VARUN SETHI

HARPREET KAUR
Batch : 2019 - 2021
Source : ( H. L. Ahuja , Google)
1. Demand
2. Elasticity
3. Elasticity of Demand
3.1 Price Elasticity
3.2 Income Elasticity
3.3 Cross Elasticity
4. Factors Influencing Elasticity of Demand
 When Price of a good falls , its quantity
demand rises and when price of it rises , its
quantity demands falls. This is known as law
of demand.
 Assumption : There is no change in Demand
Function , when only Price Increases or
Decreases.
Demand Function = F(P I, Pr, T, A)
X,
 Elasticity allows us to analyze supply and
demand with greater precision.

 Elasticity is a measure of how much buyers and

sellers respond to changes in market
conditions.
 When we talk about Elasticity, that
responsiveness is always measured in
percentage terms.

 There are three types of elasticity of demand.

1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
 Price Elasticity of Demand is defined as the
ratio of percentage change in quantity
demanded of a commodity to a given
percentage change in Price . Thus

Percentage change in quantity demanded

Price elasticity of demand =
Percentage change in price
 Perfectly Elastic Demand : (EP = ∞)
In perfectly elastic demand, a small rise in price
results in fall in demand to zero, while a small
fall in price causes increase in demand to
infinity.
 Perfectly Inelastic Demand : (EP = 0)
Perfectly inelastic demand is one when there is no
change produced in the demand of a product
with change in its price.
 Relatively Elastic Demand (EP> 1)
 The demand is said to be relatively elastic if the
percentage change in demand is greater than
the percentage change in price i.e. if there is a
greater change in demand there is a small
change in price.
 Relatively Inelastic Demand (Ep< 1 )
The demand is said to be relatively inelastic if the
percentage change in quantity demanded is
less than the percentage change in price i.e. if
there is a small change in demand with a
greater change in price.
Unitary Elastic Demand : ( Ep = 1)
When the proportionate change in demand
produces the same change in the price of the
product, the demand is referred as unitary
elastic demand.
Arc Elasticity Method : (Mid Point Formulla)
Price Elasticity of Demand and Change in Total
Expenditure :
Point Elasticity Method :
Revenue Method :
 Income Elasticity of Demand is defined as the
ratio of percentage change in quantity
demanded of a commodity to a given
percentage change in Income . Thus
 Zero income elasticity: A given increase in the
consumer’s money income does not result in
any increase in the quantity demanded of a
commodity (Ei=0).
 Negative income elasticity: A given increase in
the consumer’s money income is followed by
an actual fall in the quantity demanded of a
commodity. This happens in the case of
economically inferior goods (Ei < 0).
 Unitary income elasticity: A given
proportionate rise in the consumer’s money
income is accompanied by an equally
proportionate rise in the quantity demanded of
a commodity and vice versa (Ei=1).
 Income elasticity of demand greater than unity:
For a given proportionate rise in the
consumer’s money income, there is a greater
proportionate rise in the quantity demanded of
a commodity. Ei is greater than unity. This is in
case of luxuries.
 Income elasticity of demand less than unity:
For a given proportionate rise in the
consumer’s money income, there is a smaller
proportionate rise in the quantity demanded of
a commodity. The income elasticity of demand
is less than unity in case of necessaries (Ei < 1).
 Cross Elasticity of Demand is defined as the
ratio of percentage change in quantity
demanded of a commodity X to a given
percentage change in Price Y. Thus
 Positive Cross Elasticity : When goods are
substitute of each other then cross elasticity of
demand is positive. For instance, with the
increase in price of tea, demand of coffee will
increase.
 Negative Cross Elasticity : In case of
complementary goods, cross elasticity of
demand is negative. A proportionate increase
in price of one commodity leads to a
proportionate fall in the demand of another
commodity because both are demanded jointly.
 Zero Cross Elasticity : Cross elasticity of
demand is zero when two goods are not related
to each other. For instance, increase in price of
car does not effect the demand of cloth. Thus,
cross elasticity of demand is zero.
1. Avalability of Substitutes.(More Substitutes,
More Elasticity or Less Substitute, Less
Elasticity)
2. Effect of Income.(High Income, High
Elasticity)
3. If Number of users are more, than elasticity is
High.
4. Habitual (If a person is habitual to a product,
than elasticity is High.)
 Price inelastic – a change in price causes a
smaller % change in demand.
 Price Inelastic Products are : Petrol , Diesel ,
Salt, Tap Water , Diamonds etc.

 Price elastic – a change in price causes

a bigger % change in demand.
 Price elastic Products are : Heinz Soup, Nik
Bakers Coffee, Kit Kat Chocolate Bar Etc.