ELASTICITY OF DEMAND

Sonu Chowdhury

CONTENTS

• Elasticity of Demand• Types of Elasticity of Demand• Price Elasticity of Demand• Types of Price Elasticity of Demand• Practical Application

MEANING OF ELASTICITY OF DEMAND

• The extent of variation in demand is technically represented as elasticity of demand.

• It measures the responsiveness of demand for a commodity to change in its determinants.

KINDS OF ELASTICITY OF DEMAND

• Price Elasticity• Income Elasticity• Cross Elasticity

PRICE ELASTICITY OF DEMAND

The extent of the change of demand for a commodity to a given change in price, other demand determinants remaining constant is termed as price elasticity of demand.

The coefficient of price elasticity of demand is measured as

• ___________________________% Change in Quantity Demanded

% Change in Price

Pe =

• Elastic demand means that demand responds greatly or relatively more to a price change.

• Similarly, inelastic demand does not mean that demand is totally insensitive. It means that the relative change in demand is less that that of price.

KINDS OF PRICE ELASTICITY OF DEMAND

1) Perfectly elastic demand2) Relatively elastic demand3) Elasticity of demand equal to utility4) Relatively inelastic demand5) Perfectly inelastic demand

1. Perfectly Elastic Demand

• Infinite demand at a given price.• Numerical Coefficient is infinity. • Demand curve will be horizontal straight line.• It is a case of theoretical extremity. Hardly

encountered in practice.

Perfectly elastic demand

P

R

I

C

E

y

0 x

Perfectly elastic demand curve

D D

When the demand for a product changes –increases or decreases even when there is no change in price, it is known as perfect elastic demand.

2. Relatively Elastic Demand

• Proportionate change in quantity demanded is greater than price.

• Numerical Coefficient is greater than 1.• Demand curve will be gradually sloping.• It is a realistic concept as many commodities can

have more elastic demand.

Relatively elastic demand

Relatively elastic demand curve

P

R

I

C

E

demand0 x

y

D

D

When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand.

3. Unitary Elastic Demand

• Proportionate change in quantity demanded is exactly same as the change in price.

• Numerical Coefficient is exactly 1.• This is a theoretical norm, which helps to distinguish

between elastic and inelastic demand.

Elasticity of demand equal to utility

Elasticity of demand equal to utility curve

y

x0 demand

P

R

I

C

E

D

D

When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand

4. Relatively Inelastic Demand

• Proportionate change in quantity demanded is less than that of price.

• Numerical Coefficient is less than 1.• Demand curve is rapidly sloping.• This is a realistic concept.

Relatively inelastic demand

Relatively inelastic demand curve

XO

Y

demand

D

D

P

R

I

C

E

When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand

4. Perfectly Inelastic Demand

• When the demand for a commodity shows no response to a change in price.

• Numerical Coefficient is zero.• Demand curve is straight vertical line.• It is a theoretical consideration rather than a

practical phenomenon.

Perfectly inelastic demand

demand

D

D

Perfectly inelastic demand curve

0

Y

X

P

R

I

C

E

When a change in price, howsover large, change no changes in quality demand, it is known as perfectly inelastic demand

ALL KINDS OF DEMAND CAN BE SHOWN IN ONE DIAGRAM AS FOLLOW

DD1

D2D3

D4

D5

Y

X0

DEMAND

P

R

I

C

E

WHERED1) Perfectly elastic

demandD2)Relatively elastic

demandD3)Elasticity of demand

equal to utilityD4)Relatively inelastic

demandD5)Perfectly inelastic

demand

FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

• Nature of the Commodity• Availability of Substitutes• Number of uses of commodity• Consumer’s Income• Height of Price and Range of Price Change• Proportion of Expenditure• Durability of the Commodity

• Influence of habbit and customes• Complementary of goods• Time• Recurrence of Demand• Possibility of Postponement

PRACTICAL IMPORTANCE OF THE CONCEPT OF PRICE ELASTICITY OF

DEMAND

• Businessmen• Government• Trade Unionist• Economist• International Trade

End of The Topic