LECTURE NOTES

Avijit Mallik
Assistant Professor
IBA,DU
ELASTICITIES
Salvatore#5
Elasticity
• Price Elasticity of Demand
• Income Elasticity of
Demand
• Cross Elasticity of Demand
■ Responsiveness of consumers to a change in
a product's price is Price Elasticity of
Demand
■ The income elasticity of demand is the
responsiveness of the quantity demanded for
a good to a change in consumer income.
■ The cross elasticity of demand measures
the responsiveness of the quantity demanded
for a good to a change in the price of another
good.
Price
Elasticity of
Demand

• Elastic Demand
• Unit Elastic Demand
• Inelastic Demand
Income
Elasticity of
Demand
• Ey/I = +ve (normal)
• Ey/I = -ve (inferior)
• Ey/I > 1 (luxury)
• Ey/I < 1 (necessity)
Cross
Elasticity of
Demand
• Ex,y > 0 (x,y are
substitutes)
• Ex,y < 0 (x,y are
Complements)
Calculate own price, cross price &
Income Elasticity

Feb-21 Feb-22

Price of Soyabean Oil per liter 135 Taka 168 Taka

Quantity of Soyabean Oil demanded 5 liter 4 liter

Income(monthly) 12187.5 Taka 12600 Taka

Quantity of loose oil demanded 1 liter 1.5 liter

What are the Factors Influencing Price
Elasticity of Demand?
The Availability of Substitutes: If a product has reliable substitutes in the market, its demand undergoes a
significant change. The more substitutes available, the more elastic the demand for the good or service will be.
the demand for electronics is relatively elastic because there are other substitutes for it, whereas the demand for
fuel/petrol, in general, is less elastic because there are no more substitutes available to satisfy consumer needs.
The Proportion of Income Spent on Commodities: Higher the proportion of income, higher the elasticity.
The Time Frame: The pace at which consumers can switch to another alternative and adjust their consumption
habits. However, in the long term, consumers may be able to find substitutes or adjust their consumption habits,
leading to more elastic demand.
The Degree of Necessity: Necessities, such as food and housing, tend to have inelastic demand as consumers will
continue to purchase them regardless of price changes. That’s because there is no other reliable substitute or
finding an alternative would require time, energy and investment. On the other hand, luxury goods, such as
designer clothing and high-end cars, tend to have more elastic demand because consumers are more likely to cut
back on purchases when prices increase.
Brand Loyalty: Consumers who are loyal to a particular brand may be less likely to switch to substitutes, even if
prices increase, leading to inelastic demand.