DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : K. DORASWAMY
Designation : Lecturer in CCP
Institute : Govt. Poly. For women,
Kakinada
Semester : V Semester
Subject : Business Economics
Sub-Code : CCP-502
Topic : Law of Demand
Duration : 50 minutes
Sub Topic : Elasticity of Demand
Teaching Aids : PPT, animation

CCP502.15 1
Objective
On completion of this period you would be
able to:

 Define Elasticity of Demand

 Explain the various Elasticities of Demand

CCP502.15 2
Recap
So far, we have covered:
 Extension and Contraction of demand
 Increase and decrease of demand

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Elasticity of demand

 Elasticity is the measurement of the rate of

change in demand for a given change in the
price.
 It describes the degree of responsiveness of the
demand for a commodity to a fall in its price.

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Methods of measuremt

 Percentage method
 Outlay or expenditure method
 Geometric or point method

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Percentage method
 Under this method the percentage change in the
price and the percentage change in the demand
are compared. Elasticity is the ratio of percentage
change of demand to a percentage change in the
price.

Ed = percentage change in the demand

Percentage change in Price

CCP502.15 6
 Contd..
 If by applying the above formula, the coefficient
is one, it is called unitary elasticity. If the
coefficient is less than one, it is less than unit
elasticity
 For example, if the percentage change in the
price is 10, and the percentage change in the
demand is also 10, the numerical value we get
by applying the above formula is 1
 Such elasticity is known as unitary elasticity

CCP502.15 7
Outlay or expenditure method

 Under this method the total outlay or

expenditure of the consumers on the commodity
between the higher and the lower price is
compared
 Total outlay or expenditure = price x quantity
demand

CCP502.15 8
 Contd..

 If total expenditure remains unchanged when the

prices rises or falls, it is unit elasticity
 If the total expenditure increases at a lower price
and decreases at a higher price, it is greater then
unitary elasticity or elastic demand
 When the total expenditure falls at a lower price it
is less than unitary elasticity or inelastic demand

CCP502.15 9
 Contd..

Price Quantity Total Nature of Elasticity

demanded expenditure
4 1000 units Rs.4000
Elastic
3 4000 Units Rs.12000

2 6000 units Rs.12000 Unit Elasticity

1 8000 units Rs.8000 Inelastic Demand

CCP502.15 10
 Contd..

 Between the prices Rs.4 and 3 demand is elastic

because the expenditure has increased from Rs.
4000 to 12000
 Between the prices Rs. 3 and 2, demand is
unitary because the expenditure remains
unchanged
 Between the prices Rs. 2 and 1, demand is
inelastic (less than unitary) because the
expenditure has fallen at the lower price

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 12
x
TOTAL OUTLAY

CCP502.15
UNIT ELASTICITY
an
d
E=1
em
cD E<
a sti 1 Ine
El la stic
1
E>
Y

P1
P2
P

O
PRICE
 Contd..

 It can be seen from the diagram that between the

prices P and P1 elasticity is greater than 1 because
the total outlay or expenditure has increased. - It is
elastic demand
 Between the prices P1 and P2 elasticity of demand is
equal to 1 - It is units elasticity
 After the Price P2 elasticity is less than 1. It is
inelastic demand

CCP502.15 13
Geometric method or
point method:
 Measurement of Elasticity of demand at a point on
the demand curve is called Geometrical method or
point method
 When the changes in the price and quantity
demanded are very, very small geometrical method
will be useful

CCP502.15 14
 A AY

R P
S P1
Q
price
O X
Demand M M1 B

CCP502.15 15
 Contd..

 Suppose on the demand curve A B, we have to

measure elasticity at the point p
 The formula applied is lower segment divided by
the upper segment
 In the above diagram it is PB
PA

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 The distance from P to B is divided by the
numerical value we get is 1, elasticity at that
point is unitary
 If it is more than one, elasticity at that point is
greater than one. It is elastic demand
 If it is less than one it is inelastic demand
 In the above diagram elasticity at the point p is
grater than one because PB is more than PA

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 Contd..

 If it is a curve, we draw a tangent to the point

where elasticity has to be measured and apply the
same formula lower segments upper segment

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 Y

A D
Price
P

D
O B
X
Demand

CCP502.15 19
 Contd..

 In this diagram DD (demand) is a curve

 We have to measure elasticity at the point P
 A tangent to P is drawn AB is the tangent. Tangent
is the line that just touches the point P
 We measure the distance form P to B and the from
P to A on this tangent and apply the formula PB
(lower segment : upper segment) PA

CCP502.15 20
Summary

So far, we have learnt:

 Definition for Elasticity
 Various methods of calculating the Elasticity of
Demand
 Elastic Demand
 Unit Elasticity
 Inelastic Demand

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Frequently Asked Questions
1. Define Elasticity of Demand.
2. Explain the various methods of calculating the
Elasticity of Demand.
3. Define
1. Elastic Demand
2. Inelastic Demand
3. Unit Elasticity.

CCP502.15 22