2BQ2 to 0P1AQ1.
In other words, when demand
is unit elastic, price and total
revenue are equal.

35. Elasticity, Price Changes, and Total
Revenue

36. Point/ Geometric Method
It measures elasticity of demand at
different points on demand curve.
Ed (at a point on
= lower segment
demand curve )
upper segment

37. Point Method (Contd.)
Ed = ∞
Ed > 1
Ed = 1
Ed < 1
E=0

38. Arc Elasticity
It measures the elasticity of demand over a
ranges of prices. Rather than using initial
or the final price, we use average of the
two, P; for the quantity demanded Q.
Ed = Δ Q
ΔP
x
P
Q
P = Average Price
Q = Average Quantity

39. Arc Elasticity (Contd.)
So, the formula for measuring arc price
elasticity is,
ED=
ΔQ
x (P1 + P2 ) /2
ΔP
( Q 1 + Q 2) / 2
(Q2 – Q1)
= -----------------------------
(P2- P1)
(P1+ P2)
x
---------------------------
(Q1 + Q2 )

40. Arc Elasticity (Contd.)
For example,
When the price of a good falls from Rs.15 to Rs.10 per
unit, the quantity demanded increases from 100 units to
200 units. The arc elasticity will be,
(Q2 – Q1)
Ed
= -----------------------------
(P2- P1)
(P1+ P2)
x ---------------------------
(Q1 + Q2 )
= - 100/5 x 25/300
= - 20 x 1/12
=5/3
= 1.66

41. Calculating Price Elasticity of
Demand – Arc Method
We identify two points
on a demand curve. At
point A, price is $12 and
quantity demanded is
50 units. At point B,
price is $10 and quantity
demanded is 100 units.

42. Calculating Price Elasticity of
Demand - Arc Method (Contd.)
When calculating price
elasticity of demand, we
use the average of the two
prices and the average of
the two quantities
demanded. The formula for
price elasticity of demand
is:

43. Calculating Price Elasticity of
Demand - Arc Method (Contd.)
For example, the
calculation is:

44. Cross Elasticity of Demand
Measures the responsiveness in quantity
demanded of one good to changes in the price of
another good.
= % ΔQD of A
% ΔP of B
=
PB X ΔQDA
QDA ΔPB

45. Cross Elasticity of Demand
Ec > 1 → Goods are substitutes
Ec < 1 → Goods are complements
Ec = 1 → Goods are independent

46. Cross Elasticity of Demand
Cross Elastic - The percentage change in
quantity demanded of a good is greater than
the percentage change in price of other good.
Cross Inelastic - The percentage change in
quantity demanded of a good is less than the
percentage change in price of other good.
Cross Unit Elastic - The percentage change
in quantity demanded of a good is equal to the
percentage change in price of other good

47. Cross Elasticity of Demand
Independent
Complements
Substitutes

48. Income Elasticity of Demand
Measures the responsiveness in quantity
demanded to changes in income
= % ΔQD
% ΔY
=
Y
QD
X
ΔQD
ΔY
Ey > 1 Superior Good
Ey > 1 Normal Good
Ey < 1 Inferior Good

49. Income Elasticity of Demand (Contd.)
Income Elastic - The percentage change in
quantity demanded of a good is greater
than the percentage change in income.
Income Inelastic - The percentage change
in quantity demanded of a good is less than
the percentage change in income.
Income Unit Elastic - The percentage
change in quantity demanded of a good is
equal to the percentage change in income

50. Income Elasticity of Demand (Contd.)
An Engel Curve shows the amount of a good
demanded at different levels of income.
QD
YED = 1
YED > 1
YED < 1
Income (Y)
Normal Good
Inferior Good

51. Price Elasticity of Supply
Measures the responsiveness of quantity
supplied to changes in price.

52. Factors Determining Elasticity of Supply
- Nature of Inputs Used
- Natural Constraints
- Risk Taking
- Nature of Commodity
- Technique of Production
- Time

53. Nature of Inputs Used
If specialized FOP are used then the supply
will be inelastic.
If common FOP are used then the supply
will be elastic.

54. Natural Constraints
If more teak wood is to be produced, it will
take years of plantation before it becomes
usable. Supply of teak will be less elastic.

55. Risk Taking
Higher the risk taking element among the
entrepreneurs the supply will be more
elastic and vice versa.

56. Nature of Commodity
Perishable goods are less elastic in supply
while durables are more elastic as its
easier to store.

57. Technique of Production
If complicated technique of production is
used that needs large stock of capital then
the supply of that commodity will be less
elastic and vice versa.

58. Time
The longer the time period more is the time
available to adjust the supply and more
elastic will be the supply curve.
Very Short Period : perfectly inelastic
Short Period : elastic
Long Period : more elastic

59. Measurement of Elasticity of Supply
Percentage / Proportionate Method
Point Method

60. Percentage / Proportionate Method
Percentage / Proportionate Method :
It refers to the price elasticity as the
ratio of percentage change in quantity
supplied to the percentage change in
price.

61. Percentage / Proportionate Method
Symbolically,
eD = Percentage Change in quantity supplied
Percentage in price
ΔQ
eD =
P
---------- X ----------
ΔP
Q
The absolute value of the coefficient of elasticity of
supply ranges from zero to infinity ( 0≤ eD ≤ ∞)

62. Five Coefficient of Price Elasticity of
Supply
- Perfectly Inelastic Supply (eS = 0)
- Inelastic / Less than Unit Elastic
Supply (eS < 1)
- Unitary Elastic Supply (eS= 1)
- Elastic / More than Unit Elastic
Supply (eS > 1)
- Perfectly Elastic Supply (eS = ∞)

63. Graphical Representation of Elastic
Supply
The percentage
change in quantity
supplied is greater
than the percentage
change in price:
Es > 1 and supply is
elastic.

64. Graphical Representation of Inelastic
Supply
The percentage
change in
quantity
supplied is less
than the
percentage
change in price:
Es 1 and supply
is inelastic. .

65. Graphical Representation of Unit
Elastic Supply
The percentage
change in
quantity supplied
is equal to the
percentage
change in price:
Es = 1 and supply
is unit elastic.

66. Graphical Representation of Perfectly
Elastic Supply
A small change in
price changes
quantity supplied
by an infinite
amount: Es = ∞
and supply is
perfectly elastic.

67. Price Elastic Graphical Representation
of Supply
A change in price
does not change
quantity supplied:
Es = 0 and supply
is perfectly
inelastic.

68. Point/ Geometric Method
It measures elasticity of supply depending
on the origin of supply curve.
There are three possible situations of
elasticity of supply according to this
method:
Situation 1 : Es =1
Situation 2 : Es > 1
Situation 3 : Es < 1

69. Point/ Geometric Method
Situation 1 : Es = 1 is when supply curve
starts from the origin.
Price
Es = 1
Es = 1
Es = 1
O
Quantity

70. Point/ Geometric Method
Situation 2 : Es > 1 is when supply curve
starts from Y axis.
Price
Es > 1
O
Quantity

71. Point/ Geometric Method
Situation 3 : Es < 1 is when supply curve
starts from X axis.
Price
Es < 1
O
Quantity

72. Summary of the Four Elasticity
Concepts