1. Elasticity
QD
i = f (Pi, Pj, Y, T, P, E)
“The responsiveness, or elasticity, of
the quantity demanded of a good or service
to a change in its price. More precisely,
it gives the percentage change in quantity
demanded
in response to a one percent change in price
(holding constant all the other determinants
of demand,
such as income)”.

2. D
Qd
P
P1
P2
P3
Q*
Demand for salt
D
Qd
P
P1
P2
P3
Q*
Demand for cigarettes
D
Qd
P
P1
P2
P3
Q*
Demand for Essential goods
D
Qd
P
P1
P2
P3
Q*
Demand for luxury goods

3. Price Elasticity of Demand
.
=
(1) ( 2) (3) (4)
.
(Inverse) Slope of the demand curve Quantity price ratio
Qx
Px
Sx
D1
D2
D3
D4
D5
D6

4. Qx
Px
Sx
D1
D2
D3
D4
D5
D6

5. .
P
Q
Point Elasticity
Ed
ii = 1 : unit elastic demand:
- 10 % rise in price will cause 10% drop in demand
for the product i.
Ed
ii < 1 : inelastic demand: essential goods
- 10 % rise in price will cause the drop in
demand by less than 10%.

6. Ed
ii >1 : elastic demand:
- 10 % rise in price will cause the drop in demand by
more than 10%. Luxury goods
Linear Demand curve and Elasticity
Qd
P
Eii >1Eii =δ
Eii =1
Eii <1
Eii =0

7. Cross price elasticity of demand
Non-Linear Demand curve and Elasticity
Qd
P
Eii =1
Eii =1
Eii =1
If this is a rectangular hyperbola
type demand curve:
“The percentage change in quantity demanded
in response to a one percent change in price of
other goods (holding constant all the other determinants
of demand, such as income)”.

8. If
Ed
ij
Ed ij < 0 Complement

9. Income elasticity of demand
“The percentage change in quantity demanded
in response to a one percent change in income (Y)
(holding constant all the other determinants of demand,
such as income)”.

10. • For Inferior good the price elasticity is negative and income
elasticity is negative
• For Giffen goods the price elasticity is positive and income
elasticity is negative

11. Price Elasticity of Supply
Qx
Px
S5
S1
S2
S3
S4
S
Qs
P
P1
P2
P3
Supply of Land in Colombo city

12. Ed
ii = 1 : unit elastic supply:
10 % rise in price will cause 10% rise in supply of product i.
Ed
ii < 1 : inelastic supply:
Primary commodities
10 % rise in price will cause the rise in supply by less than 10%.
Ed
ii >1 : elastic supply:
10 % rise in price will cause the rise in supply by more than 10%.
Eg. Industrial goods