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Elasticity of
Demand
What is the meaning of
Elasticity of Demand?
 “The 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” - Dooley
What are the types of
Elasticity of Demand?
 Price Elasticity of Demand
 Income Elasticity of Demand
 Cross Elasticity of Demand
What is Price Elasticity of
Demand?
 Degree of responsiveness in change in quantity
demanded due to change in price; other things
remaining constant.
 Ratio of Percentage change in quantity to
percentage change in price.
 Ep = % change in Quantity demanded / %
change in Price
 Ep = [(Q2 – Q1)/ Q1] ÷ [ (P2 – P1)/ P1]
 Formulated as
EP = (∆Q / ∆P) * (P/Q)
What are the degrees of
Price Elasticity of
Demand?
 Elasticity > 1; Elastic demand
 Elasticity = 1; Unitary Elastic demand
 Elasticity < 1; Inelastic demand
 Elasticity = ∞; Perfectly elastic demand
 Elasticity = 0; Perfectly Inelastic demand
Graphically
Graphically
What are the methods of
measuring Price Elasticity of
Demand?
 Proportionate Method
Suggested by Marshall
Elasticity = Proportionate change in Quantity/
Proportionate change in price
 Mid-point Method/ Arc Elasticity of Demand
E = [(Q2 – Q1)/ (P2-P1)] * [(P1+P2)/ (Q1+Q2)]
This method is used when price change is large
What are the methods of
measuring Price Elasticity of
Demand?
 Total Expenditure Method : Evolved by Marshall
Price Change Quantity
Change
Expenditure
Change
Elasticity of
Demand
Decrease Increase Constant E = 1
Decrease Increase Increase E > 1
Decrease Increase Decrease E < 1
What are the methods of
measuring Price Elasticity of
Demand?
 Point Elasticity Method
Elasticity = Lower
segment/Upper
Segment
What are the determinants
of Price Elasticity of
Demand?
 Availability of Substitutes
 Proportion of Consumer’s Income spent
 Number of uses of a commodity
 Complementarity between goods
 Time Elasticity
What is Cross Elasticity of
Demand?
 Degree of Responsiveness of change in the
quantity demanded of one good due to change
in price of other good.
 Elasticity = Proportionate change in quantity
demanded of X / Proportionate change in price
of Y
Goods Elasticity
Substitutes Positive
Complements Negative
What is Income Elasticity
of Demand?
 Responsiveness of change in quantity demanded
due to change in income.
 E = Proportionate change in Quantity/
Proportionate change in Income
Type of Good Elasticity
Normal Goods E > 0
Inferior Goods E < 0
Type of Good Elasticity
Luxuries E > 1
Necessities E < 1
Questions?
Contact Us
Website: www.economicsharbour.com
email: admin@economicsharbour.com
Thank You

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Elasticity of demand

  • 2. What is the meaning of Elasticity of Demand?  “The 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” - Dooley
  • 3. What are the types of Elasticity of Demand?  Price Elasticity of Demand  Income Elasticity of Demand  Cross Elasticity of Demand
  • 4. What is Price Elasticity of Demand?  Degree of responsiveness in change in quantity demanded due to change in price; other things remaining constant.  Ratio of Percentage change in quantity to percentage change in price.  Ep = % change in Quantity demanded / % change in Price  Ep = [(Q2 – Q1)/ Q1] ÷ [ (P2 – P1)/ P1]  Formulated as EP = (∆Q / ∆P) * (P/Q)
  • 5. What are the degrees of Price Elasticity of Demand?  Elasticity > 1; Elastic demand  Elasticity = 1; Unitary Elastic demand  Elasticity < 1; Inelastic demand  Elasticity = ∞; Perfectly elastic demand  Elasticity = 0; Perfectly Inelastic demand
  • 8. What are the methods of measuring Price Elasticity of Demand?  Proportionate Method Suggested by Marshall Elasticity = Proportionate change in Quantity/ Proportionate change in price  Mid-point Method/ Arc Elasticity of Demand E = [(Q2 – Q1)/ (P2-P1)] * [(P1+P2)/ (Q1+Q2)] This method is used when price change is large
  • 9. What are the methods of measuring Price Elasticity of Demand?  Total Expenditure Method : Evolved by Marshall Price Change Quantity Change Expenditure Change Elasticity of Demand Decrease Increase Constant E = 1 Decrease Increase Increase E > 1 Decrease Increase Decrease E < 1
  • 10. What are the methods of measuring Price Elasticity of Demand?  Point Elasticity Method Elasticity = Lower segment/Upper Segment
  • 11. What are the determinants of Price Elasticity of Demand?  Availability of Substitutes  Proportion of Consumer’s Income spent  Number of uses of a commodity  Complementarity between goods  Time Elasticity
  • 12. What is Cross Elasticity of Demand?  Degree of Responsiveness of change in the quantity demanded of one good due to change in price of other good.  Elasticity = Proportionate change in quantity demanded of X / Proportionate change in price of Y Goods Elasticity Substitutes Positive Complements Negative
  • 13. What is Income Elasticity of Demand?  Responsiveness of change in quantity demanded due to change in income.  E = Proportionate change in Quantity/ Proportionate change in Income Type of Good Elasticity Normal Goods E > 0 Inferior Goods E < 0 Type of Good Elasticity Luxuries E > 1 Necessities E < 1