Elasticity

The law of demand and supply predict the direction of changes in price and quantity in response to

various shifts in demand and supply. But often it is not enough to know merely whether quantity rises or

falls in response to a change in price; it is also important to know by how much.

Price Elasticity of Demand

• Price elasticity of demand is defined as the measure of responsiveness in the quantity demanded for a commodity as a result of change in price of the same commodity. It is a measure of how consumers react to a change in price.

• In other words, it is percentage change in quantity demanded by the percentage change in price of the same commodity

E = =

Types of Elasticity

Type Value

Perfectly Elastic E = ∞

Relatively Elastic E >1

Perfectly Inelastic E = 0

Relatively Inelastic E < 1

Unit Elastic E = 1

Perfectly Elastic Perfectly Inelastic

Relatively Elastic Relatively Inelastic Unit Elastic

Income elasticity

Income elasticity = proportionate change in quantity purchased ÷ proportionate change in income.

Cross Elasticity

Cross Elasticity = proportionate change in purchase of commodity ‘x’ ÷ proportionate change in the price of commodity ‘y’.

Point method of measuring elasticity of demand

• A (Ed = ∞) ie. AB/0 Ed = lower segment of demand curve ÷ upper segment of demand

curve. M (Ed > 1) ie. MB/AM

P (Ed = 1) ie. PB/AP

N (Ed< 1) ie. NB/AN

B (Ed = 0) ie 0/AB