Demand and Elasticity
of Demand
Amandeep Verma
Assistant Professor in Economics
“The demand for anything, at a given price, is the amount of it,
which will be bought per unit of time, at that price.”
Benham
“By demand we mean the various quantities of a given commodity or
service which consumers would buy in one market in a given period of
time at various prices.”
Bobber
Requisites:
a. Desire for specific commodity.
b. Sufficient resources to purchase the desired commodity.
c. Willingness to spend the resources.
d. Availability of the commodity at
 (i) Certain price (ii) Certain place (iii) Certain time.

1.
2.
3.
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Individual demand
Market demand
Income demand
Demand for normal goods (price –ve, income +ve)
Demand for inferior goods (eg., coarse grain)
4. Cross demand
Demand for substitutes or competitive goods (eg.,tea & coffee, bread and
rice)
Demand for complementary goods (eg., pen & ink)
5. Joint demand (same as complementary, eg., pen & ink)
6. Composite demand (eg., coal & electricity)
7. Direct demand (eg., ice-creams)
8. Derived demand (eg., TV & TV mechanics)
9. Competitive demand (eg., desi ghee and vegetable oils)
10.Demand of unrelated goods
Prices of Goods
 Income of Consumer
 Prices of Related Goods
 Population
 Tastes, Habit
 Expectation about future prices
 Climatic Factors
 Demonstration Effect
 Distribution of national income


Demand Schedule: a tabular presentation showing different quantities of a
commodity that would be demanded at different prices.

Types of Demand Schedules
Individual Demand schedule
Price A
1
50
2
40
3
30
4
20
Market Demand Schedule
Price A
B
C
M.S
1
50
45
40
135
2
40
30
38
108
3
35
20
30
85
4
20
15
25
60

The Graphical Representation of Demand Schedule is called a Demand Curve. It is
of two types:
Types of Demand Curve
Individual DC
Y
Price
Market DC
Y
Less Flatter
O
Demand
Price
X
More Flatter
O
Demand
X


Movement along demand curve Vs. Shift in demand curve:
Distinction between change in quantity demanded and change in demand.

A. Change in quantity demanded – When quantity demanded changes ( rise or
fall ) as a result of change in price alone, other factors remaining the same.


Contraction/fall in quantity demanded
Extension/Rise in quantity demanded
The change is depicted/ represented by the movement up or down on a
given demand curve. This does not require drawing a new demand curve.
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1.
2.
3.
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Prof. Samuelson: “Law of demand states that people will buy more at lower
price and buy less at higher prices, others thing remaining the same.”
Ferguson: “According to the law of demand, the quantity demanded varies
inversely with price”.
Chief Characteristics:
Inverse relationship.
Price independent and demand dependent variable.
Income effect & substitution effect.
Assumptions:
No change in tastes and preference of the consumers.
Consumer’s income must remain the same.
The price of the related commodities should not change.
The commodity should be a normal commodity
P
P
P1
A
B
P2
D2
D1
Q
Q1
Q2
Q
CHANGE IN PRICE=
change in quantity
demanded
CHANGE IN OTHER=
change in demand
P
D1
D2
Q
CHANGE IN OTHER=
change in demand
•Change in consumer tastes
•Change in people’s income
•
normal goods
•
inferior goods
•Change in Population
•Change in Habits
•Government Policies
• Income distribution
•Change in price of related goods
•Consumer expectations with regard to future prices
•Advertisement Expenditure
Dx= a-bPx
Dx= Demand for X commdity
A= constant
B= Slope
Px= price of X commodity
Price
Demand
0
10
2
12
4
14
6
16
8
18
10
20
12
22
Why demand curve slopes downwards?
1. Income effect
2. Substitution effect
3. Diminishing Marginal Utility
4.
Increase in number of consumer
5. Alternative uses


Definition: “Elasticity of demand is defined as the responsiveness of the
quantity demanded of a good to changes in one of the variables on which
demand depends.”
These variables are price of the commodity, prices of the related
commodities, income of the consumer & other various factors on which
demand depends. Thus, we have Price Elasticity, Cross Elasticity, Elasticity
of Substitution & Income Elasticity. It is always price elasticity of demand
which is referred to as elasticity of demand
A. Price Elasticity
Measures how much the quantity demanded of a good changes when its
price changes.
Or
It may be defined as “Percentage Change in Quantity demanded over
percentage change in price”
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Availability of substitutes
Postponement of consumption
Proportion of expenditure (needles: inelastic; TV: elastic)
Nature of the commodity (necessity vs. luxury; durability/reparability
eg., shoes)
Different uses of the commodity (paper vs. ink)
Time period (elastic in the long term)
Change in income (necessaries: inelastic; milk and fruit for a rich man)
Habits
Joint demand
Distribution of income
Price level (very costly & very cheap goods: inelastic)
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•
•
•
•
•
•
•
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•
•
•
•
Exceptions:
Inferior goods
Articles of snob appeal. (exception: Veblen goods, eg., diamonds)
Expectation regarding future prices (shares, industrial materials)
Emergencies
Quality-price relationship
Conspicuous necessities.
Ignorance
Change in fashion, habits, attitudes, etc..
Importance:
Price determination.
To Finance Minister
To farmers
In the field of Planning.
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•
•
•
•
•

Price Elasticity
Elastic Demand or more than 1 – When quantity demanded responds
greatly to price changes
Inelastic Demand or less than 1 – When quantity demanded responds
little to price changes.
Unitary Elastic – When quantity demanded responds equally to the
price changes.
Perfectly inelastic or 0 elastic demand
Perfectly elastic or infinite elastic demand
Economic factors determine the size of price elasticity for individual
goods. Elasticity tends to be higher when the goods are luxuries, when
substitutes are available and when consumer have more time to adjust
their behavior.
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•
•
PED = % Change in Qty Demanded
% Change in Price
Points to Remember:
We drop the minus sign from the numbers by
treating all % changes as positive. That means all
elasticity’s are positive, even though prices and
quantities move in the opposite direction because of
the law of downward sloping demand.
Definition of elasticity uses percentage changes in
price and demand rather than actual changes. That
means that a change in the units of measurement
does not affect the elasticity. So whether we
measure price in Rupees or paisa, the price elasticity
stays the same.
•
Price discrimination
•
Public utility pricing (electricity, railway)
•
Joint supply (wool and mutton)
•
Super markets
•
Use of machines (lower cost of production for elastic)
•
Factor pricing (workers producing inelastic demand products)
•
International trade (devalue when exports are price-elastic)
•
Shifting of tax burden (shift commodity tax when demand is
inelastic)
•
Taxation policy
•
•
•
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•
•
•
When demand is price inelastic, marginal revenue is negative and a price
decrease reduces total revenue.
When demand is price elastic, marginal revenue is positive and a price
decrease increases total revenue.
In the borderline case of unit elastic demand, marginal revenue is 0 and a price
change leads to no change in the total revenue.
B. Income Elasticity of Demand: Is the degree of responsiveness of quantity
demanded of a good to a small change in the income of the consumer.
If the proportion of income spent on a good remains the same as income
increases, then income elasticity for the good is equal to one.
If the proportion spent on a good increases, then the income elasticity for the
good is greater than one.
If the proportion decreases as income rises, then income elasticity for the
good is less than one.

•
•
•
Types:
Zero
Negative
Positive (i) low (ii) unitary (iii) high

Empirical evidence suggests that income elasticity
falls as income rises.

Income elasticity and business decisions
If ei is >0 but <1, sales will increase but slower than
the general economic growth;
If ei is >1, sales will increase more rapidly than
general economic growth
Corollary: in a growing economy while farmers suffer
as their products have low income elasticity,
industrialists gain as their products have high income
elasticity.
1.
2.


Cross Elasticity: A change in the demand for one
good in response to a change in the price of
another good represents cross elasticity of
demand of the former good for the latter good.
•
If two goods are perfect substitutes for each
other cross elasticity is infinite and if the two
goods are totally unrelated, cross elasticity
between them is zero.
Goods between which cross elasticity is positive
can be called Substitutes, the good between
which the cross elasticity is negative are not
always complementary as this is found when the
income effect on the price change is very strong.
•
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Perfectly Elastic
Perfectly Inelastic
Unitary Elastic
Relatively more elastic
Relatively less elastic
Y
p
O
Ed = ∞
d
d1
X
Y
p1
Ed = 0
p
O
d
X
Y
p1
Ed = 1
p
O
d
d1
X
Y
p1
Ed > 1
p
O
d
d1
X
Y
p1
Ed < 1
p
O
d
d1
X
1.
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Percentage or Proportionate Method
= Percentage change in demand or;
Percentage change in price
= Proportionate change in demand
Proportionate change in price
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2. Total Outlay (Expenditure) Methods
TO=TQ * P ; where,
TO=total outlay; TQ=total quantity; P=price of
the commodity

3. Geometric (Point) method – at any given
point on the curve
= lower segment of demand curve
upper segment of demand curve
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