What do we mean by Elasticity of Demand? and what are its various types. The presentation explains all.

1. Elasticity of
Demand

2. What is the meaning of
Elasticity of Demand?
 “The elasticity of demand measures the
responsiveness of the quantity demanded of a
good, to change in its price, price of other goods
and changes in consumer’s income” - Dooley

3. What are the types of
Elasticity of Demand?
 Price Elasticity of Demand
 Income Elasticity of Demand
 Cross Elasticity of Demand

4. What is Price Elasticity of
Demand?
 Degree of responsiveness in change in quantity
demanded due to change in price; other things
remaining constant.
 Ratio of Percentage change in quantity to
percentage change in price.
 Ep = % change in Quantity demanded / %
change in Price
 Ep = [(Q2 – Q1)/ Q1] ÷ [ (P2 – P1)/ P1]
 Formulated as
EP = (∆Q / ∆P) * (P/Q)

5. What are the degrees of
Price Elasticity of
Demand?
 Elasticity > 1; Elastic demand
 Elasticity = 1; Unitary Elastic demand
 Elasticity < 1; Inelastic demand
 Elasticity = ∞; Perfectly elastic demand
 Elasticity = 0; Perfectly Inelastic demand

6. Graphically

7. Graphically

8. What are the methods of
measuring Price Elasticity of
Demand?
 Proportionate Method
Suggested by Marshall
Elasticity = Proportionate change in Quantity/
Proportionate change in price
 Mid-point Method/ Arc Elasticity of Demand
E = [(Q2 – Q1)/ (P2-P1)] * [(P1+P2)/ (Q1+Q2)]
This method is used when price change is large

9. What are the methods of
measuring Price Elasticity of
Demand?
 Total Expenditure Method : Evolved by Marshall
Price Change Quantity
Change
Expenditure
Change
Elasticity of
Demand
Decrease Increase Constant E = 1
Decrease Increase Increase E > 1
Decrease Increase Decrease E < 1

10. What are the methods of
measuring Price Elasticity of
Demand?
 Point Elasticity Method
Elasticity = Lower
segment/Upper
Segment

11. What are the determinants
of Price Elasticity of
Demand?
 Availability of Substitutes
 Proportion of Consumer’s Income spent
 Number of uses of a commodity
 Complementarity between goods
 Time Elasticity

12. What is Cross Elasticity of
Demand?
 Degree of Responsiveness of change in the
quantity demanded of one good due to change
in price of other good.
 Elasticity = Proportionate change in quantity
demanded of X / Proportionate change in price
of Y
Goods Elasticity
Substitutes Positive
Complements Negative

13. What is Income Elasticity
of Demand?
 Responsiveness of change in quantity demanded
due to change in income.
 E = Proportionate change in Quantity/
Proportionate change in Income
Type of Good Elasticity
Normal Goods E > 0
Inferior Goods E < 0
Type of Good Elasticity
Luxuries E > 1
Necessities E < 1

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