Supply and

Demand:
Elasticity
 Introduction
 In previous chapter we have seen that if
price increases QD decreases and vice
versa.

• Now we will measure the degree to which

demand and supply change with a response
to price.
 Let take this Quiz
 If prices of vacation travel will
increase, How will you respond?

 If prices of food or electricity will increase,

how will you respond?
 Elasticity

The quantitative relationship between price

and quantity purchased is analyzed using
the crucial concept of elasticity

Different Types of Elasticity in Demand:

 Price Elasticity of Demand
 Income Elasticity of Demand
 Cross Price Elasticity of Demand
• Price elasticity of supply
 Price Elasticity of Demand
5

Price Elasticity of Demand measures the

responsiveness of the quantity demanded
to a given price change.
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Ex: The Price of X rises from Rs. 25 to Rs.

30.As a result the demand for X falls from 80
pieces
to 40 a day. Find the Price elasticity of
demand.

This means that for a 10% increase in price the demand will
fall by 25%.
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Ex: The price of petrol rises from 80 to 84.

As a result the quantity demanded at a petrol
bunk falls from 4000 to 3880 lts a day. What
is the price elasticity of demand?

This means that for a 10% increase in price the demand will fall
by 6%.
 Types of Price Elasticity of Demand

Elastic, inelastic and unitary demand

• for a 10% increase in price the demand will
fall by 25% - Elastic
• for a 10% increase in price the demand will
fall by 6% - Inelastic
• for a 10% increase in price the demand will
fall by 10% - Unitary (Elasticity = 1)
• Perfectly Inelastic ( Elasticity = 0)
• Perfectly Elastic (Elasticity = ∞)
 The diagrams
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Whether petrol will be more inelastic in the
short run or in the long run?
What factors would most likely explain why
salt is very inelastic?
What factors would most likely explain why
gas lighter is very inelastic?
What factors would likely explain why
Mahindra cars are very elastic?
Why would tires be less inelastic while petrol
is more inelastic? 
Goods that are more essential to everyday living, and that
have fewer substitutes, typically have lower elasticities;
staple foods are a good example.

Goods with many substitutes, or that are not essential,

have higher elasticities. Goods that are considered
luxuries, or whose purchase can be easily postponed,
often have elastic demand.
Factors affecting Elasticity

These factors are -

• the number of good substitutes available,
• the degree of necessity,
• the proportion of a purchaser's budget
consumed by the item,
• the time period involved.
 Income Elasticity of
Demand
14

With income elasticity of demand one

measures the responsiveness of demand to
a change in consumer’s real income.
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Average real incomes fall by 5% over a

given year. The income elasticity of demand
for Brand X is +2.5.If initial sales of brand X
were 25 million, what will be the new sales
figure as a result of fall in income?
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 Cross Price Elasticity of Demand

17

Cross price elasticity of demand (CPED)

measures the responsiveness of demand for
good X following a change in the price of a
related good Y.
CPED’ tells us two goods (A and B) are
substitutes, complements or not related.
18
Cross Price Elasticity of Demand Formulae

Where:
Ex = The cross price elasticity of demand
Δ = 'change in'
Qd = Quantity demanded
P = Price
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‘CPED’ tells us two goods (A and B) are
substitutes, complements or not related.
EX- Tea (good A) and Coffee (good B)are
substitutes. Price of Coffee falls by 10%.
Demand for Tea falls by 5%.

(If the CPED is positive then the two goods

in question are Substitutes.)
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Ex- Tea and Sugar are Complements.Assume
that Sugar is good A and Tea is good B. Price
of Tea falls by 10%.
Demand for Sugar rises by 2%.

The price of Tea falls, so the demand for sugar

rises.
(If the CPED is Negative then the two goods in
question are Complements)
 Price Elasticity of Supply
21

We need to find how responsive is ‘supply’

to a given ‘price change’.
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Ex- The market price for rice rises from

Rs.50 per kg. to Rs.55 per kg. A shopkeeper
wants to increase his supply of rice at this
higher price from 40 kgs to 50 kgs per day.
What is the price elasticity of supply?
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Ans –
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Ex – The price of a pencil rises from Rs.2 to

Rs.2.10.The price elasticity of supply for
pencil is 1.6.A shopkeeper wants to change
his supply of pencils in response to this price
change.He currently supplies 300 pencils a
day.What will he supply following the price
change?
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324

Notice that the elasticities are positive.

Supply curve tend to be upward sloping, so
the relationship between price and quantity
supplied is nearly always positive.
So the value of elasticity is nearly always
positive.
Happy Learning