1. Elasticity of Demand Dr. V.S. Karpe By Dept. of Economics
Sarvajanik Arts & Commerce College, Visarwadi, Tal. Navapur, Dist. Nandurbar (MH)

2. Examples
As a result of fall in the price of radio from Rs. 500 to Rs. 400, quantity demanded increases from 100 radios to 150 radios.
As a result of fall in the price of wheat from Rs. 10 per kg to Rs. 9 per kg, the demand increases from 500 kgs to 520 kgs.
As a result of a fall in the price of salt from Rs. 3 per kg to Rs per kg, the demand increases from 1000 to 1005 kgs.

3. Definition
Elasticity of Demand as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends.
It is the percentage change in quantity demanded divided by the percentage change in one of the variables on which demand depends.
These variables are price of the commodity, price of the related commodities, income of the consumers.

4. Price Elasticity
It expresses the response of quantity demanded to a change in its price, ceteris paribus.
Price Elasticity = Ep
Ep = % change in quantity demanded
% change in price
Ep= Change in quantity X Original price
Change in price Original quantity

5. Example
The price of a commodity decreases from Rs. 6 to Rs. 4 and the quantity demanded increases from 10 units to 15 units. Find the co-efficient of price elasticity.

6. Interpreting numerical values of elasticity of demand
The numerical value of elasticity of demand can assume any value between zero and infinity
Elasticity is zero, if there is no change in quantity demanded when price changes.
Elasticity is one if the percentage change in quantity demanded is equal to the percentage change in price.

7. Interpreting numerical values of elasticity of demand
Elasticity is greater than one when the percentage change in quantity demanded is more than the percentage change in price.
Elasticity is less than one when the percentage change in quantity demanded is less than the percentage change in price
Elasticity is infinity when a small reduction in price raises the demand from zero to infinity.

9. Methods of measuring elasticity
Percentage method
( Suppose quantity demanded of coconut is initially 800 units at a price of Rs. 10 and increases to 1000 units when price falls to Rs. 8. Calculate price elasticity of demand of coconut)

10. Point elasticity of demand
Refers to measuring the elasticity at a particular point on the demand curve.
Defined as dq/dp x p/q
Where dq/dp is the derivative of quantity q w.r.t price p on the demand curve.
Point elasticity = Upper segment / Lower segment

11. Arc Elasticity method
Arc elasticity measures elasticity at the mid point of an arc between any two points on a demand curve.
Elasticity = q1-q2/q1+q2 X p1 +p2/ p1-p2
Where p1 = original price
q1 = original quantity
p2 = new price
q2 = new quantity

12. Total outlay method
Elasticity is measured by comparing expenditure levels before and after any change in price.

13. Determinants of price elasticity of demand
Availability of substitutes
Proportion of income spent on the commodity
Nature of need that the commodity satisfies
Number of uses to which a commodity can be put
Time
Consumer habits
Price range

14. Income elasticity of demand
Income elasticity is the degree of responsiveness of quantity demanded to a small change in the income of the consumers
The relationship between income elasticity of goods and proportion of income spent on it can be described in the following propositions.

15. Propositions
If the proportion of income spent on goods remain the same as income increases, then income elasticity for the goods is equal to one.
If the proportion of income spent on goods Increases as income increases, then income elasticity for the goods is greater than one
If the proportion of income spent on goods decreases as income increases, then income elasticity for the goods is less than one

16. Positive Income elasticity of demand
When with an increase in the income of the consumer, the demand for the good increases and vice versa.
It is positive in case of normal goods

17. Negative Income elasticity of demand
When increase in income of the consumer is accompanied by a fall in the demand of goods
It happens in case of inferior goods or Giffen goods

18. Zero Income elasticity of demand
When change in the income of a consumer does not have any effect on the demand
Demand for necessaries like oil, salt etc have zero income elasticity of demand

19. Cross Elasticity of Demand
Cross elasticity of demand is the change in the demand of one good in response to a change in the price of another good.
Ec = ∆qx py X
∆py qx
Where Ec = Cross elasticity of demand
qx = original quantity demanded of X
∆qx = Change in quantity demanded of X
py = Original price of Y
∆py = Change in Price of Y

20. Positive cross elasticity of demand
It is positive in case of substitute goods.
For ex, a rise in the price of coffee will lead to a rise in demand for tea.
The curve slopes upward from left to right

21. Negative cross elasticity of demand
It is negative in case of complementary goods
For ex, an increase in the price of bread will lead to a fall in the demand for butter
The curve slopes downward from left to right

22. Zero cross elasticity of demand
Cross elasticity demand is zero when two goods are not related to each other.
For ex, rise in the price of wheat will have no effect on the demand for shoes.

23. Read the following data and answer the questions
XYZ are 3 commodities. X and Y are complements whereas X and Z are substitutes.
A shopkeeper sells commodity X at Rs. 40 per piece. At this price he is able to sell 100 pieces of X per month. After some time he decreases the price of X to Rs. 20. Following the price decrease:
He is able to sell 150 pieces a month
The demand for Y increases from 25 units to 50 units
The demand for commodity Z decreases from 150 units to 75 units

24. Quiz
The price elasticity of demand when the price of X decreases from Rs. 40 to Rs. 20 will be equal to :
1.5
1.0
1.66
0.6

25. Quiz
The cross elasticity of demand for Y when the price of X decreases from Rs. 40 to Rs. 20 is equal to: +1 -1
-1.5
1.5