1. Project Submitted
On
“Micro Economic”
By
Rajkumar Jangid
(BBA 1st Year)
106/10 civil lines,Ajmer 305001
Website: www.dezyneecole.com

2. CONTANT
Pages
What is demand --------------------------- 1
Elasticity of demand --------------------- 1
Price elasticity of demand --------------- 2
Quantity demand -------------------------- 3
Method of price elasticity ---------------- 5
Cross elasticity of demand ---------------- 12
Income elasticity of demand --------------- 17
Measuring of income elasticity -------------- 19

3. DEMAND
The demand for a commodity is its quantity
which consumers are able and willing to buy at
various prices during a given period of time.
ELASTICITY OF DEMAND
Elasticity of demand refer to price elasticity of
demand, though the notion of elasticity of
demand also relates to income, cross and
substitution elasticity of demand.

4. PRICE ELASTICITY OF DEMAND
The elasticity of demand is the degree of
responsiveness of demand to change in price. In
the word of prof. lipsey “elasticity of demand
may be defined as the ratio of the percentage
change in demand to the percentage change in
price” thus price elasticity of demand is the
ratio of % change in amount demand to a %
change in price.
Ep = %change in amount demand
% change in price
Represent into equation
= change; q = amount of demand p =
for price
Ep= q/p

5. QUANTITY DEMAND
CASE 1: when the change in
demand is more than
proportionate to the change in
price. Price elasticity of demand
is greater than unity or
relatively elastic Ep >1
CASE 2: when the change in
demand is less than
proportionate to change in
price. Price elasticity of demand
is less than unity or relatively
inelastic Ep<1
CASE 3: when the changes in
demand is exactly proportionate to
the price Ep=1 unit

6. CASE 4: when whatever the
change in price there is
absolutely no change in demand.
So price is perfectly inelastic in
this case Ep=0
CASE 5: when an infinitesimal
small change in price leads to an
infinitely large change in the
amount of demand, so the price
elasticity of demand is infinity.
Ep= ∞

7. Methods of measuring price elasticity
The percentage method: - the price elasticity of
demand is measuring by its coefficient (Eq). This
coefficient (Ep) measure the percentage change in
quantity of a commodity demanded resulting from
a given percentage change in its price.
= change; Ep= price of elasticity
Ep= %change in q/% change in p
q = quantity demand; p = price
if Ep>1= price is increase than demand then
demand so demand is elastic.
Ep<= price is smaller/decrease then demand, so
demand is inelastic.
Conclusion: - (1) when the quantity rise demand is
elastic.
(2) When the price rise the demand is inelastic.

8. The point method: - professor Marshall devised a
geometrical method for measuring elasticity at a
point on the demand.
=change into quantity
= change into price
P, q = initial price
q = BD=Q; p =PQ
p = PB; q = OB

9. Substituting these values into the formula-
Eq= QM PB
PQ OB
Moreover, QM BS
PQ OB
BS PB
PB OB
= BS/OB
Since PBS and ORS are similar
N= CN (lower segment)
ND (upper segment)
Elasticity of demand at points-
M= CM = 5 =5 or >1
MD 1 (greater than unity)

10. L= CL = 6 ∞
CD 0 (infinity)
p= CP = 1 or <1
PD 5 (less than unity)
Conclusion: midpoint of the demand curve is the
elasticity of demand is unity.
THE ARC METHOD – we have studied the
measurement of elasticity at a point on a demand
curve. It is known as ARC elasticity

11. point Price Quantity
P 8 10
M 10 12
From P to M
Ep = q p = (12-10) = 2 8 = 4
P q (6-8) -2 10 5
If we move in reverse direction from M to P

12. THE TOTAL OUTLAY METHOD: Marshall
evolved the total outlay or total revenue or total
expenditure method as a measure of elasticity
Total outlay =price quantity
Price /kg Quantity in TE in rs Ep
1 kgs 2 (1 *2)=3 4
9 20 180
8 30 240 >1
7 40 280
6 50 300
5 60 300 =1
4 75 300
3 80 240
2 90 180 <1
1 100 100

13. 1. ELASTIC DEMAND: - demand is elastic
when with the fall in price the total
expenditure increases and with the rise in
price the total expenditure decrease when the
price falls from rs. 9 to rs. 8, the total
expenditure increase from rs. 180 to rs. 240
and when price rise from rs. 7 to rs. 8 the
total expenditure falls from rs. 280 to rs. 240
so (Ep>1) demand id elastic.
2. UNITY ELASTIC DEMAND: - when
with the falls or rise in the price the total
expenditure remains unchanged, the
elasticity of demand is unity this is shown in
the table when with the fall in price from rs.
6 to rs. 5 or with the rise in price from rs. 4
to rs. 5 the total expenditure remains
unchanged at rs. 300 i.e. Ep=1

14. 3. Less elastic demand: - demand is less elastic
if with the fall in price, the total expenditure
falls & with the rise in price the total
expenditure rises. When the price falls from
rs.3 to rs.2, total expenditure falls from
rs.240 to rs.180 this is the case if inelastic or
less elastic demand.
CROSS ELASTICITY OF DEMAND
The cross elasticity of demand is the relation
between percentage change in the quantity
demanded of a good to the percentage change in the
price of a related good. The cross elasticity of
demand between goods A and B is
Eba= %change in the quantity of B
%change in the price of A
It can also be measured with the formula of ARC
elasticity with the difference that here price and
quantity refer to different goods.

15. (A) Cross elasticity of substitutes:- in the case of
substitutes the cross elasticity is positive and
large. The higher the Eba, the better
substitutes the goods are. If the price of
butter rises, it will lead to increase in the
demand for jam.
CASE 1 Eba>1 if a change in
the price of good A leads to
more than proportionate
change in the demand for
good B, the cross elasticity is
high.
CASE2 Eba=1 when a
change in the price of good A
causes the same proportionate
of good B so the cross
elasticity of demand is unity.

16. CASE3 Eba<1 when the quantity demanded of
good B change less than
proportionately in response to the
change in the price of good A, as
in panel (c) it means that good A
and B are poor substitutes for
each other.
CASE4 Eba=0 when the change
in the price of good A has no
effect what so ever on the demand
for good B the cross elasticity of
demand is zero.
CASE5 Eba=∞
In case the two goods are
perfect substitutes the cross
elasticity of demand will be
infinity.

17. Cross elasticity of complementary goods- if two
goods are complementary, a rise in the price of one
leads to a fall in the demand for the other. Rise in
the price of cars will bring a fall in their demand
together with the demand for petrol. Similarly, a
fall in the prices of cars will raise the demand for
petrol.
Case-1 if the change in quantity
demanded B is exactly in the
same proportionate as the change
in the price A, the cross elasticity
is unity (Eba=1)
Case2-when the change in the
quantity of B is less in response to
a change in the price of A, so the
cross elasticity is less than unity
(Eba<1)

18. Case3-in the case of
complementary goods, cross
elasticity is greater than unity
(Eba>1) when the change in
the demand for B good is more
than proportionate to the
change in the price of good.
Case4- when the change in the
price of A causes no change
what so eves in the purchases
of B so the cross elasticity of
demand is zero (Eba=0)
case5-when an infinitesimal
change in the price of A causes
an infinitely large change in
the purchase of B, so it is
infinity (Eba=∞)

19. INCOME ELASTICITY OF DEMAND
Ey= %change in quantity demand
% change in income
Demand=Q
Income=Y
Case-1 Ey>1 (in the case of
luxury goods) when the quantity
is more than income Ey?>1 and
this shows positive and elastic
income demand.
Case-2 Ey<1(in the case of
necessary goods) when the
income rise more than quantity
when Ey<1 and this shows
negative and inelastic demand.

20. Case-3 Ey=1(in the case of
comfort goods) when the quantity
and income increase or decrease in
same proportionate so the
relationship between income and
quantity is Ey=1.
Case-4 Ey=∞ when the income
increase is less proportionate then
quantity so Ey=∞.
Case-5 Ey=0 when the quantity is
constant and the income increase
continuously so the relation
between the income and quantity
so Ey=0

21. MEASURING INCOME ELASTICITY OF
DEMAND
Relationship – income and quantity
Ey=DQ Y = QA = LQ >1
DY Q OQ QA
1. Ey>1 luxury
2. Ey<1 necessary
3. Ey=1 comfort
Ey = DQ Y
DY Q

22. (1) In figure where LA is tangent to the Engel
curve E, at point A. the coefficient of income
elasticity of demand at point A is
Ey= DQ Y = LQ QA = LQ >1
Dy Q QA OQ QA
This shows that the curve E is income elastic over
much of its range. When the Engel curve is
positively sloped and Ey>1 it is the case of a
luxury good.
(2) In figure where NB is the tangent to the
Engel curve E2 curve over much its range is

23. larger than zero but smaller than 1 when the
Engel curve is positively sloped and Ey<1
the commodity is a necessity and is income
inelastic.
In figure the Engel curve E3 is backward
sloping range draw a tangent GC at point C.
the coefficient of income elasticity at point C
is Ey= -GQ GC = -GQ <0
GC OQ QA
This shows that over the range from B
upward the Engel curve E3 is an inferior
good.