ELASTICITY OF

DEMAND

What is Elasticity of demand?

The concept of elasticity of demand refers to the
responsiveness of demand for a commodity to
changes in its determinants.
This concept was given by the famous Economist
Prof. Alfred Marshall.

DEFINITION
PROF. ALFRED MARSHALL:
The elasticity of demand in a market is
great or small , depending on whether the
amount demanded increases much or little
for a given fall in the price and diminishes
much or little for a given rise in price.

FORMULA
Elasticity of demand =

Proportionate change in the

quantity demanded
Proportionate change in the
determinants of demand

TYPES
OF
ELASTICITY OF DEMAND

TYPES OF ELASTICITY OF DEMAND

PRICE ELASTICITY
OF
DEMAND

INCOME ELASTICITY CROSS-ELASTICITY

OF
OF
DEMAND
DEMAND

PROMOTIONAL
ELASTICITY
OF
DEMAND

PRICE ELASTICITY OF DEMAND

The extent of response of demand for a commodity
to a given change in price, other demand
determinants remaining constant, is termed as the
price elasticity of demand.
Its co-efficient can be measured as:
Proportionate change in quantity demanded
Ed =
Proportionate change in price

The formula for calculating price elasticity can be

stated as:

Ed =

Q/Q
P/P

Alternatively Ed =

Where,
Q = the original demand
P = the original price
Q = the change in demand
P = the change in price

Depending on the magnitude and proportional

change involved in the data on demand and prices,
various numerical values of co-efficient of price
elasticity can be obtained.

TYPES
OF
PRICE
ELASTICITY OF DEMAND

Unitary Elastic Demand

The demand is said to be unitary elastic when the
proportionate change in the quantity demanded is
the same as the proportionate change in price.
Q
Here,
P

Example:
If the price rises by 10% and demand fallss by 10%,
the elasticity is unitary (Ed =1)

Y
D

PRICE

P1

(Ed=1)

P
D

Q1

QUANTITY DEMANDED

The demand curve in this case is a rectangular

hyperbola curve.
In the above figure, when the price rises from PP1 ,
the demand falls to QQ1. Therefore, Ed =1.

Relatively Elastic Demand

The demand is said to be relatively elastic when the
proportionate change in the quantity demanded is
the greater than the proportionate change in price.
Q
Here,
P

>

Example:
If the price rises by 10% and demand falls by 30%,
the elasticity is relatively elastic, i.e., (Ed >1)

PRICE

D
(Ed >1)

P1
P

Q1

QUANTITY DEMANDED

The demand curve in this case has a gradually

declining slope (flat curve).
In the above figure, when the price rises from PP1 ,
the demand falls to QQ1. Therefore, Ed >1.

Relatively Inelastic Demand

The demand is said to be relatively inelastic when
the proportionate change in the quantity demanded
is the less than the proportionate change in price.
Q
Here,
P

<

Example:
If the price rises by 30% and demand falls by 10%,
then the elasticity is relatively inelastic, i.e., (Ed <1).

PRICE

D
P1

(Ed <1)

Q1 Q

QUANTITY DEMANDED

The demand curve in this case has a sharply

declining slope (steep curve).
In the above figure, when the price rises from PP1 ,
the demand falls to QQ1. Therefore, Ed<1.

Perfectly Elastic Demand

The demand is said to be perfectly elastic when at a
given price or with a slightest fall in the price, there is
an infinite extension of demand.
Here,
Q is any number and
therefore,
any number
Ed =
=
0

P is zero, and

PRICE

(Ed = )

O QUANTITY DEMANDED

The demand curve in this case is horizontal to Xaxis.

It suggest that the demand is ever-rising at the given
price.

Perfectly Inelastic Demand

Whatever be the change in the price, if the demand
does not respond at all (the quantity demanded
remains unchanged), the demand is said to be
perfectly inelastic .
Here,
Q is zero and
therefore,
0
Ed =

any number

P is any number, and

= 0

PRICE

(Ed =0)

D
Q

QUANTITY DEMANDED

The demand curve in this case is vertical to Y-axis.

It suggest that the demand remains unchanged at
any price.

INCOME ELASTICITY OF DEMAND

The extent of response of demand for a commodity
to a given change in income, other demand
determinants remaining constant, is termed as the
income elasticity of demand.
Its co-efficient can be measured as:
Proportionate change in quantity demanded
Em =
Proportionate change in income

The formula for calculating income elasticity can be

stated as:

Em =

Q/Q
M/M

Alternatively Em =

Where,
Q = the original demand
P = the original price

Q = the change in demand

P = the change in price

Q
M
X
Q
M

The income elasticity helps us in classifying the commodities. The

following points are noted in this regard:
1.

When income elasticity is positive (E m), the commodity is of a

normal type.

2.

When income elasticity is negative (E m), the commodity is inferior.

Example: Cereals like jowar, bajra, etc.

3.

When income elasticity is positive and greater than one (E m>1), the
commodity is a luxury.
Example: T.V. sets, cars, etc.

4.

When income elasticity is positive but less than one (E m<1), the
commodity is an essential one.
Example: Foodgrains, medicines, etc.

CROSS-ELASTICITY OF DEMAND
The extent of response of demand for a commodity
to a given change in the price of some other related
commodity, other demand determinants remaining
constant, is termed as the cross-elasticity of
demand.
Its co-efficient can be measured as:

Exy =

Proportionate change in demand for X commodity

Proportionate change in the price of Y commodity

The formula for calculating price elasticity can be

stated as:

Exy =

Qx Q x

Alternatively Exy =

Py Py
Where,
Q = the original demand
P = the original price

Q = the change in demand

P = the change in price

Qx
X
Qx

Py
Py

The demand for two complementary goods is

negative.
Example: The demand for car and petrol.
When the price of petrol increases, the demand for
cars will decline.
The demand for substitute goods is positive.
Example: The demand for tea and coffee.
When the price of tea increases, the demand for
coffee will increase.

PROMOTIONAL ELASTICITY OF
DEMAND
The extent of response of demand for a commodity
to a given change in advertisement expenditure,
other demand determinants remaining constant, is
termed as the promotional elasticity of demand.
Its co-efficient can be measured as:

Ex =

Proportionate change in demand for X commodity

Proportionate change in the advertisement expenditure

The formula for calculating price elasticity can be

stated as:

Ex =

Qx Q x

Alternatively Ex =

A A

Qx
X
Qx

Where,
Q = the original demand
A = the original advertisement expenditure

Q = the change in demand

A = the change in advertisement expenditure

A
A

This elasticity of demand is very useful to business

firms to find out the impact of their advertisement
expenditure on the demand for their commodity.
Future expansions, innovations and modifications
are planned by business firms with the help of
promotional elasticity of demand.