ELASTICITY OF DEMAND

Prof. Alfred Marshal, The elasticity (or

Responsiveness) of demand in a market is large or
small according to the amount demanded increases
much or little for a given rise in price.
Prof. K.E. Boulding, The elasticity of demand may be
defined as the percentage change in the quantity
demand which would result in one percent change in
price. Boulding gives the following formula to
calculate the elasticity of demand-

Elasticity of demand

1.
2.
3.
4.

Types of elasticity of demand

Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Promotional or advertisement

Price elasticity of demand

price elasticity of demand is the ratio of percentage change
in quantity demanded to the percentage change in price.
It is measured as percentage change in quantity demanded
divided by the percentage change in price.

the co-efficient of price-elasticity of demand can be

expressed as under:
Percentage change in Quantity demanded

Ep =
Percentage change in a price of the commodity

The measure of price elasticity (e) is called co-efficient of price

elasticity. The measure of price elasticity is converted into a
more general formula for calculating coefficient of price elasticity

Ep =

%Q
% P
Where Ep = Price Elasticity
P = Price
Q = Quantity
= Change

 According to Alfred Marshall: "Elasticity of

demand may be defined as the percentage
change in quantity demanded to the
percentage change in price."
According to A.K. Cairncross : "The elasticity
of demand for a commodity is the rate at
which quantity bought changes as the price
changes."

 DEGREES OF PRICE ELASTICITY

Different commodities have different price
elasticities. Some commodities have more elastic
demand while others have relative elastic demand.
Basically, the price elasticity of demand ranges from
zero to infinity. It can be equal to zero, less than one
,greater than one and equal to unity.
Perfectly Elastic Demand
Perfectly inelastic Demand
Unitary Elastic Demand
Relatively Elastic Demand.
Relatively Inelastic Demand.

 Types of Price Elasticity

Unit elasticity of demand (e = 1)
Elastic demand (e > 1), i.e., elasticity is greater
than unity.
Inelastic demand (e < 1 ), i.e., elasticity is less
than unity.
Perfectly elastic demand;
Perfectly inelastic demand;
Relatively elastic demand;
Unitary elastic demand; and
Relatively inelastic demand.

I Perfectly Elastic Demand (e=):

When minor, nothing or as good as zero
percentage change in price results in
tremendous percentage change in demand, it
is known as perfectly elastic demand.
We can say in other words that it is a situation
in which demand of a commodity
continuously changes without any change in
price

Perfectly Elastic Demand

Perfectly elastic demand is said to happen when a little change in price leads to an
infinite change in quantity demanded. A small rise in price on the part of the seller
reduces the demand to zero. In such a case the shape of the demand curve will be
horizontal straight line as shown in figure.

The figure shows that at the ruling price OP, the demand is infinite. A slight rise in
price will contract the demand to zero. A slight fall in price will attract more
consumers but the elasticiy of demand will remain infinite. But in real world, the
cases of perfectly elastic demand are exceedingly rare and are not of any practical

Perfectly Inelastic Demand (e=0)

When extreme percentage change in price of
the commodity and if minor, nothing or as
good on zero percentage in demand is known
as perfectly inelastic demand.
Example:
0.25 or 0.10 % Change in price
10 % or 15 % Change in demand

Perfectly inelastic Demand

Perfectly inelastic demand is opposite to perfectly elastic demand. Under the

perfectly inelastic demand, irrespective of any rise or fall in price of a commodity,
the quantity demanded remains the same.

At price OP, the quantity demanded is OQ. Now, the price falls
to OP, from OP1, demand remains the same. Similarly, if the
price rises to OP2 the demand still remains the same.

Unitary Elastic Demand (e=1)

When equal percentage or a proportionate
change in price of commodity and demand of
commodity is there, it is known as unitary
elastic demand . It means that percentage
change in demand of a commodity is equal to
percentage change in price.
Example:
10 % Change in price
10 % Change in demand

 Unitary Elastic Demand. The demand is said to be unitary

elastic when a given proportionate change in the price level
brings about an equal proportionate change in quantity
demanded, The numerical value of unitary elastic demand is
exactly one i.e., ed = 1. Marshall calls it unit elastic.
In figure DD demand curve represents unitary elastic
demand. This demand curve is called rectangular hyperbola.
When price is OP, the quantity demanded is OQ1. Now price
falls to OP1, the quantity demanded increases to OQ1. The
shaded area in the fig. equal in terms of price and quantity
demanded denotes that in all cases price elasticity of demand
is equal to one.

Relatively Elastic or Highly Elastic

Demand (e>1):
When less percentage change in price of
commodity and if as compared to that more
percentage change in demand is there, it is
known as highly elastic demand.
We can say in other words that it refers to a
situation in which percentage change in demand
of commodity is higher than percentage change
in price of that commodity.
Example:
5 % Change in price
20 % or 25 % Change in demand

IV Relatively inelastic demand or

Highly Inelastic Demand (e<1)
When as compared to price less percentage
change in demand of that particular commodity
is there it is known as highly inelastic demand.
It means when percentage change in demand of
a commodity is less than percentage change in
demand in price.
Example:
20 % Change in price
5 % Change in demand

Point and arc Elasticity of Demand

The elasticity of demand is conventionally
measured either at a finite point or between
any two finite points, on the demand curve.
The elasticity measured on a finite point of a
demand curve is called point elasticity and the
elasticity measured between any two finite
points is called arc elasticity.

(A) POINT ELASTICITY

The point elasticity of demand is defined as
the proportionate change in quantity
demanded in response to a very small
proportionate change in price. The concept of
point elasticity is useful where change in price
and the consequent change in quantity
demanded are very small.
Point elasticity- Elasticity measured at a given
point on the demand curve (function).

(B) ARC ELASTICITY

Arc elasticity is a measure of the average of
responsiveness of the quantity demanded to a
substantial change in the price.
In other words, the measure of price elasticity
of demand between two finite points on a
demand curve is known as arc elasticity.
Arc elasticity -Average elasticity measured
over between a specific range (two points) of
a demand curve (function).

2. Income Elasticity of Demand

Other things remaining the same due to certain
percentage change in consumers income if there
is certain percentage change in demand it is
known as income elasticity of demand.
It means the ratio of percentage change in
quantity demanded due to percentage change in
income of consumers.
Ey = Percentage change in Quantity demanded
Percentage change in income

 Ey =

%Q
% y

Where, Ey = Income Elasticity

y = Income
Q = Quantity
= Change

Types of Income Elasticity

Positive Income Elasticity
Increase in normal/ luxury goods, there will be positive
relation between income and demand because as
income increases demand increase and vice versa.
Positive income elasticity may be of three types EY=1, Ey>1, Ey<1
Unitary income elasticity of demand; (em = 1); Income elasticity of demand greater than unity; (em >
1);
Income elasticity of demand less than unity; (em < 1);

II Negative Income Elasticity (EY<0) Incase of inferior goods, the income elasticity
of demand is negative because there will be
an inverse relation between income and
demand for inferior goods. As income
increases demand for inferior goods decreases
and vice versa.

III Zero Income Elasticity (EY=0)

In case of necessary goods whether income
increases or decreases the quantity
demanded remains the same. So Zero income
is found here.

CROSS ELASTICITY OF DEMAND

It is the ratio of proportionate change in the quantity
demanded of Y to a given
proportionate change in the price of the related
commodity X. It is a measure of relative change in
the quantity demanded of a commodity due to a
change in the price of its substitute complement.
change in the price of X
Ce=
proportionate change in the quantity demanded of Y
proportionate change in the price of X

Cross Elasticity of Demand

Other things remaining the same due to certain
percentage change in price of one commodity certain
percentage change in demand of another commodity is
known as cross elasticity of demand.
EC = Percentage change in Quantity demanded y
commodity
Percentage change in price x commodity
OR
EC = %QX
%PY

Advertising or Promotional Elasticity

of Demand
Firms spend considerable amounts of money on
advertisement and other sales promotional
activities with the object of promoting its sales.
Thus, sales differ in their responsiveness. It refers
to the responsiveness demand to change in
advertising or other promotional expenses.
The formula to calculate the advertising elasticity
is as follows:
Advertising elasticity of demand=
Proportionate change in sales
Proportionate change in advertisement expenditure