ch-5 Elasticity & Its Application Completed

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B.Com / BA / B.Sc– 1st Semester

Micro – Economics (GE)
CHAPTER – 5
Elasticity & Its Application
Elasticity of Demand
Elasticity of demand is defined as the responsiveness of the quantity demanded of a good
due to changes in one of the variables on which demand depends (like Price, Income of
the consumer, Price of related goods, other variables).
These variables are :
1. Price of the commodity – Price Elasticity of demand
2. Price of related commodities – Cross Elasticity of demand.
3. Income of the consumers – Income elasticity of demand.
It is to be noted that when we talk of elasticity of demand, unless and until otherwise
mentioned, we talk of price elasticity of demand.
Topic-1 : Price Elasticity of Demand

It is defined as the responsiveness of the quantity demanded of a good due to change in
price when all the factors held constant.
Price elasticity of demand tells us the percentage change in quantity demand for each one
percent (1%) change in its price.
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒆𝒅
PED = (-)
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆
ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

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INTERPRETATION OF NUMERICAL VALUE OF

ELASTICITY OF DEMAND
When prices of different commodities change, the quantity demanded of each commodity reacts
in a different manner. So, there are five types of Degrees (Values) of Price Elasticity of Demand.
1. Elasticity is one, or Unitary (Ed=1) if, percentage change in the quantity

demanded is equal to percentage change in price. In this case demand
curve is rectangular hyperbola. Rectangular hyperbola is a curve under
which the total area at all points will be the same.
2. Elasticity is Less than one, (Ed<1) When percenatge change in the

quantity demanded is less than percentage change in price, in such case
demand is said to be Relatively Inelastic demand. Quantity demand is
relatively insensitive to price. Demand curve line is fairly steep.
In this case demand curve is steeper and Inclined more towards Y- axis.
3. Elasticity is more than one (Ed>1) When percentage change in quantity

demand is more than percentage change in price, in such case demand is
said to be Relatively Elastic Demand. Quantity demand is relatively
sensitive to price. Demand curve line is fairly flat.
In this case demand curve is flatter and Inclined more towards X- axis.
4. Perfectly (complete) Inelastic Demand (Ed = 0), When there is no

change in demand with change in price, then demand is said to be
perfectly Inelastic. In this case demand curve is Vertical straight line and
parallel to Y- axis.
5. Perfectly (infinitely) Elastic Demand (Ed = ∞), When there is change in

demand at prevailing price in the market, then demand is said to be
Perfectly Elastic Demand. In this case demand curve is Horizontal
straight line and parallel to X- axis. This type of demand curve found in
perfectly competitive market.

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There are four method of measuring Price Elasticity of Demand :
1) Percentage Method
2) Point Method (Using Derivative & Geometric Method)
3) Arc Method
4) Total Outlay (Expenditure) Method
Method – I : Percentage Method

This method is also called Proportionate Method & Mathematical Method & Flux Method.
It is the most common method for measuring the price elasticity of demand (Ed). This
method was introduced by Prof. Marshall.
According to this Method, Elasticity is measured as the ratio of percentage change in the
quantity demanded to percentage change in the Price, other factors remaining constant.

PED =
OR
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚
×𝟏𝟎𝟎
PED = 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆
𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝑷𝒓𝒊𝒄𝒆
×𝟏𝟎𝟎
OR
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝑷𝒓𝒊𝒄𝒆
PEd = ×
𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆
In symbolic terms
∆𝑄 𝑃 ∆𝑄 𝑃
PEd = × OR PEd = ×
𝑄 ∆𝑃 ∆𝑃 𝑄
Where, P = Initial Price Q = Initial Quantity

∆Q = Change in Demand ∆P = change in Price ∆Q = Q1 - Q
Q1 = New Demand P1 = NewPrice ∆P = P1 - P
Note :
1) Since price and quantity are inversely related (with a few exceptions), price elasticity is
negative.

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2) But, for the sake of convenience, we ignore the negative sign and consider only
the numerical value for the elasticity.
3) While giving the value of price elasticity in examination, ignore the negative sign.
Give your answer as positive value.
Method – II : Point (Geometric) Elasticity / Method

Geometric Method (Used in Case of Linear Demand Curve)
• According to this method, Price Elasticity is measured on different points of a
simple straight line demand curve.
• Price elasticity of demand is different at different points on a straight line demand
curve, even the slope is same on straight line demand curve.
• To know the elasticity of demand at any point, a point is so drawn on demand
curve. This point divide the demand curve in two parts.
• Lower segment of the demand curve is divided by the upper segment of demand
curve. The resultant dividend will indicate price elasticity of demand.
• When we go upward to the curve, elasticity is high, when we move downward on
the curve elasticity will be low.
• Formula:
𝑳𝒐𝒘𝒆𝒓 𝒔𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 𝑪𝒖𝒓𝒗𝒆

Ed =
𝑼𝒑𝒑𝒆𝒓 𝒔𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝒅𝒆𝒎𝒂𝒅𝒏 𝒄𝒖𝒓𝒗𝒆
In the adjoining figure, AB is straight line demand curve which touches both the axis. D is the mid
point, C is located in the upper section and E is located in the lower section. According to the
point method Ed on different point is:
𝑫𝑩 𝟎
At point D = =1 At point B = =0
𝑫𝑨 𝑨𝑩
𝑪𝑩 𝑨𝑩
At point C = >1 At point A = =∞
𝑪𝑨 𝟎
𝑬𝑩
At point E = <1
𝑬𝑨
Thus we see that as we move from B to A, elasticity goes on increasing. And we move
from A to B, elasticity goes in decreasing. At, the mid point it is equal to one, at point A it
is infinity and at point B it is Zero.

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Method – III : Arc Elasticity / Arc Method / Mid point Method

• Often we may required to calculate elasticity, over some portion of demand curve
rather than at a single point. In other words, elasticity may be calculate over a range
of price. For this, we use Arc method of elasticity of demand.
• An arc is the portion between two points on a demand curve.
• If there is large change in price and quantity demanded, then existing percentage
method was not so useful, then the percentage formula is modified.
• When price elasticity is found between two prices (or two points on the demand
curve), the questions arises which price and quantity should be taken as base
(original). This is because elasticities found by using original price and original
quantity as base will be different from the one derived by using new price and
quantity figures.
• Therefore, in order to avoid confusion, generally mid point method (Arc Method) is
used i.e., the average of two price and quantities are taken as (new and original
both) base. The Arc elasticity can be found by using the formula :
𝑞1−𝑞2 𝑝1+𝑝2
PEd = ×
𝑞1+𝑄2 𝑝1−𝑝2
Or
∆𝑸.(𝑷𝟏+𝑷𝟐)
Ed =
∆𝑷 (𝑸𝟏+𝑸𝟐)
Where P1, Q1 are the original price and quantity, and P2, Q2 are the new ones.
Question : Suppose, price of an ice cream is Rs. 4 and demand is for 1 unit of ice cream.
When price of ice cream falls to Rs. 2 demand extend to 4 units of ice cream.
Ans: DO yourself
Note:
• Arc Elasticity method is, therefore more realistic and dependable method than
percentage method. In the first case, it will be greater than unity (6) or elastic and
in the second case it will be less than unity (0.75) or inelastic.
• The arc method (mid point formula) has the advantage of consistent elasticity
value when price move in either direction.

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Method – IV : Total Expenditure/Revenue (Outlay) Method

Total expenditure or Outlay method of measuring elasticity of demand was developed by
Dr. Marshall. According to this method, elasticity is measures on the basis of change in
total expenditure (P×Q) due to change in the price of the commodity. When the price of
goods change, three situations can take place.
1. Equals to One (Ed=1)
When the price of a commodity rises or falls but total expenditure (total Revenue)
remains constant, then it will Ed is Unitary Elastic (Equals to one). In other words, there
will be no change in total expenditure (total Revenue) due to change in price of the
commodity. In the table, when price rises from Rs. 4 to Rs. 8, the expenditure is constant
at Rs. 32. Similarly, when price falls from Rs. 8 to Rs.2, the expenditure is constant at Rs.
32.
Price (₹) Demand Total Exp.
4 8 32
8 4 32
2 16 32
2. Greater than One (Ed>1)

When total expenditure (total Revenue) changes due to change in the opposite direction
of price, then the elasticity of demand is said to be greater than one. It means the total
expenditure (total Revenue) increases with fall in price and total expenditure (total
Revenue) decreases with rise in price, then Ed for that commodity is greater than one.
4 8 32
8 2 16
2 20 40
3. Less than One (Ed<1)
When total expenditure changes in the same direction of price, then the elasticity of
demand is said to be Less than one. It means the total expenditure increases with rise in
price and total expenditure decreases with fall in price, then Ed for that commodity is
Less than one.
4 6 24
8 4 32
2 8 16

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Quick Revision
Price TR/TE Relation Value
Increase Unchanged No Relation Ed = 1
Decrease Unchanged (Unitary Elastic)
Increase Decrease Indirect Relation Ed>1
Decrease Increase Elastic
Increase Increase Direct Relation Ed<1
Decrease Decrease Inelastic
The main drawback of this method is that by using this we can only say whether the
demand for good is elastic or inelastic, we cannot find the exact coefficient of price
elasticity.
Topic-2 : Income Elasticity of Demand
Income elasticity of demand measures the responsiveness change in the demand of a

commodity due to change in the income of consumer, when the price of the commodity
and related goods remain constant. Income elasticity of demand is calculated as the
percentage change in quantity demanded to percentage change in income. That is

Ei =
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑰𝒏𝒄𝒐𝒎𝒆
OR
∆𝑄 𝑌 ∆Q = Q1 - Q
Ei = ×
∆𝑌 𝑄 ∆Y = Y1 - Y
Where, Y = Initial Income Q = Initial Quantity
∆Q = Change in Demand ∆Y = change in Income
Q1 = New Demand Y1 = New Income
Types of Income Elasticity of Demand

Income elasticity can be positive, negative or zero. Income elasticity can take five
different values. These are:

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POSITIVE INCOME ELASTICITY
1. Greater than One
This occurs when the percentage change in quantity demanded is greater than the
percentage change in income. It is called high income elasticity.
2. Equal to One
This occurs when the percentage change in quantity demanded is equal to the
percentage change in income. It is called unitary income elasticity.
3. Less than One (But more than Zero)

This occurs when the percentage change in quantity demanded is less than the
percentage change in income. It is called low income elasticity.
ZERO INCOME ELASTICTY

4. Equal to Zero
This occurs when there is no change in the quantity demanded with change in
income. It is called zero income elasticity.
NEGATIVE INCOME ELASTICTY

5. Less than Zero
This occurs when the percentage change in the quantity demanded is negative with
change in income. It is called negative income elasticity. It holds in case of inferior
goods.
Quick Revision
Value of Ey Situation Terminology
Ey > 1 % ∆ in demand > % ∆ in income High income elasticity
Ey = 1 % ∆ in demand = % ∆ in income Unitary income elasticity
0 < Ey < 1 % ∆ in demand < % ∆ in income Low income elasticity
Ey = 0 Same demand at different income Zero income elasticity
Ey < 0 % ∆ in demand is negative at Negative income elasticity
different Income

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Topic-3 : Cross Elasticity of Demand

• The demand for a particular commodity may change due to changes in the price of
related goods. these related good may be either complementary goods or
substitute goods. This type of relationship is studied under ‘cross demand’.
• Cross demand refers to the quantities of a commodity or service which will be
purchased due to change in the price of its related goods, other things being
constant.
• For example change in the price of tea ordinarily causes change in demand for
coffee (here the price of coffee remain same). Likewise change in the price of cars
causes change in demand for petrol (here the price of cars remain same).
Meaning of cross elasticity of demand : The cross elasticity of demand (Ec) is a quantitative
measure of the effect on the quantity demanded of Good – X due to change in the price of
Good – Y. The cross elasticity can be calculated as percentage change in quantity demanded of
Good – X is divided by percentage change in the price of Good – Y.
It can be written as :
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒆𝒅 𝒐𝒇 𝑿

Ec =
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝒀
∆𝑄𝑥 𝑃𝑦 ∆Q = Q1 - Q
OR Ec = ×
∆𝑃𝑦 𝑄𝑥 ∆P = P1 - P
Where, Py = Initial Price of good y Qz = Initial Quantity demanded of good X
∆P = change in Price of Good y ∆Qx = Change in Demand of Good X
P1 = NewPrice of Good y Q1 = New Demand of Good X

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Nature of degree of Cross Elasticity of Demand

1. Positive cross elasticity (substitute goods)
When goods are substitute of each other then cross
elasticity of demand is positive. In other words, when an
increase in the price of Y leads to an increase in the
demand of X, it is called positive cross elasticity of
demand. For example, with the increase in price of tea,
demand of coffee will increase.
In fig. quantity has been measured on X-axis and price on
Y-axis. At price OP of Y-commodity, demand of X-
commodity is OM. Now as price of Y commodity increases
to OP1 demand of X-commodity increases to OM1 Thus, cross elasticity of demand is
positive.
2. Negative Cross Elasticity (Complementary goods)

In case of complementary goods, cross elasticity of demand is negative. A
proportionate increase in price of one commodity leads to
a fall in the demand of another commodity because both
are demanded jointly, it is called Cross Elasticity of
Demand.
In fig. quantity has been measured on X-axis while price
has been measured on Y-axis. When the price of
commodity increases from OP to OP1 quantity demanded
falls from OM to OM1. Thus, cross elasticity of demand is
negative.
3. Zero Cross Elasticity of Demand :

Cross elasticity of demand is zero when two goods are
not related to each other. For example, increase in price
of car does not affect the demand of cloth. Thus, cross
elasticity of demand is zero. It has been shown in fig.
In the case of cross price elasticity of demand, the sign (plus or minus) is very important: it
tells us whether the good is substitute or complementary.

Topic-4 : Determinants of price elasticity of demand
1) Availability of Substitutes :
If a commodity has large numer of substitute, then demand for such commodity is
more elastic. because If there is an increase in price of the commodity, their people
will start using substitue commodities. While, Commodities with few or no
substitute have less elastic demand.
2) Position of commodity in consumer’s budget :

If the Proportion of income spent on the commodities is high, the demand for such
commodities is elastic. On the other hand, If the proportion of income spent on
the commodities is low, then the demand for such commodities is Inelastic.
3) Nature of goods
Necessities goods like food grains, vegetables, medicine etc have an Inelastic
demand because one can not easily live without it, while luxury goods and comfort
good like, fan, refrigerator, AC etc. have an Elastic Demand, because one can easily
live without it.
4) Postponement of Consumption
The demand for commodities is elastic, whose consumption can be postponed for
sometime such as the demand of Television, Car etc. On the other hand,
commodities with urgent demand like life saving drugs, food, necessity have
Inelastic demand.
5) Different uses of the commodity

If the commodity has several uses, then its demand will be more elastic. Because
when its price fall, it can be put to several uses. Similarly, To illustrate, milk has
several uses. If price falls, it can be used for a variety of purposes like production of
curd, cream, ghee and sweets. when the price rises, it is withdrawn from many
existing uses, its use will be restricted only to essential purpose like feeding the
children and sick person. On the other hand, a commodity with no alternative uses
has Less elastic Demand.

6) Time Period
Demand is generally Inelastic in the short period. Because it is difficult to change
habits and find substitutes in short period. While, Demand is more elastic in Long
period because it is easier to change habits in long run and find substitutes /
alternative.
For example, in response to higher petrol price, one can, in the short run, make
fewer trips by car. In the longer run, not only can make fewer trips, but he can one
make fewer trips, but he can purchase a car with a smaller engine capacity. Hence
one’s demand for petrol falls y more when one has made long term adjustment to
higher prices.
7) Consumer habits :
If consumers are habituated of some commodities, have Inelastic demand like
Cigarettes, Alcohol, tobacco etc. because it becomes a necessity for the consumer,
no matter how much its price change. But if the consumer is not habitual of such
commodities then they have Elastic demand.
8) Income Level
Demand for higher income group is less elastic Because rich people are not affected
much by changes in the price of good. While, demand for lower income group is
more elastic Because poor people are highly affected by increase or decrease in the
prices of goods.

ELASTICITY OF SUPPLY
Topic – 5 : Price Elasticity of Supply
Price Elasticity of Supply can be defined as a measure of responsiveness of a quantity
supplied to change in the price of commodity.
OR
Price elasticity of supply can be defined as the percentage change in quantity supplied
of a commodity divided by the percentage change in its price.
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑺𝒖𝒑𝒑𝒍𝒊𝒆𝒅

Es =
Method : Percentage Method or Proportionate Method

It is the most common method for measuring the price elasticity of Supply (Es). This
method is also known as ‘Proportionate Method’.
According to this Method, Elasticity is measured as the ratio of percentage change in the
quantity Supplied to percentage change in the Price.
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑺𝒖𝒑𝒑𝒍𝒊𝒆𝒅
Es =
∆𝑄 𝑃 ∆Q = Q1 - Q
OR Es = ×𝑄
∆𝑃 ∆P = P1 - P
Where, P = Initial Price Q = Initial Quantity

P1 = NewPrice Q1 = New Supply
∆P = change in Price ∆Q = Change in Supply

Topic – 6 : Degrees of Price Elasticity of Supply
When prices of different commodities change, the quantity Supplied of each commodity reacts
in a different manner. So, there are five types of Degrees of Price Elasticity of Supply.
1. Unitary Elastic Supply (Es = 1)

When percentage change in the quantity Supplied is equal to
percentage change in price, then supply for such commodity is
said to be unitary Elastic. In this case Es=1 and supply curve is
straight line passing through origin. In this case, the
coefficient of elasticity is one.(Es = 1)
2. Less than Unitary Elastic (Es<1)

When percentage change in the quantity Supplied is less than
percentage change in price, then supply for such a commodity
is said to be less than unitary. In other words, the quantity is
not very responsive to price. It is also known as less elastic or
Inelastic Supply. In this case Es<1 and supply curve is steeper
and has an intercept on X- axis (cuts the X- axis in positive
range). The coefficient of elasticity falls in the range 0 < Es <
1.
3. Greater than Unitary Elastic (Es>1)
When percentage change in quantity supplied is more than
percentage change in price, then supply for such commodity
is said to be greater than Unitary Elastic. quantity supplied of
a good changes substantially in response to a small change in
the price of the good. It is also known as Highly elastic or
Elastic Supply. In this case coefficient of Es>1 and supply curve
is flatter and has an intercept on Y-axis (cuts the X-axis in
negative range).
4. Perfectly Inelastic Supply or Zero Elasticity supply (Es = 0)

When there is no change in Supply with change in price, then
supply for such a commodity is said to be perfectly Inelastic.
In other words, the quantity supplied is unaffected by any
change in price. It is also known as Zero Elasticity of Supply.

In this case Es=0 and supply curve is Vertical straight line and
parallel to Y- axis.
5. Perfectly Elastic Supply (Es = ∞)
When there is change in Supply at prevailing(fixed) price in
the market, then supply for such a commodity is said to be
Perfectly Elastic supply. Infinitesimally small change in price
results in an infinitely large change in quantity supplied
indicating that producers will supply any quantity demanded at
that price. In this case supply curve is Horizontal straight line
and parallel to X- axis.
Quick Revision
Types Value Description Shape of supply Curve
Unitary Elastic Es = 1 % ∆ in supply = % ∆ in Price Straight line passing through origin
Less than Unitary Es<1 % ∆ in supply < % ∆ in Price Steeper, Intersects X- axis
Greater than Unitary Es>1 % ∆ in supply > % ∆ in Price Flatter, Intersects Y- axis
Perfectly Inelastic Es = 0 Same supply at different Price Parallel to Y-axis
Perfectly Elastic Es = ∞ Different supply at Same Price Parallel to X-axis
Important points
1. All the supply curve which pass through origin are unitary Elastic, irrespective of the
angle it make with origin.
2. If two straight line supply curves intersects each other, then the flatter supply has more
elasticity as compared to steeper supply curve at point of intersection.
Topic – 7 : Determinants of Price Elasticity of Supply

The more easily sellers can change the quantity they produce, the greater the price
elasticity of supply. Following are the general determinants of elasticity of supply:
1) Time Period
In the short period, supply is less elastic, because in short period factors of
production are not easily adjustable. But, In the long period supply is More Elastic,
because all the factors are easily adjustable. .
2) Cost of Production

If increase in production causes substantial increase in costs, producers will have
less incentive to increase quantity supplied in response to increase in price and
therefore, price elasticity of supply would be less. If there are constant costs or
negligible rise in costs as output increases, supply will be elastic.
3) Technique of Production
In case of production of commodity, supply will be less elastic if it involves the use
of complex technique of production. Output of such goods cannot be easily
increased with increased in their prices. On the other hand, use of a simple
technology facilitates quicker changes in output and supply. Hence, supply is more
Elastic.
4) Nature of Commodity
Nature of the commodity is an important determinant of the price Elasticity of
Supp. Perishable like food vegetables, fruits etc. have an Inelastic Supply, while
luxury goods and comfort good like, fan, refrigerator, AC etc. have an Elastic
Supply.
5) Risk Taking
If supplier/producer are willing to take risk, the supply will be more elastic. On the
other hand, if entrepreneurs are reluctant to take risk, the supply will be less
elastic.
6) Availability of Facilities (Production Facilities)

If There are more production facilities, then supply of goods is more elastic. And if
there is less production facilities, then supply of good is less elastic or inelastic.

Case Studies
Case-1 : Can Good News for Farming Be Bad News for Farmers?
Video Link : https://youtu.be/oiHe6c2_nNs
As we know that, Demand for Wheat (essential good) is inelastic and Supply for wheat is also
Inelastic (because production of wheat depends upon nature.) We can see in the Diagram, D1 is the
original demand curve (Steeper) and S1 is the original Supply curve (Steeper).
Demand Curve & Supply curve Intersects at point E (Equilibrium Point). At E, Equilibrium price is ₹
3 and Equilibrium Quantity is 100 units. In this case total revenue is generated ₹300.
Suppose there is a good news for farmers. Government introduces a new hybrid seeds for the
production of wheat. It increases the Production of wheat on same land than before.
In this case, the discovery of the new hybrid seeds affects the supply curve. Because the hybrid seeds
increases the amount of wheat that can be produced on each acre of land, farmers are now willing to
supply more wheat. In other words, the supply curve shifts to the right. The demand curve remains
the same because consumers’ desire to buy wheat products is not affected by the introduction of a
new hybrid seeds.
(Draw Diagram Yourself From Video)

Diagram shows an example of such a change. When the supply curve shifts from S1 to S2, the
quantity of wheat sold increases from 100 to 110 and the price of wheat falls from ₹3 to ₹2.Total
revenue falls from ₹300 to ₹220. Thus, the discovery of the new hybrid lowers the total revenue that
farmers receive from the sale of their crops.
If farmers are made worse off by the discovery of this new hybrid, so why they adopt it. The answer
is “how competitive markets work”. Because each farmer is having a small part of the market, They
takes the price which is determined by the industry. For given price of wheat, it is better to use the
new hybrid to produce and sell more wheat. Yet when all farmers do this, the supply of wheat
increases, the price falls, and farmers are worse off.

Case-2 : Why Did OPEC Fail to Keep the Price of Oil High?
Video Link : https://youtu.be/Y9N_5a-LLkA
The Organization of the Petroleum Exporting Countries is an intergovernmental organization or cartel
Founded on 14 September 1960 in Baghdad (Iraq) by the first five members, namely Islamic
Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
In the 1970s, members of the OPEC decided to raise the world price of oil to increase their incomes.
These countries accomplished this goal by agreeing to jointly reduce the amount of oil they supplied.
As a result, the price of oil rose more than 50 percent from 1973 to 1974.
Then, a few years later, OPEC did the same thing again. From 1979 to 1981, the price of oil
approximately doubled.
Yet OPEC found it difficult to maintain such a high price.
From 1982 to 1985, the price of oil steadily declined about 10 percent per year. Dissatisfaction soon
prevailed among the OPEC countries.
In 1986, cooperation among OPEC members completely broke down, and the price of oil plunged 45
percent.
In 1990, the price of oil was back to where it began in 1970, and it stayed at that low level throughout
most of the 1990s.
In the short run, both the supply and demand for oil are relatively inelastic. Supply is inelastic
because the quantity of oil reserves and the capacity for oil extraction cannot be changed quickly.
Demand is inelastic because buying habits do not respond immediately to changes in price. Thus in
the diagram, the short-run supply and demand curves are steep. When the supply of oil shifts from S1
to S2, the price increase from P1 to P2 is large.
The situation is very different in the long run. Over long periods of time, producers of oil outside
OPEC respond to high prices by increasing oil exploration and by building new extraction capacity. It
shows elastic supply.
Consumers also respond with this, such as by replacing old inefficient cars with newer efficient ones.
It shows elastic demand.

Thus in the diagram, the long-run supply and demand curves are more elastic. In the long run, the
shift in the supply curve from S1 to S2 causes a much smaller increase in the price.
This analysis shows why OPEC succeeded in maintaining a high price of oil only in the short run.
But, OPEC reduction in supply proved less profitable in the long run. The cartel learned that raising
prices is easier in the short run than in the long run.
Case-3: Does Drug Interdiction Increase or Decrease Drug-Related Crime?

Video Link : https://youtu.be/sALZxYb77PM
A persistent (long lasting) problem facing our society is the use of illegal drugs, such as heroin,
cocaine, ecstasy, and methamphetamine.
Drug use has several adverse effects.
One is that drug dependence can ruin the lives of drug users and their families.
Another is that drug addicts often turn to robbery and other violent crimes to obtain the money
needed to support their habit.
To discourage the use of illegal drugs, the government devotes billions of money each year to
reducing the flow of drugs into the country.
Let’s use the tools of supply and demand to examine this policy of drug interdiction.
Although the purpose of drug interdiction is to reduce drug use, its direct impact is on the sellers of
drugs rather than the buyers. When the government stops some drugs from entering the country and
arrests more smugglers, it raises the cost of selling drugs and, therefore, reduces the quantity of drugs
supplied at any given price. The demand for drugs—the amount buyers want at any given price—is
not changed. Drugs interdiction raises the price of drugs, it raises the total amount of money that
drug users pay for drugs. Addicts who already had to steal to support their habits would have an even
greater need for quick cash. Thus, drug interdiction could increase drug-related crime.
Because of this adverse effect of drug interdiction, some analysts argue for alternative approaches to
the drug problem. Rather than trying to reduce the supply of drugs, policymakers might try to reduce
the demand by pursuing a policy of drug education.
Successful drug education has the effects shown 2 nd diagram. The demand curve shifts to the left
from D1 to D2. As a result,
the equilibrium quantity
falls from Q1 to Q2, and
the equilibrium price falls
from P1 to P2. Total
revenue, P × Q, also falls.
Thus, in contrast to drug
interdiction, drug education
can reduce both drug use
and drug-related crime.

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Jai Shree Krishna 1

B.Com / BA / B.Sc– 1st Semester

Topic-1 : Price Elasticity of Demand

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

INTERPRETATION OF NUMERICAL VALUE OF

1. Elasticity is one, or Unitary (Ed=1) if, percentage change in the quantity

2. Elasticity is Less than one, (Ed<1) When percenatge change in the

3. Elasticity is more than one (Ed>1) When percentage change in quantity

4. Perfectly (complete) Inelastic Demand (Ed = 0), When there is no

5. Perfectly (infinitely) Elastic Demand (Ed = ∞), When there is change in

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Method – I : Percentage Method

% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒆𝒅

Where, P = Initial Price Q = Initial Quantity

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Method – II : Point (Geometric) Elasticity / Method

𝑳𝒐𝒘𝒆𝒓 𝒔𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 𝑪𝒖𝒓𝒗𝒆

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Method – III : Arc Elasticity / Arc Method / Mid point Method

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Method – IV : Total Expenditure/Revenue (Outlay) Method

2. Greater than One (Ed>1)

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Topic-2 : Income Elasticity of Demand

Income elasticity of demand measures the responsiveness change in the demand of a

% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒆𝒅

Types of Income Elasticity of Demand

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

3. Less than One (But more than Zero)

ZERO INCOME ELASTICTY

NEGATIVE INCOME ELASTICTY

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Topic-3 : Cross Elasticity of Demand

% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒆𝒅 𝒐𝒇 𝑿

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Nature of degree of Cross Elasticity of Demand

2. Negative Cross Elasticity (Complementary goods)

3. Zero Cross Elasticity of Demand :

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Topic-4 : Determinants of price elasticity of demand

2) Position of commodity in consumer’s budget :

5) Different uses of the commodity

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑺𝒖𝒑𝒑𝒍𝒊𝒆𝒅

Method : Percentage Method or Proportionate Method

Where, P = Initial Price Q = Initial Quantity

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

1. Unitary Elastic Supply (Es = 1)

2. Less than Unitary Elastic (Es<1)

4. Perfectly Inelastic Supply or Zero Elasticity supply (Es = 0)

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Topic – 7 : Determinants of Price Elasticity of Supply

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

6) Availability of Facilities (Production Facilities)

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

(Draw Diagram Yourself From Video)

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

Case-3: Does Drug Interdiction Increase or Decrease Drug-Related Crime?

ECONOMICS CLASSES BY PRATHAM SINGH (7011004544,9643399334)

“if You liked My videos & Notes,

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