ELASTICITIES OF DEMAND

• The determinants of demand tell us as to what

is the effect of the determinants on the
demand.
• But it does not tell us as to magnitude of the
effect or influence.
• The elasticity of demand tells us about the
magnitude of this effect.
• Elasticity: The responsiveness of the dependent variable to
a change in the independent variable is called as elasticity.
• Demand elasticity measures the responsiveness of the
demand to change in the determinants of demand.
• Demand elasticities are of various types depending upon
the responsiveness we are measuring in the context of the
determinant.
• The important elasticities of demand most often used by
managers are 1. Price Elasticity, 2.. Income elasticity,
• 3. Cross Elasticity.
• Arc Elasticity: The measure of elasticity of
demand between two finite points is called arc
elasticity.
• Point Elasticity : is the elasticity of demand at
a finite point on the demand curve.
• Arc elasticity differs between the same two
finite points on the demand curve if the
direction of change is changed.
 Price Elasticity of Demand
• Acc. To Kenneth Boulding; Elasticity of
Demand measures the responsiveness of
demand to changes in price. It may be defined
as “ the percentage change in the quantity
demanded which would result for one per
cent change in price”.
• In other words, it is the rate at which quantity
bought changes as the price changes.
• Elasticity of demand =
• Proportionate change in demand
• Proportionate change in price
 Degrees of Price Elasticity of Demand

• Elasticity of demand for different commodities

is different.
• Some products have more elastic demand and
others have less elastic demand.
• Elasticity of demand may have value from zero
to infinity.
• Completely Inelastic Demand: is shown by a
straight line which is parallel to the verticle
axis.
• The price elasticity in this case is zero because
whatever the changes in price, there is no
change in the demand for the product.
• Perfectly Elastic Demand:
• This is also known as infinitely elastic demand and is
represented by a horizontal line parallel to the horizontal
axis.
• This means that even a very slight change in the price brings
about a very big expansion or contraction in the demand.
• This means that the firm cannot sell any quantity even if the
price is increased slightly and a reduction in price means
that the quantity demanded increases so much that no
seller will be able to satisfy this demand at reduced prices.
• Unitary Elastic Demand: This is the type of
elasticity in which given percentage change in
price leads to exactly the same percentage of
change in the demand.
• A commodity can have unitary elasticity of
demand when the total expenditure on the
product remains unchanged whatever the
change in price of the commodity.
• Relatively Elastic and Inelastic Demand:
• When the elasticity of demand is between zero and
one, it is termed as relatively inelastic demand.
• When the elasticity of demand is greater than one, it is
termed as a relatively elastic demand.
• Necessities like wheat, flour are said to have relatively
inelastic demand . That is their elasticities lie between
zero and one.
• Luxury items usually have relatively elastic demand and
their value generally lies above 1.