Demand elasticity is a measure of proportionate change
in the quantity demanded due to proportionate change
another factor.
Elasticity –
The responsiveness of one variable to changes in
another.
When price rises, what happens to demand?
Demand falls
BUT!
How much does demand fall?
3 basic types used:
 Price elasticity of demand
 Income elasticity of demand
 Cross elasticity
Price elasticity of demand
Price elasticity of demand is a measure of proportionate change
in the quantity demanded due to proportionate change in
price of that commodity. Thus The responsiveness of demand
to changes in price is called Price elasticity of demand.
Ep is infinite.
Demand
Ed<1
Price
Ed=1
Price
Price
Ed>1
Price
Highly Elastic- % change in demand is higher than %
change in the price of that commodity.
Unit Elasticity- % change in demand is equal to %
change in the price of that commodity.
Inelastic- % change in demand is less than % change in
the price of that commodity.
Perfectly Inelastic- no change in demand due to changes
in the prices. Here, Ed=0
Demand
Demand
Ed=0
Demand
Income
elasticity
of
demand:
In economics, the income elasticity of demand
measures the responsiveness of the quantity
demanded of a good to the change in the income of
the people demanding the good. It is calculated as the
ratio of the percent change in quantity demanded to
the percent change in income. For example, if, in
response to a 10% increase in income, the quantity of a
good demanded increased by 20%, the income
elasticity of demand would be 20%/10% = 2.
 A negative income elasticity of demand is associated with inferior
Demand
Demand
Yed<1
Demand
Income
Yed=1
Income
Yed>1
Income
Income
goods; an increase in income will lead to a fall in the demand and may
lead to changes to more luxurious substitutes.
 A positive income elasticity of demand is associated with normal
goods; an increase in income will lead to a rise in demand. If income
elasticity of demand of a commodity is less than 1, it is a necessity good.
If the elasticity of demand is greater than 1, it is a luxury good or
a superior good. If the elasticity of demand is equal to 1, it is
a comfortable good .
 A zero income elasticity (or inelastic) demand occurs when an increase
in income is not associated with a change in the demand of a good.
These would be sticky goods.
Yed=
0
Demand
 A negative income elasticity of demand is associated with inferior
goods; an increase in income will lead to a fall in the demand and may
lead to changes to more luxurious substitutes.
 A positive income elasticity of demand is associated with normal
goods; an increase in income will lead to a rise in demand. If income
elasticity of demand of a commodity is less than 1, it is a necessity good.
If the elasticity of demand is greater than 1, it is a luxury good or
a superior good.
 A zero income elasticity (or inelastic) demand occurs when an increase
in income is not associated with a change in the demand of a good.
These would be sticky goods.
Cross
elasticity
of
demand
In economics, the cross elasticity of demand and cross
price elasticity of demand measures the responsiveness of
the quantity demand of a good to a change in the price of
another good.
 It is measured as the percentage change in quantity
demanded for the first good that occurs in response to a
percentage change in price of the second good. For
example, if, in response to a 10% increase in the price of
fuel, the quantity of new cars that are fuel inefficient
demanded decreased by 20%, the cross elasticity of
demand would be -20%/10% = -2.
Ced= %change in quantity demanded of good X
% change in price of good Y
The numerical value of cross elasticity depends on
whether the two goods in question are substitutes,
complements or unrelated.
(i)Substitute goods. When two goods are substitute of
each other, such as coke and Pepsi, an increase in the
price of one good will lead to an increase in
demand for the other good. The numerical value of
goods is positive For example there are two goods.
Coke and Pepsi which are close substitutes. If there is
increase in the price of Pepsi called good y by 10% and
it increases the demand for Coke called good X by 5%,
the cross elasticity would be – 0.2 . Since, Ced is
positive therefore, Coke and Pepsi are close
substitutes.
 Complementary goods. in case of complementary goods
such as car and petrol, cricket bat and ball, a rise in the
price of one good will bring a fall in the demand for
another good. The cross elasticity of demand negative.
 (iii) Unrelated goods. The two goods which are
unrelated to each other, say apples and pens, if the price of
apple rises in the market, it is unlikely to result in a change
in quantity demanded of pens. The elasticity is zero of
unrelated goods.
Two
goods
that
complement each other
show a negative cross
elasticity of demand: as
the price of good Y rises,
the demand for good X
falls.
Two goods that are
substitutes have a
positive cross elasticity
of demand: as the
price of good Y rises,
the demand for good
X rises.
Two goods that are
independent have a
zero cross elasticity
of demand: as the
price of good Y rises,
the demand for
good
X
stays
constant.
Determinants
 Availability of substitute goods: the more and closer the
substitutes available, the higher the elasticity is likely to be,
as people can easily switch from one good to another if an
even minor price change is made. There is a strong
substitution effect. If no close substitutes are available, the
substitution effect will be small and the demand inelastic.
 Breadth of definition of a good: the broader the definition
of a good (or service), the lower the elasticity. For example,
Company X's fish and chips would tend to have a relatively
high elasticity of demand if a significant number of
substitutes are available, whereas food in general would have
an extremely low elasticity of demand because no substitutes
exist.
 Percentage of income: the higher the percentage of the
consumer's income that the product's price represents, the
higher the elasticity tends to be, as people will pay more
attention when purchasing the good because of its
cost;[25][26] The income effect is substantial.[30] When the
goods represent only a negligible portion of the budget the
income effect will be insignificant and demand inelastic,[30]
 Necessity: the more necessary a good is, the lower the
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
elasticity, as people will attempt to buy it no matter the
price, such as the case of medicine or basic
necessities for those that need it.[
Duration: in short span of time demand will be less
elastic because consumer does not have as much time
to seek the substitutes while in long run it will be
highly elastic.
Tastes, habits and addiction
Price of Commodity- at very high or very low price
Ed will be inelastic or less elastic and for medium price
it will be more elastic.
Postponement of the use of the commodity
Unequal distribution of wealth or income
Usefulness
 Identifying the market
 Estimation of demand
 Determining category of goods
 Price determination of goods
 Helpful in the formulation of economic policy
 Helpful in the tax policy
Methods to measure Ed
1. The Percentage Method- given by Flux
 ep = (ΔQ/ΔP) × (P/Q)
 It is also known as ratio method, when we measure the
ratio as: ep = %ΔQ/%ΔP
 Where, %ΔQ = percentage change in demand
 %ΔP = percentage change in price
2.elastic
Total
outlay
or inelastic
is to examinemethod
the change in total outlay of the
 Marshall suggested that the simplest way to decide whether demand is


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


consumer or total revenue of the firm.
Total Revenue = (Price × Quantity Sold)
TR = (P × Q)
Marshall has laid down the following propositions:
(a) Elastic Demand: If ep > 1, the percentage rise in quantity demanded
is greater than the percentage fall in price. Revenue increases because
the increase in quantity demanded more than offsets the decrease in
price. Price and revenue move in opposite directions.
(b) Inelastic Demand: If ep < 1, the percentage rise in quantity
demanded is less than the percentage fall in price. Revenue falls
because the decline in price is not offset by the relatively small rise in
quantity. Price and revenue move in the same direction.
(c) Unitary Elastic Demand: If ep = 1, the percentage rise in quantity
demanded equals the percentage fall in price. Revenue is unchanged
because the decline in price is just offset by the rise in quantity.
Example
Price
Quantity (in units)
Total Outlay (or
revenue)
Original 3
10
30
Change 2
15
30
Original 3
10
30
Change 2
17
34
Original 3
10
30
Change 2
11
22
Elasticity of
demand
Unitary elasticity
(price elasticity = 1)
Elastic demand
(price elasticity > 1)
Inelastic demand
(price elasticity < 1)
Table 2: Changes in price, outlay
and elasticity of demand
Demand
If price increases,
Expenditures
If prices decreases,
Expenditures
Inelastic demand
Increase
Decrease
Elastic demand
Decrease
Increase
Unitary demand
Remain unchanged
Remain unchanged
Under this method Ed is measured at each point on
demand curve.
Formula- Point Elasticity = Lower segment of the demand
curve below the given point / Upper segment of the demand
curve above the given point.