Elasticity

The law of demand and supply predict the direction

of changes in price and quantity in response to
various shifts in demand and supply. But often it is
not enough to know merely whether quantity rises or
falls in response to a change in price; it is also
important to know by how much.
 Price Elasticity of Demand

• Price elasticity of demand is defined as the

measure of responsiveness in the quantity
demanded for a commodity as a result of change
in price of the same commodity. It is a measure of
how consumers react to a change in price.
• In other words, it is percentage change in quantity
demanded by the percentage change in price of
the same commodity
E= =
 Types of Elasticity

Type Value

Perfectly Elastic E=∞

Relatively Elastic E >1

Perfectly Inelastic E=0

Relatively Inelastic E<1

Unit Elastic E=1

Perfectly Elastic Perfectly Inelastic

Relatively Elastic Relatively Inelastic Unit Elastic

 Income elasticity

Income elasticity = proportionate change in quantity

purchased ÷ proportionate change in income.
 Cross Elasticity

Cross Elasticity = proportionate change in purchase of

commodity ‘x’ ÷ proportionate change in the price of
commodity ‘y’.
 Point method of measuring elasticity of demand

• A (Ed = ∞) ie. AB/0 Ed = lower segment of demand curve ÷

upper segment of demand curve.
M (Ed > 1) ie. MB/AM

P (Ed = 1) ie. PB/AP

N (Ed< 1) ie. NB/AN

B (Ed = 0) ie 0/AB