This document defines elasticity as the percentage change in one variable due to a 1% change in another variable. It discusses price elasticity of demand, which is the responsiveness of quantity demanded to a change in price. Perfectly elastic, relatively elastic, unitary, relatively inelastic, and perfectly inelastic demands are defined based on the elasticity value. Point and arc elasticities are introduced as ways to measure elasticity. Determinants of price elasticity like availability of substitutes and necessities vs luxuries are outlined. Income elasticity and cross elasticity are also defined. An example of calculating price elasticity using a demand equation is provided.

1. Elasticity: Concept, Measurement
and Determinants
Dadhi Adhikari
Kathmandu College of Management
20th
Sept, 2007

2. Meaning of Elasticity
• Let Y=f(x)
• Elasticity of Y with respect to X is defined as
percentage change in Y due to one percent
change in X
• Mathematically
∞
≅
∆
∆
==
x
x
x
x
x
x
Q
P
Q
P
P%
Q%
dP
dQ
P
Q
inchange
inchange
E

3. Price Elasticity of Demand
• Responsiveness of quantity demanded of a
commodity to change in its own price
x
x
Q
P
dP
dQ
E =

4. Types of price elasticity
1. Perfectly elastic demand E=∞
2. Relatively elastic demand E>1
3. Unitary elastic demand E=1
4. Relatively inelastic demand E<1
5. Perfectly inelastic demand E=0
D
D

5. How to measure?
• Point Elasticity: If price change is very small then point
elasticity is the appropriate measure of elasticity. Point
elasticity measures the elasticity at particular point of
demand curve.
• Here price elasticity of demand at point A is given by
x
x
Q
P
dP
dQ
E =
APx
QX
B
C
At point B, elasticity = infinity
At point C, elasticity = zero
Hence price elasticity varies along
a linear demand curve

6. How to measure?
• Arc Elasticity: If price change is relatively
large then Arc Elasticity is appropriate
measure
P1
P2
Q1 Q2
A
B
12
12
12
12
*
QQ
PP
PP
QQ
E
+
+
−
−
=

7. Sign of Price Elasticity of Demand
• Sign of price elasticity of demand is
always negative due to demand law.
However we always take absolute value to
explain the elasticity of demand.
• Sign is positive for Giffen goods

8. Determinants of Price Elasticity of
Demand
• Availability of substitute: elastic
• Time horizon: in long run demand is elastic
• Habit: inelastic
• Definition of market: Narrowly defined
market =>elastic demand
• Necessities vs luxuries: Necessities =>
inelastic demand

9. Income elasticity of demand
incomeYHere
Q
Y
==
dY
dQ
E
1.Income elasticity is positive for Normal goods
and negative for inferior goods
2. Income elasticity of demand is greater than
one for luxuries and less than one for
necessities.

10. Cross elasticity of demand
x
y
y
x
xy
Q
P
dP
dQ
E *=
Cross elasticity is positive for substitute and
negative for complementary goods

11. Numerical example
• Let the demand equation is Q=60 – 10 P.
Find the price elasticity of demand when
price increases from Rs 2 to Rs 3