Micro CH-4 Elasticty of Demand

JVM INSTITUTE BY LALIT KUKREJA JI 9213922047,9899009023
Chapter 4
ELASTICITY OF DEMAND
CONCEPT OF ELASTICITY OF DEMAND
Demand for a commodity is affected by a number of factors like change in its own price, change in the income
of consumer, change in the prices of related goods, etc. Elasticity of Demand refers to the percentage
change in demand for a commodity with respect to percentage change in any of the factors affecting
demand for that commodity.
Elasticity of demand can be calculated as:
Elasticity of Demand = Percentage Change in demand for X
Percentage Change in a factor affecting the Demand for X
Out of various determinants of demand, there are 3 quantifiable determinants of demand:
1) Price of given Commodity
2) Price of related goods
3) Income of the Consumer.
So, we have 3 dimensions of elasticity of demand:
1. Price elasticity of demand: price elasticity of demand refers to the percentage change in demand for a
commodity with respect to percentage change in the price of the given commodity.
2. Cross elasticity of demand: Cross elasticity of demand refers to the percentage change in demand for a
commodity with respect to percentage change in the price of a related good (substitute good or
complementary good).
3. Income elasticity of demand: Income elasticity of demand refers to the percentage change in demand for
a commodity with respect to percentage change in the income of consumer.
PRICE ELASTICITY OF DEMAND
Price Elasticity of demand means the degree of responsiveness of demand for a commodity with
reference to change in the price of such commodity.
Some Noteworthy Points about price Elasticity of Demand
 It establishes a quantitative relationship between quantity demanded of a commodity and its price, while
other factors remain constant.
 Higher the numerical value of elasticity, larger is the effect of a price change on the quantity demanded.
 For certain goods, a change in price leads to a greater change in the demand, whereas, in some cases,
there is a small change in demand due to change in price.
For Example: If prices of two commodities ‘x’ and ‘y’ rise by 10% and their demands fall by 20% and 5%
respectively, then commodity ‘x’ is said to be more elastic as compared to commodity ‘y’.
 Price is the most important determinant of demand. So, price elasticity of demand is sometimes shortened
as ‘Elasticity of Demand’ or ‘Demand Elasticity’ or simply ‘Elasticity’. Unless otherwise stated, whenever
these words are used, they ‘price Elasticity of Demand’.
4METHODS FOR MEASURING PRICE ELASTICITY OF DEMAND
The main methods for measuring price elasticity of demand are:

1. Percentage Method
2. Geometric Method
JVM INSTITUTE 9899009023, 9213922047 Page 1

1. Percentage Method
It is the most common method for measuring price elasticity of demand (E d). This method was introduced
by Prof. Marshall. This method is also known as ‘Flux method’ or ‘proportionate Method’ or
‘Mathematical Method’.
According to this method, elasticity is measured as the ratio of percentage change in the quantity
demanded to percentage change in the price.
Elasticity of Demand (Ed) = Percentage change in QuantityDemanded
Percentage Change in Price
Where,
1. Percentage change in Quantity demanded = Change in Quantity (∆Q)x 100

Initial Quantity (Q)
2. Change in Quantity (∆Q) = Q1 – Q
3. Percentage change in Price = Change in Price (∆P) x 100
Original Price (P)
4. Change in Price (∆P) = P1 – P
Proportionate Method
The percentage method can also be converted into the proportionate method. Putting the values of 1, 2, 3 and
4 in the formula of method, we get:
Ed = ∆Q x 100
Q
∆P x 100
P
= ∆Q
Q
∆P
P
Ed = ∆Q x P
∆P Q
Where,
Q = Initial Quantity demanded
Q1 = New Quantity demanded
∆Q = Change in the Quantity demanded
P = Initial Price
P1 = New Price
∆P = Change in Price
Illustration 1:
Calculate price elasticity of demand if demand increases from 4 units to 5 units due to fall in price from
Rs. 10 to Rs. 8.
Solution:
Elasticity of demand in the given case will be :
Percentage change in QuantityDemanded = Change in Quantity (∆Q) x 100
= ( 5 – 4) x 100
4
= 25%
Percentage change in Price = Change in Price (∆P) x 100
Initial Price (P)
= ( 8 – 10) x 100
10
= - 20%
Ed = 25%
-20%
= -1.25 (or 1.25 as only numerical or absolute value is taken)
Negative Sign may be ignored:
The coefficient of price elasticity of demand is always a negative number (ignoring exceptions to law of
demand) because of inverse relationship between price and quantity demanded. So, negative sign is always
implied.
However, minus sign is often ignored while writing the value of elasticity. It is more common to say that
elasticity is 1.25 than to say that it is (-) 1.25. So, negative sign can be ignored and positive number can be
easily taken.
Illustration 2:
When price rises from Rs. 8 to Rs. 10 the demand falls from 5 units to 4 units. Now elasticity of demand
will be:
Percentage change in QuantityDemanded = Change in Quantity (∆Q) x 100
= (4 – 5) x 100
5
= - 20%
Percentage change in Price = Change in Price (∆P) x 100
Initial Price (P)
= ( 10 – 8) x 100
8
= 25%
Ed = - 20%
25%
= -0.8

DEGREES OF ELASTICITIES OF DEMAND
When prices of different commodities change, the quantity demanded of each commodity reacts in a different
manner.
For example: Demand of medicines or needle responds very less to a change in price as compared to AC or
DVD Player. So, degree of responsiveness of quantity demanded to a change in price may differ and
hence, elasticity of demand could also differ.
Price Elasticity of demand can be expressed in terms of numerical value, which ranges from zero to infinity. Let
us discuss the various kinds of price elasticities of demand.
1. Perfectly Elastic Demand: When there is an infinite demand at a particular price and demand
becomes zero with a slight rise in the price, then demand for such a commodity is said to be
perfectly elastic. In such a case, Ed= æand demand curve DD is a horizontal straight line parallel to X –
axis as shown in Fig. 4.4
Perfectly Elastic Demand
Y (Ed = æ)
P DD
Price (in Rs.)
0 Q1 Q Q2 X
Quantity demanded (in Units)
Fig. 4.4
Table 4.4: Perfectly Elastic Demand
Price (In Rs.) Demand (In units)
30 100
30 200
30 300
As seen in the schedule, the quantity demanded can be 100 units, 200 units, 300 units and so on at the
same price of Rs. 30. In Fig.4.4, the quantity demanded can be OQ or OQ 1 or OQ2 at the same price of
OP.
It must be noted that perfectly elastic demand is an imaginary situation.
2. Perfectly Inelastic Demand: When there is no change in demand with change in price, then demand
for such a commodity is said to be perfectly inelastic. In such a case, Ed = 0and the demand curve DD
is a vertical straight line parallel to Y-axis as shown in Fig. 4.5.
Perfectly Inelastic Demand
(Ed = 0)
Y
DD
P1
(Price (in Rs.)
P
P2
O Q X
Quantity Demanded (in Units)
Table 4.5: Perfectly Elastic Demand

30 100
30 100
40 100
As seen in the schedule, the quantity demanded remains constant at 100 units, whether the price is Rs. 20,
Rs. 30. Or Rs. 40. In Fig. 4.5the quantity remains constant at OQ as the price changes from OP to OP1 or
OP2.
3. Highly Elastic demand: When percentage change in the quantity demanded is more than
percentage change in price, then demand for such a commodity is said to be highly elastic. In such
a case, Ed> 1. The highly elastic demand curve is flatter and its slope is inclined more towards X-axis, as
shown in Fig. 4.6.
Highly Elastic Demand (Ed > 1)
Y
D
P---------------------
Price (in Rs.)
P1
D
X
O Q Q1
Quantity Demand (In Units)
Table 4.6: Highly Elastic Demand
20 100
10 200
As seen in the schedule, the quantity demanded rises by 100% due to a 50% fall in price. In Fig.4.6, the
quantity demanded rises from OQ to OQ 1 with a fall in price from OP to OP 1. As OQ1 is proportionately
more than PP1, the elasticity of demand is more than 1. Commodity like AC, DVD Player, etc. generally
have highly elastic demand.
4. Less Elastic Demand: When percentage change in the quantity demanded is less than percentage
change in price, then demand for such a commodity is said to be less elastic or in-elastic. In such a
case, Ed< 1. The less elastic demand curve is steeper and its slope is inclined more towards Y – axis, as
shown in Fig, 4.7.
Less Elastic Demand

(Ed < 1)

Y
D
P1---------------------
Price (in Rs.)
D
X
O Q Q1
Quantity Demand (In Units) Fig. 4.7.
Table 4.7: Less Elastic Demand

20 100
10 120
As seen in the schedule, the quantity demanded rises by 20% due to a 50% fall in price. In Fig.4.7, the
quantity demanded rises from OQ to OQ1 with a fall in price from OP to OP 1. As OQ1 is proportionately less
than PP1, so, the elasticity of demand is less than 1. Commodities like salt, vegetables etc. generally
less elastic demand.
5. Unitary Elastic Demand: When percentage change in the quantity demanded is equal to percentage
change in price, then demand for such a commodity is said to be unitary elastic. In this case Ed = 1
and the demand curve is a rectangular hyperbola. Rectangular hyperbola is a curve under which the
total area at all points will be the same. It means, in Fig. 4.8, area of OPLQ is equal to the area of
OP1RQ1
Unitary Elastic Demand

(Ed > 1)
Y
D
P---------------------L
Price (in Rs.)
R
P1 D
X
O Q Q1
Quantity Demand
(In Units)
Fig. 4.8
Table 4.8: Unitary Elastic Demand

20 100
10 150
As seen in the schedule, the quantity demanded rises by 50% with a 50% fall in price. In Fig.4.8, the
quantity demanded rises from OQ to OQ 1 with a fall in price from OP to OP 1. As OQ1 is proportionately
equal to PP1, so, the elasticity of demand is equal to 1. Commodities like scooter, refrigerator etc.
generally unitary elastic demand.
Ed = æ
Price (in Rs.)
Ed> 1
Ed = 0 Ed< 1 Ed= 1
O X
Quantity demanded (in units)
Fig.4.9
Quick Recap – Coefficients of Ed
Type Value Description
Perfectly Elastic (Ed = æ) Infinite demand at same price
Perfectly Inelastic (Ed = 0) Same demand at all prices
Highly Elastic (Ed> 1) % ∆ in Demand > % ∆ in Price
Less Elastic (Ed< 1) % ∆ in Demand < % ∆ in Price
Unitary Elastic (Ed = 1) % ∆ in Demand = % ∆ in Price
Flatter the Curve, More is the Elasticity

 When 2 demand curves intersect each other, then the flatter curve is more elastic at the point of
intersection.
 In Fig. 4.10, demand curves DD (flatterer curve) and D1D1 (steeper curve) intersect each other at point
E. At this point, OQ quantity is demanded at the price of OP. when price rises from OP to OP 1, the
quantity demanded falls from OQ to OQ2 for demand curve DD and from OQ to OQ 1 for demand curve
D1D1.
Y
D D1 (Steeper Curve)
P1 ---------------------------

Price (in Rs.)
E
P
D1 D
X
O Q2Q1Q
Quantity Demand
(In Unit) Fig. 4.10
With the same change in price (PP 1), change in demand (OQ 2) in case of demand curve DD is more than
change in demand (OQ1) in case of demand curve D 1D1. It means,, demand is more elastic in case of DD
(flatter curve) as compared to D1D1 (Steeper curve).
1.5 FACTORS AFFECTING PRICE ELASTICITY OF DEMAND
1. Nature of Commodity:
 Elasticity of demand of a commodity is influenced by its nature. A commodity for a person may be
necessary, a comfort or a luxury.
 When a commodity is necessity (ed=0) like food grains, vegetables, medicines, etc., is demand is
generally inelastic as it is required for human survival and its demand does not fluctuate with
change in price.
 When a commodity is a comfort (ed<1) like fan, refrigerator, etc., its demand is generally elastic as
consumer can postpone its consumption.
 When a commodity is a luxury (ed>1) like AC, DVD player etc., its demand is generally more
elastic as compared to demand for comforts.
The term ‘Luxury’ is a relative terms as any item (like AC), may be luxury for a poor person but a
necessity for a rich person.
2. Availability of Substitutes: (ed>1)
 Demand for a commodity with large number of substitutes will be more elastic.
 The reason is that even a small rise in its prices will induce the buyers to go for its substitutes.
 For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-versa. Thus,
availability of close substitutes makes the demand sensitive to change in the prices.
 On the other hand, commodities with few or no substitutes like wheat and salt have less elasticity of
demand.
3. Income Level:
 Elasticity of demand for any commodity is generally less for higher income(ed<1) level group in
comparison to people with low incomes(ed>1).
 It happens because rich people are not influenced much by changes in the price of goods. But, poor
people are highly affected by increase or decrease in the price of goods. As a result, demand for
lower income group is highly elastic.
4. Level of Price:
 Level of price also affects the price elasticity of demand. Costly (ed>1) goods like laptop, AC, etc.
have highly elastic, demand as their demand is very sensitive to changes in their prices.
 However, demand for inexpensive(ed<1) goods like needle, match box, etc. is inelastic as change
in prices of such goods do not change their demand by a considerable amount.
5. Postponement of Consumption: (ed>1)

 Commodities like biscuits, soft drinks, etc. whose demand is not urgent, have highly elastic demand
as their consumption can be postponed in case of an increase in their prices.
 However, commodities with urgent demand like life- saving drugs, have inelastic demand because
of their immediate requirement.
6. Number of Uses: (ed> or < 1)
 If the commodity under consideration has several uses, then its demand will be elastic.
 When price of such a commodity increases, then it is generally put to only more urgent uses and,
as a result, its demand fails.
 When the prices fall, then it is used for satisfying even less urgent needs and demand rises.
 For example, electricity is a multiple –use commodity. Fall in its price will result in substantial
increase in its demand, particularly in those uses (like AC, heat convector, etc.) where it was not
employed formerly due to its high price.
7. Share in Total Expenditure:
 Less Spent:- Toothpaste, bootpolish, newspaper etc Demand is Inelastic
 More Spent :- Dresses, Scooter Etc demand is more elastic (ed>1).
8. Time period:
 Price elasticity of demand is always related to a period of time. It can be a day, a week, a month, a
year or a period of several years.
 Elasticity of demand varies directly with the time period.
 Demand is generally inelastic in the short period (ed=1). It happens because consumers find it
difficult to change their habits, in the short period, in order to respond to a change in the price of the
given commodity.
 However, demand is more elastic in long run (ed>1) as it is comparatively easier to shift to other
substitutes, if the price of the given commodity rises.
9. Habits: (ed<1)
 Commodities, which have become habitual necessities for the consumers, have less elastic
demand.
 It happens because such a commodity becomes a necessity for the consumer and he continues to
purchase it even if its price rises.
 Alcohol, tobacco, cigarettes, etc. are some examples of habit forming commodities.
Example 1:
When price is Rs. 10 per unit, demand for a commodity is 100 units. As the price falls to Rs. 8 per unit,
demand expands to 150 units. Calculate elasticity of demand.
Solution:

Original Quantity (Q) = 100 units Original Price(P) = Rs. 10
New Quantity (Q1) = 150 units New Price (P1) = Rs. 8
Change in Quantity (∆Q) = 50 units Change in Price (∆P) = - Rs. 2
Elasticity of Demand (Ed) = ?
Price Elasticity of demand Ed = ∆Q x P

∆P Q
= 50 x 10
-2 100
= (-) 2.5
Ans. Ed = (-) 2.5 (Demand is highly elastic as Ed> 1)
Example 2:
The demand for a good falls to 240 units in response to rise in price by Rs. 2. If the original demand
was 300 units at the price of Rs. 20, calculate price elasticity of demand.
Solution:
New Quantity (Q1) = 240 units Rise in Price (∆P) = Rs. 2
Change in Quantity (∆Q) = - 60 units New Price (P1) = Rs.22

∆P Q
= - 60 x 20
2 300
= (-) 2
Ans. Ed = (-) 2 (Demand is highly elastic as Ed> 1)
Example 3:
The market demand for a good at Rs. 4 per unit is 100 units. Due to increase in price, the market
demand falls to 75 units. Find out the new price, if the price elasticity of demand is (-) 1.
Solution:
New Quantity (Q1) = 75 units New Price (P1) = .?
Change in Quantity (∆Q) = - 25 units Change in Price (∆P) = ∆P
Elasticity of Demand (Ed) = (-) 1

∆P Q
1 = - 25 x 4
∆P100
∆P =Rs. 1
As the quantity demanded is decreasing, price will increase. It means.
New Price = original price (P) + Change in Price (∆P) = 4 + 1 = 5
Ans.New Price = Rs. 5
Example 4:
When price of a commodity falls by 80%, the quantity demanded of it increases by 100%. Find out its
price elasticity of demand.

Solution:
% Change in demand = 100% % Change in Price = - 80%
Price Elasticity of Demand (Ed) = Percentage change in Quantity Demanded

= 100%
- 80%
PriceElasticity of Demand (Ed) = (-) 1.25
Ans. (Ed) = (-) 1.25(Demand is highly elastic as Ed> 1)
Example 5:
A 5% fall in the price of x leads to 10% rise in the demand for x. A 20% rise in the price of y leads to 6%
fall in the demand for y. calculate the price elasticities of demand of x and y. Out of x and y, which
commodity is more elastic?
Solution:
Price Elasticity of Demand for ‘x’
% Change in Demand of x = 10% % Change in Price of x= - 5%

= 10%
- 5%
PriceElasticity of Demand (Ed) = (-) 2
Price Elasticity of Demand for ‘y’
% Change in Demand of y = - 6% % Change in Price of y = 20%

= - 6%
20%
Ans. Price Elasticity of x = (-) 2; price Elasticity of y = (-) 0.3; x is more elastic as compared to
commodity y.
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.
Example 6:
Calculate the price elasticity of demand for a commodity when its price increases by 25% and quantity
demanded falls from 150 units to 120 units.
(CBSE, Sample Paper 2012)
Solution:
Original Quantity (Q) = 150 units % Change in Price = 25%

New Quantity (Q1) = 120 units Elasticity of Demand (Ed) = ?
Change in Quantity (∆Q) = -30 units
Percentage change in Demand = ∆Q x 100

Q
= - 30 x 100
150
= - 20%
= - 20%
25%
Ans. Ed = (-) 0.8 (Demand is less elastic because Ed< 1)
Example 7:
The price of commodity is Rs. 15 per unit and its quantity demanded is 500 units. Its quantity
demanded rises by 80 units as a result of fall in its price by 20 per cent. Calculate its price elasticity of
demand. Is its demand inelastic? Give reason for your answer.
{(CBSE, Delhi 2005 (II)}
Solution:
Original Quantity (Q) = 500 units % Change in Price = -20%
Change in Quantity (∆Q) = 80 units Elasticity of Demand (Ed) = ?
New Quantity (Q1) = 580 units

Q
= 80 x 100
500
= 16%
= 16%
- 20%
Ans. Ed = (-) 0.8 (Demand is less elastic because Ed< 1)
Example 8:
A consumer spends Rs. 80 on a commodity when its price is Rs. 1 per unit and spends Rs. 96 when its
price is Rs. 2 per unit. Calculate price elasticity of demand for the commodity by the percentage
method?
Solution:
Price (Rs.) Total Expenditure Quantity (in units)
(Rs.) (Total Expenditure / price)

1 80 80
2 96 48

New Quantity (Q1) = 48 units New Price (P1) = Rs.2
Change in Quantity (∆Q) = - 32 units Change in Price (∆P) = Rs. 1
Percentage Change in demand = ∆Q x 100

Q
= - 32 x 100
80
= -40%
Percentage Change in Price = ∆P x 100

P
= 1 x 100
1
= 100%
Price Elasticity of Demand (Ed) = (-) 0.4
Ans. Ed = (-) 0.4 (Demand is lesselastic as Ed< 1)
Example 9:
A dentist was charging Rs. 300 for a standard cleaning job and it used to generate total revenue equal
to Rs. 30,000 per month. She has, since last month, increased the price of dental cleaning to Rs. 350.
As a result, fewer customers are now coming for dental cleaning, but the total revenue is now Rs.
33,250. From this, what we conclude about the elasticity of demand for her dental service?
Solution:
Fees (Rs.) Total Revenue Number of Customers
(Rs.) (Total Revenue / Fees)
300 30,000 100
350 33,250 95
Total Expenditure Method
With increase in fees, the total revenue of dentist has also increased. Hence, the elasticity of demand
for her dental service is less than one.
Proportionate Method
Original Quantity (Q) = 100 units Original Price(P) = Rs.300
Change in Quantity (∆Q) = - 5 units Change in Price (∆P) =Rs. 50

∆P Q
= - 5 x 300
50 100
= (-) 0.3
Ans. Ed = (-) 0.3 (Demand is lesselastic as Ed< 1)

Example 10:
The price elasticity of demand for good X is known to be twice that of good Y. price of X falls by 5%
while that of good Y rises by 5%. What is the percentage change in the quantities demanded of X and
Y?
Solution:
Percentage fall in price of x = 5%:
Percentage rise in price of Y = 5%
Also, Price Elasticity (Ed) of X will be 2.
Therefore, a 5% fall in the price of good X will lead to a 10% rise in the demand for X and a 5% rise in the price
of good Y will lead to a 5% fall in the demand for Y.
Ans. Quantity of X will rise by 10%;
Quantity of Y will fall by 5%.
Example 11:
The price elasticities of demand for good X and Y are known to be 1 and 2 respectively. Price of X rises
by 5% while that of good Y falls by 5%. What are the percentage changes in the quantities demanded of
X and Y?
Solution:
Percentage change in the quantity of X
1 = Percentage change in Quantity Demanded
5
Percentage change (fall) in the quantity of X = 5%
Percentage change in the quantity of Y
2 = Percentage change in Quantity Demanded
5
Percentage change (rise) in the quantity of Y = 10%
Ans. Quantity of X will fall by 5%;

Quantity of Y will rise by 10%.
Example 12:
The demand for goods X and Y have equal price elasticity. The demand of X rises from 100 units to 250
units due to a 20 per cent fall in its price. Calculate the percentage rise in demand of Y, if its price falls
by 8 per cent.
Solution:
Original Quantity (Q) = 100 units % Change in Price = -20%
Change in Quantity (∆Q) = 150 units

Q
= 150 x 100
100

= 150%
= 150%
- 20%
Now, Price Elasticity of Good Y = (-) 7.5 (as both X and Y have same price elasticity),
Let us now calculate % rise in Demand for Y
% Rise in Demand = ? % Change in Price = - 8%
Elasticity of Demand (Ed) = (-) 7.5
(-) 7.5 = Percentage change in Quantity Demanded
- 8%
Percentage rise in demand = 60%
Ans. Demand for Good Y will be rise by 60%.
Example 13:
The price elasticity of demand of good X is held the price elasticity of demand of Good Y. A 25% rise in
the price of good Y reduces its demand from 400 units to 300 units. Calculate percentage rise in
demand of Good X when its price falls from Rs. 10 to Rs. 8 per unit.
Solution:
In the given example, we will first calculate Price Elasticity of Good Y
Original Quantity (Q) = 400 units % Change in Price = 25%
Change in Quantity (∆Q) = -100 units

Q
= -100 x 100
400
= 25%
= - 25%
25%
Now, Price Elasticity of Good X = (-) 0.5 (as elasticity of demand of good X is half the price elasticity of
demand of Good Y),
Let us now calculate % rise in Demand for X
Original Price(P) = Rs. 10 % Rise in Quantity = ?
Change in Price (∆P) = Rs. 8 Elasticity of Demand (Ed) = (-) 0.5
New Price (P1) = - Rs. 2
Percentage change in Price =∆P x 100

P
= - 2 x 100

10
= - 20%
(-) 0.5 = Percentage change in Quantity Demanded
- 20
Percentage rise in demand for X = 10%
Ans. Demand for Good X will rise by 10%.
Example 14:
The percentage change in demand is three times the percentage change in price. If original demand
was 30 units at the price of Rs. 7 per unit, then calculate the price elasticity of demand, given price
increased by 10%. Indicate whether the demand is elastic or not, also calculate the new quantity
demanded.
Solution:
Give: percentage change in demand = 3 times of percentage change in Price
i.e. % change (fall) in demand = 3 x 10 = - 30% (as price has increased by 10%)
PriceElasticity of Demand (Ed) =- 30
10
As price is increasing, the quantity demanded will fall, it means,
New Quantity = Original Quantity (Q) - % Fall in demand
= 30 – 30% of 30
= 30 – 9
= 21 units
Ans. Price Elasticity of demand (Ed) = (-) 3; Demand is highly elastic as Ed> 1: New Quantity = 21 units.
Example 15:
If ratio of change in quantity (∆Q) to original quantity (Q) is 0.5 and elasticity of demand is (-) 1.25.
Calculate the percentage change in price.
Solution:
Given ∆Q = 0.5 (Positive value indicated that quantity has increased. It means, new price is
Q
less than the original price, i.e., price has decreased).
.
Percentage change in Price =∆Q x 100
Q
= 0.5 x 100
= 50%
(-) 1.25=50%
Percentage change (rise) in Quantity demanded = 20%.
Percentage change (Fall) in price = 40%.
Example 16:
If ∆Q= -0.6 and price elasticity is (-) 0.75, calculate the percentage change in price.
Q
Also calculate the new expenditure if initial expenditure was Rs. 500 at the price of Rs. 20.
Solution:
Calculation of Percentage Change in Price
Given ∆Q= 0.6 (Negative value indicates that quantity has decreased. It means, new price
Q
is more than the original price. i.e., price has increased.)the new price is less than the original price, i.e
Percentage change in Price =∆Q x 100
Q
= - 0.6 x 100
= - 60%
Price Elasticity of Demand (Ed) = - 60%
(-) 0.75 = - 60%
Percentage change (rise) in price = 80%.
Calculation of New Expenditure
Initial Expenditure = original Quantity (Q) x Original Price (P) = 500
= Q x 20 = 500
i.e., Q = 25
New Quantity (Q1) = Original Quantity + Change in Quantity
= 25 + (25 x – 60%)
= 25 – 15
= 10 Units
New Price (P1) = Original Price + Change in Price
= 20 + (20 x – 80%)
= 20 + 16
= Rs. 36
New Expenditure = New Quantity (Q1) x New Price (P1)
= 10 x 36
= Rs. 360
Example 17:
The demand function of commodity ‘X’ is given as: Q x = 20 – 2Px. Calculate its price elasticity of
demand when price falls from Rs. 5 to Rs. 3.
Solution:
Change in Quantity (∆Q) = 4 units Change in Price (∆P) = - Rs. 2
∆P Q
= 4x 5
-2 100
= (-) 1
Ans. Ed = (-) 1 (Demand is Unitary elastic as Ed = 1)
Negative sign of Ed indicate the inverse relationship between price and quantity demanded.
Example 18

The demand for commodity ‘A’ rises by 20% due to fall in price by Rs. 2 from the original price of Rs. 8.
(i) Calculate elasticity of demand by ‘Percentage Method’.
(ii) Whether demand of ‘A’ is elastic or inelastic? Give reason for your answer
(iii) What will be the shape of demand curve of A?
(iv) If new demand of commodity ‘A’ is 84 units, then calculate its original demand.
(v) Determine the price elasticity by ‘Total Expenditure Method’.
(vi) Whether price elasticity of demand calculated in (i) and (v) give the same answer?
Solution: (i)
Original Price(P) = Rs. 8 % Rise in Quantity = ?
Change in Price (∆P) = -Rs. 2 Elasticity of Demand (Ed) = (-) 0.5
New Price (P1) = Rs. 6
Percentage change in Price =∆P x 100

P
= - 2 x 100
8
= - 25%
Ed = Percentage change in Quantity Demanded
Ed =20%
- 25%
= (-) 0.8 or 0.8
It must be noted that E d is always a negative number due to inverse relationship between price and quantity
demanded. So, negative sign is always implied. So, in the given case, E d can be written as (-) 0.8 or
0.8.
(ii) Demand of ‘A’ is inelastic as elasticity of demand (0.8) is less than 1.
(iii) The demandof ‘A’ will be a Downwards Sloping Steeper Curve. It will be downward sloping due to inverse
relationship between price and quantity demanded. It will be a steeper curve as demand is inelastic.
(i) Let the original demand be x.
We know; Original Demand + Rise in Demand = New Demand
X + 20% of x = 84 units
0r x + 20 x
100 = 84 units
Or, 120 x = 8,400 units
X or Original Demand = 70 Units
(ii) Price Elasticity by Total Expenditure Method
Price (Rs.) Quantity Total Expenditure in Rs.
(in Units) (Price x Quantity)
8 70 560
6 84 504
Demand is less elastic (Ed< 1) as total expenditure also falls with fall in price.
(iii) No, Price elasticity in (i) and (v) do not give the same absolute value. Price elasticity of demand is
determined at 0.8 in (i) by Percentage Method. However, price elasticity by Total Expenditure method
provides only a rough measure of elasticity (Ed< 1) and cannot give the exact magnitude of elasticity.

EXAMPLE 19. A consumer spends Rs. 1,000 on a good priced at Rs. 10 per unit. When its price falls by
20 per cent the consumer spends Rs. 800 on the good. Calculate the price elasticity of demand by the
Percentage method. (CBSE, All India 2015 (I)
(Price Elasticity of Demand (Ed) = 0)
EXAMPLE 20 What will be the effect of 10 percent rise in price of a good on its demand if price elasticity of demand is
(a) Zero, (b) -1, (c) -2. Ed=0, 10% decrease, 20%
EXAMPLE21 When price of a commodity X falls by 10 per cent , its demand rises from 150 units to 180 units . Calculate
is price elasticity of demand . How much should be the percentage fall in its price so that its demand rises from 150 to
210 units?
Year – 2017 ed=2 , 20%
EXAMPLE 22 When the price of a good rises from rs. 10 per unit to rs. 12 per unit , its quantity demanded falls by 20
per cent. Calculate its price elasticity of demand . how much would be the percentage change in its quantity
demanded , if the price from rs.10 per unit to 12 per unit. Ed=1 ,30%.
EXAMPLE 23 When price of good rises by 20 per cent its demand falls by 40 per cent . Calculate its elasticity of
demand.
EXAMPLE 24 A consutmer spends rs. 1000 on a food priced at rs. 8 per unit . when prices rises by rs25 per unit , the
consumer continues to spend rs 1000 on the good. Calculate price elasticity of demand by percentage method . ed =
-0.8

Micro CH-4 Elasticty of Demand

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JVM INSTITUTE BY LALIT KUKREJA JI 9213922047,9899009023

PRICE ELASTICITY OF DEMAND

4METHODS FOR MEASURING PRICE ELASTICITY OF DEMAND

The main methods for measuring price elasticity of demand are:

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1. Percentage change in Quantity demanded = Change in Quantity (∆Q)x 100

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Table 4.5: Perfectly Elastic Demand

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Less Elastic Demand

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Table 4.7: Less Elastic Demand

Unitary Elastic Demand

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Flatter the Curve, More is the Elasticity

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1.5 FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

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Price Elasticity of demand Ed = ∆Q x P

Price Elasticity of demand Ed = ∆Q x P

Price Elasticity of demand Ed = ∆Q x P

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Price Elasticity of Demand (Ed) = Percentage change in Quantity Demanded

Price Elasticity of Demand (Ed) = Percentage change in Quantity Demanded

Price Elasticity of Demand (Ed) = Percentage change in Quantity Demanded

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Percentage change in Demand = ∆Q x 100

Percentage change in Demand = ∆Q x 100

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Original Quantity (Q) = 80 units Original Price(P) = Rs. 1

Percentage Change in demand = ∆Q x 100

Percentage Change in Price = ∆P x 100

Price Elasticity of demand Ed = ∆Q x P

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Ans. Quantity of X will fall by 5%;

Percentage change in Demand = ∆Q x 100

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Percentage change in Demand = ∆Q x 100

Percentage change in Price =∆P x 100

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Percentage change in Price =∆P x 100

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