Elasticity:

Elasticity measures the relative change in one

variable in response to a relative change in
another variable.
Price Elasticity of Demand:
is defined as the relative change in quantity
demanded due to a relative change in price.
The price elasticity of demand is formally
defined by the following formula:
which comprises three elements. First is the
percentage change in the quantity demanded,
calculated as:

Where:
 Q0 is the original quantity demanded
 Q1 is the new quantity demanded
 Q bar is the average quantity in the two price-
quantity combinations.
The second element is the relative change in the
price, calculated as:

Where:
 P0 is the original price
 P1 is the new price
 P bar is the average price in the two price-
quantity combinations.
The third element is the minus sign at the
front of the equation for the price elasticity
of demand. It is due to the inverse
relationship between price and quantity
demand
Hence,

The concept of elasticity is valuable because

elasticities are “unit-less”. The price elasticity of
demand can fall anywhere on the range of zero to
infinity, but most markets have demand elasticities
in the neighborhood of one.
Price elasticity of demand might be:
Case 1:

Edp = infinite, perfectly elastic demand

Any change in quantity demand in response to a fixed price will lead to a
perfect/infinite elastic demand.

Edp = Any percentage change in Qd/ No change in price

Case 2:
Edp = 0 Perfectly inelastic demand

There is no change in demand in response to

any change in price (increase/decrease)

Edp = No change in Qd/ any change in price

Case 3:
Edp>1 Relatively elastic demand

The percentage change in quantity demand is greater

than the percentage change in price

Edp = 15 percent increase in Qd/ 10 percent decrease in price

Case 4:
Edp<1 Relatively inelastic demand

The change in demand of a product is less than the

change in price
Edp = 7 percent increase in Qd/ 10 decrease in price
Case 5:
Edp= 1 Unitary elastic demand

Change in price and change in demand is same

Edp = 10 % increase in Qd/10 percent decrease in Price
Case-1:
Edp = infinite also called perfectly elastic demand

Any change in quantity demand in response to a fixed price will lead to a

perfect/infinite elastic demand.

Case 1:

P Qd
10 15
10 22.5
Here change is price is zero and Qd increases 50%
Price elasticity of demand= calculate
If change in price is zero and Qd decreases by 50%, calculate price elasticity
of demand ???
Case 2:
Edp= 0 also called perfectly inelastic demand

There is no change in demand in response to a price increase/decrease

Case 2:

P Qd
10 15
Price elasticity of demand when price decreases by 10%= calculate
Price elasticity of demand when price increases by 10%= calculate
Case 3:
Edp > 1 also called Relatively elastic demand
The percentage change in quantity demand is greater than the percentage change in price

Case 3:

P Qd
10 20
09 30
As per graph, calculate Price elasticity of demand= ???
If, price falls by 10%, Qd increases more
Than 10 % and vice versa
 Case 4:
Edp < 1 Also called Relatively inelastic demand
The change in demand of a product is less than the change in price

Case 4: (remember to follow the law of demand, inverse relationship

between price and demand)

P Qd
10 50
09 53
10% fall in price/6% rise in Qd
Price elasticity of demand= Calculate

10% increase in price/6% decrease in Qd

Price elasticity of demand= Calculate
Case 5:
Edp =1 also called Unitary elastic demand
Change in price and change in demand is same

Case 5:

P Qd
10 24
09 26.40
Price falls by 10%/ Qd rises by 10%
Price elasticity of demand= ??
OR
Price rises by 100%/Qd decreases by 100 %
Price elasticity of demand= ??
There are three factors which influence on the price
elasticity of demand:
1- The number of substitutes for the good:
Recall that substitutes are goods used in place of each
other. If a product has several substitutes, then an increase
in price will lead to a relatively large decrease in quantity
demanded as consumers switch to substitutes, implying a
relatively elastic demand.
On the other hand, if a good does not have many
substitutes, a price change does not change quantity
demanded very much, implying a relatively inelastic
demand. For example, apples have a relatively large
number of substitutes, including oranges, grapefruit, and
grapes, to name a few. An increase in the price of the
apples will likely cause a relatively large decrease in
quantity demanded, i.e., the demand for apples is
relatively elastic.
On the other hand, doctors do not have easy to-find
substitutes. Therefore, if the price of visiting your doctor
increases, it is unlikely that you will choose not to visit her
when you are sick. The demand for doctors is relatively
inelastic
Examples:
Relative Elastic price elasticity of demands:

1- Fruits
2- Bread
3- Vegetables
4- Transportation
Relative Inelastic price elasticity of demands:
1- Doctors
2- Oil, Petrol
3- Flour
4- Electricity
2. The amount of disposable income spent on the good:
The greater the share of your income spent on a good, the
more elastic the demand. This is because a small
percentage increase in price can take a big bite out of a
household’s discretionary income and cause the household
to reconsider how they will spend their money, i.e., look
for substitutes. For example, if the price of chewing gum
increased in price from $0.30 to $0.40, this would
represent a 33% increase in price, and yet you would likely
not purchase dramatically fewer packs of chewing gum.
On the other hand, if the price of a $20,000 car increases
by the same percentage ($6,600), it is likely that the
quantity demanded for cars will decline dramatically.
3. The duration of the price change:
Generally, the longer a price change is in place, the more
elastic demand is. As time passes, it is more likely that a
substitute can be found for the good.
For example, if the price of gasoline increased by $0.10 a
gallon for a single week, it is unlikely that you will
purchase a more fuel-efficient car; you will likely pay the
higher price in the short run. In other words, the short-run
demand for gasoline is extremely inelastic. However, if the
price of gasoline were to increase by $2.00 per gallon for
the next year, most of us would try to substitute out of
gasoline either through carpooling or by buying more fuel-
efficient cars; the quantity of gasoline purchased would
decline dramatically. In other words, the long-run demand
for gasoline is more elastic.