Elasticity of Demand

Elasticity of Demand
The law of demand only shows that the direction of change in quantity demand due to the change in price. This does
not tell how much or to what extent the demand changes in response to a change in its price. Elasticity of demand
describes the responsiveness or sensitiveness of demand to change in its determinants. Thus, elasticity of demand is
the ratio of the percentage change in the quantity demanded to the percentage change in any one quantitative
determinants of demand i.e. price, income and price of relates goods etc.
It shows how much or what extant the quantity demanded of a commodity will change as a result of a change in the
quantitative determinants of demand.

𝑷𝒓𝒐𝒑𝒐𝒓𝒕𝒊𝒐𝒏𝒂𝒕𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

𝑬𝒅 =
𝑷𝒓𝒐𝒑𝒐𝒓𝒕𝒊𝒐𝒏𝒂𝒕𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒂𝒕𝒊𝒗𝒆 𝒅𝒆𝒕𝒆𝒓𝒎𝒊𝒏𝒂𝒏𝒕 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅
Types of Elasticity of Demand
As price of the good, income of the consumer and price of related goods are the main determinants of demand, there
are three types of elasticity of demand. They are –

1) Price elasticity of demand

2) Income elasticity of demand
3) Cross elasticity of demand
Price Elasticity of Demand
The price elasticity of demand is defined as the ratio of percentage change in quantity demanded to the percentage
change in price. It can be expressed as,

𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

Ep = 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

X 100
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅
Ep =
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆
X 100
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒑𝒓𝒊𝒄𝒆

∆𝑸
X 100 Where, Ep = Price elasticity of demand
𝑸
Ep = Q = Initial quantity demanded
∆𝑷
𝑷
X 100 ∆Q = Change in quantity demanded
P = Initial price of goods
∆𝑸 𝑷 ∆P = Change in price of goods
∴ Ep = x
∆𝑷 𝑸 Price elasticity of demand is always negative due to the inverse
relationship between the price and the quantity demanded. But for
the sake of simplicity in understanding we ignore the negative sign.
Types of Price Elasticity of Demand

There are five types of elasticity of demand. They are as follows:

1. Perfectly Elastic Demand (EP = ∞):
If a very small (negligible) change in price of a commodity causes infinitely large change in its quantity demanded, it
is a case of perfectly elastic demand.

Ep = ∞
Price

P D
The above figure shows perfectly elastic
demand curve where quantity demanded
keeps on changing at the same price P.

O Q1 Q2 Q3 X
Quantity Demand
Types of Price Elasticity of Demand

There are five types of elasticity of demand. They are as follows:

1. Perfectly Elastic Demand (EP = ∞):
If a very small (negligible) change in price of a commodity causes infinitely large change in its quantity demanded, it
is a case of perfectly elastic demand.

Ep = ∞
Price

P D
The above figure shows perfectly elastic
demand curve where quantity demanded
keeps on changing at the same price P.

O Q1 Q2 Q3 X
Quantity Demand
2. Perfectly Inelastic Demand (EP = 0):

When the demand for a commodity does not change despite change in its price, the demand is said to be perfectly
inelastic. In other words, there is no effect of changes in the price on the quantity demanded.

Y
D

P3
Ep = 𝟎
Price

P2 The above figure shows the inelastic demand curve

showing that quantity demanded is fixed at OQ units
P1 irrespective of the price.
It means price may be OP1, or OP2, or OP3, the
O Q X quantity demanded will be constant at OQ.
Quantity Demand
2. Perfectly Inelastic Demand (EP = 0):

When the demand for a commodity does not change despite change in its price, the demand is said to be perfectly
inelastic. In other words, there is no effect of changes in the price on the quantity demanded.

Y
D

P3
Ep = 𝟎
Price

P2 The above figure shows the inelastic demand curve

showing that quantity demanded is fixed at OQ units
P1 irrespective of the price.
It means price may be OP1, or OP2, or OP3, the
O Q X quantity demanded will be constant at OQ.
Quantity Demand
3. Relatively Elastic Demand (EP > 1)

When a change in price leads to a more than proportionate change in demand, the demand is said to be relatively
40%
elastic. For example, if 20% change in price results 40% change in quantity demanded, then ep = 20% = 20 ie. ep > 1.

In the above figure, the elastic

P2
demand curve shows that when the
Ep > 𝟏
Price

∆𝑷 price falls from OP2 to OP1,

demand rises from OQ1 to OQ2.
P1 The percentage change in demand
∆𝑸 is more than the percentage change
D
in price.
O Q1 Q2 X
Quantity Demand
3. Relatively Elastic Demand (EP > 1)

When a change in price leads to a more than proportionate change in demand, the demand is said to be relatively
40%
elastic. For example, if 20% change in price results 40% change in quantity demanded, then ep = 20% = 20 ie. ep > 1.

In the above figure, the elastic

P2
demand curve shows that when the
Ep > 𝟏
Price

∆𝑷 price falls from OP2 to OP1,

demand rises from OQ1 to OQ2.
P1 The percentage change in demand
∆𝑸 is more than the percentage change
D
in price.
O Q1 Q2 X
Quantity Demand
4. Relatively Inelastic Demand (EP < 1)

When a change in price leads to a less than proportionate change in the demand, the demand is said to be less elastic
10% 1
or relatively inelastic. For example, if 20% change in price results 10% change in demand, then ep = = < 1.
20% 2

P2
In the above figure, inelastic demand
∆𝑷 Ep < 𝟏
Price

curve shows that change in quantity

demanded (Q1Q2) is less than change in
P1 price (P1P2). The slope of an inelastic
∆𝑸 demand curve is more, i.e., the demand
D curve is steeper as shown in Fig.
O Q1 Q2 X
Quantity Demand
4. Relatively Inelastic Demand (EP < 1)

When a change in price leads to a less than proportionate change in the demand, the demand is said to be less elastic
10% 1
or relatively inelastic. For example, if 20% change in price results 10% change in demand, then ep = = < 1.
20% 2

P2
In the above figure, inelastic demand
∆𝑷 Ep < 𝟏 curve shows that change in quantity
Price

demanded (Q1Q2) is less than change in

P1 price (P1P2). The slope of an inelastic
demand curve is more, i.e., the demand
∆𝑸
D curve is steeper as shown in Fig.

O Q1 Q2 X
Quantity Demand
5. Unitary Elastic Demand (Ep = 1)

When percentage change in quantity demand is equal to the percentage change in price, the demand for the
commodity is said to be unitary elastic. For example, If 20% change in price results 20% change in demand, then ep
20%
= 20% = 1

In the above figure, unitary elastic demand curve

P2 shows that change in quantity demanded (Q1Q2)
Ep = 𝟏 is equal to the change in price (P1P2). The
Price

∆𝑷 unitary elastic demand curve is a straight

downward sloping line forming 45° angles with
P1 both the axis.
∆𝑸 D

O Q1 Q2 X
Quantity Demand
5. Unitary Elastic Demand (Ep = 1)

When percentage change in quantity demand is equal to the percentage change in price, the demand for the
commodity is said to be unitary elastic. For example, If 20% change in price results 20% change in demand, then ep
20%
= 20% = 1

In the above figure, unitary elastic demand curve

P2 shows that change in quantity demanded (Q1Q2)
Ep = 𝟏 is equal to the change in price (P1P2). The
Price

∆𝑷 unitary elastic demand curve is a straight

downward sloping line forming 45° angles with
P1 both the axis.
∆𝑸 D

O Q1 Q2 X
Quantity Demand
Income Elasticity of Demand
The income elasticity of demand is defined as the ratio of percentage change in quantity demanded to
the percentage change in income. It measures the responsiveness or sensitiveness of demand to the
change in income of the consumer.
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝐝𝐞𝐦𝐚𝐧𝐝𝒆𝒅
Ey =
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒊𝒏𝒄𝒐𝒎𝒆

𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

X 100
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒊𝒏𝒄𝒐𝒎𝒆
Ey =
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒊𝒏𝒄𝒐𝒎𝒆
X 100
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒊𝒏𝒄𝒐𝒎𝒆
∆𝑸
X 100
𝑸 Where, Ey = Income elasticity of demand
Ey = ∆𝒀 Q = Initial quantity demand
X 100
𝒀 ∆Q = Change in quantity demand
Y = Initial income
∆𝑸 𝒀
∴ Ey = x ∆Y = Change in income
∆𝒀 𝑸
Types of Income Elasticity of Demand
1. Income Elasticity Greater than Unity (EY > 1)
When a change in income leads to a more than proportionate change in demand, the
income elasticity of demand is greater than unity. For example, if 20% change in
40%
income results 40% change in quantity demanded, then Ey = = 2 i.e. Ey > 1.
20%
Y
In the above figure, demand
D curve shows that change in
Income

Y2 quantity demand (Q1Q2) is

Ey > 𝟏
∆𝒀 more than change in
Y1 income (Y1Y2). The demand
∆𝑸 curve is upward sloping and
D
O Q1 Q2
elastic income demand as
X
shown in Fig.
Quantity Demand
2. Income Elasticity Less than Unity (EY < 1)
When a change in income leads to a less than proportionate change in the demand, the
income elasticity will be less than unity. For example, if 20% change in income
10%
results 10% change in quantity demanded, then Ey = = 0.5 i.e. Ey < 1.
20%
Y
D
Ey < 𝟏
In the above figure, inelastic
Y2 demand curve shows that change
Income

∆𝒀 in quantity demand (Q1Q2) is

Y1 less than change in income
∆𝑸 (Y1Y2). The demand curve is
D upward sloping and steeper as
O Q1 Q2 X shown in Fig.
Quantity Demand
3. Income Elasticity Equal to Unity (EY = 1)
When percentage change in quantity demand is equal to the percentage change in
income, income elasticity will be equal to the unity. For example, If 20% change in
20%
income results 20% change in demand, then Ey = = 1.
20%

Y
D In the above figure, unitary elastic
demand curve shows that change
Y2 Ey = 𝟏
in quantity demanded (Q1Q2) is
Income

∆𝒀 equal to the change in price

Y1 (P1P2). The unitary elastic
∆𝑸 demand curve is a straight
D
O
upward sloping line forming 45°
Q1 Q2 X
angles with both the axis.
Quantity Demand
4. Zero Income Elasticity of Demand (EY = 0)

When the demand for a commodity does not change despite change in income, the
income elasticity is said to be zero. For example, 5% rise in income leads to no change
0
in quantity demanded, then Ey = = 0 i.e. Ey = 0.
5

The above figure shows the

Y inelastic demand curve showing
D
that quantity demanded is fixed at
Y3 OQ units irrespective of the
Income

Ey = 𝟎
Y2 income. Perfectly inelastic
demand curve is a vertical straight
Y1 line parallel to the Y-axis as shown
in Fig. It means income may be
O Q X OY1, or OY2, or OY3, the quantity
Quantity Demand demanded will be constant at OQ.
5. Negative Income Elasticity of Demand (EY < 0)

If income and quantity demand are inversely related, then there is negative income
elasticity of demand. For example, If 5% rise in income leads to 2% reduction in
−2
demand, then Ey = < 0.
5

Y
In the above figure, the demand
curve shows that when the
Y2 income falls from OY2 to OY1,
Income

EY < 𝟎 demand rises from OQ1 to OQ2.

∆𝒀
Here the demand and income
Y1 changes in the opposite direction.
The demand curve is downward
∆𝑸
D sloping as shown in Fig. This will
happen in the case of inferior or
O Q1 Q2 X low quality goods.
Quantity Demand
Cross Elasticity of Demand
Cross elasticity of demand is the measurement of change in the quantity demanded of a
commodity due to change in price of related goods i.e. complement and substitute
goods. It can be expressed as:
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒅𝒆𝒎𝒂𝒏𝒅 𝒇𝒐𝒓 𝑿
Ec =
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒀
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅 𝒇𝒐𝒓 𝑿
x 100
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅 𝒇𝒐𝒓 𝑿
Ec =
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑;𝒓𝒊𝒄𝒆 𝒐𝒇 𝒀
x 100
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒀
∆𝑸𝒙
x 100
𝑸𝒙
Ec = ∆𝑷𝒚
x 100 Where, ∆𝑄𝑥 = Change in demand for ‘X’
𝑷𝒚 ∆𝑃𝑦 = Change in price of ‘Y’
Py = Initial price of ‘Y’
∆𝑸𝒙 𝑷𝒚
∴ Ec = x Qx = Initial demand for ‘X’
∆𝑷𝒚 𝑸𝒙
Types of Cross Elasticity of Demand

1. Positive Cross Elasticity of Demand (Ec > o)

If the quantity demanded for one commodity (say X) varies positively with the price of another
commodity (say Y), cross elasticity will be positive. In the case of substitute goods, the
cross elasticity of demand is positive.
Y
D

In the above figure, DD’ curve indicates that

Price of Y

P2 Ec > 𝟎
demand for X is positively related with the price
of Y, because they are substitutes. When the
P1
price Y-commodity increases from OP1 to OP2
quantity demanded for X-commodity increases
D from OQ1 to OQ2. Thus, cross elasticity of
O Q1 Q2 X
demand is positive.
Quantity Demanded for ‘X’
2. Negative Cross Elasticity of Demand (Ec = -ve)
If quantity demanded for one good and Price of another good are inversely related, then there is negative
cross elasticity of demand. In the case of complementary goods, cross elasticity of demand is negative.

Y
D

In figure, DD’ curve indicates that demand for ‘X’ and

Price of Y

P2
price of Y are inversely related because these are
Ec < 𝟎
complements. When the price of Commodity-X increases
P1
from OP1 to OP2 quantity demanded falls from OQ2 to
OQ1. Thus, cross elasticity of demand is negative.
D
O Q1 Q2 X
Quantity Demanded for ‘X’
3. Zero Cross Elasticity of Demand (Ec = 0):

Cross elasticity of demand is zero when two goods are not related to each other. If the change in price of
one good does not affect the quantity demanded for other good, then there is zero cross elasticity of
demand. For instance, increase in price of car does not affect the demand of cloth. Thus, cross elasticity
of demand is zero.

Y
D
Price of Y

P2 Perfectly inelastic demand curve is a

Ec = 𝟎 vertical straight line parallel to the Y-axis
as shown in Fig. It means price may be
P1
OP1, or OP2, the quantity demanded will
D be constant at OQ. It exists in case of
O Q unrelated goods.
X
Quantity Demanded for ‘X’
Price Elasticity of Supply
The price elasticity of supply is defined as the ratio of percentage change in quantity
supplied to the percentage change in price. It measures the responsiveness or
sensitiveness of supply to change in price. It can be expressed as,
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝐬𝐮𝐩𝐩𝐥𝐢𝒆𝒅
Es =
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

∆𝑸𝒔 𝑷
∴ Es = x
∆𝑷 𝑸𝒔

Where, Es = Price elasticity of supply

Qs = Initial quantity supplied
∆Qs = Change in quantity supplied
P = Initial price of goods
∆P = Change in price of goods
Types of Price Elasticity of Supply

1. Perfectly Elastic Supply (Es = ∞):

When a very small (negligible) change in price of a commodity causes infinitely large change in its
quantity supplied, it is a case of perfectly elastic supply.

Y The above figure shows perfectly

elastic supply curve where
quantity supplied keeps on
Es = ∞ changing at the same price P.
Price

P S Perfectly elastic supply curve is a

horizontal line parallel to the x-
axis. It means that at price OP,
quantity supplied can be OQ1 or
O Q1 Q2 Q3 X
OQ2 or OQ3. It is an ideal and
Quantity Supply imaginary situation.
2. Perfectly Inelastic Supply (Es = 0)
When the supply of a commodity does not change despite change in its price, the
supply is said to be perfectly inelastic. In other words, there is no effect of changes in
the price on the quantity supplied.

Y S
The above figure shows the inelastic
P3 supply curve showing that quantity
Es = 𝟎 supplied is fixed at OQ units
P2 irrespective of the price. Perfectly
Price

inelastic supply curve is a vertical

P1 straight line parallel to the Y-axis as
shown in Fig. 4.5. It means price may
O Q X be OP1, or OP2, or OP3, the quantity
Quantity Supply
supplied will be constant at OQ.
3. Relatively Elastic Supply (Es > 1)
When a change in price leads to a more than proportionate change in supply, the supply
is said to be relatively elastic. For example, if 20% change in price results 40% change
40%
in quantity supplied, then Es = = 2 i.e. Es > 1.
20%

Y
In the above figure, the elastic
supply curve shows that when the
price rises from OP1 to OP2,
S
Price

supply rises from OQ1 to OQ2.

P2 Es > 1
∆𝑷 The percentage change in quantity
P1 supply is more than the
S ∆𝑸 percentage change in price. The
supply curve is upward sloping
𝟎 Q1 Q2 X
and flatter as shown in Fig.
Quantity Supply
4. Relatively Inelastic Supply (Es < 1)
When a change in price leads to a less than proportionate change in the supply, the supply is said to be
less elastic or relatively inelastic. For example, if 20% change in price results 10% change in supply,
10%
then Es = = 0.5 i.e. Es < 1.
20%

Y
S
P2 In the above figure, inelastic
Price

Es < 1 supply curve shows that change

∆𝑷 in quantity supplied (Q1Q2) is
P1 less than change in price
∆𝑸 (P1P2). The supply curve is
S upward sloping and steeper as
𝟎 Q1 Q2 X shown in Fig.
Quantity Supply
5. Unitary Elastic Supply (Es = 1)
When percentage change in quantity supply is equal to the percentage change in price, the supply of a
commodity is said to be unitary elastic. For example, If 20% change in price results 20% change in
20%
supply, then Es = = 1.
20%
In the above figure, unitary
Y elastic demand curve shows
that change in quantity
S demanded (Q1Q2) is equal to
Price

P2 the change in price (P1P2).

Es = 1
The unitary elastic demand
∆𝑷
P1
curve is a straight upward
sloping line forming 45°
S ∆𝑸 angles with both the axis.
𝟎 Q1 Q2 X
Quantity Supply
Measurement of Price Elasticity of Demand
 Point Method
 Arc Method
 Percentage Method
Point Method
The method for measuring elasticity at a particular point on a demand curve is known
as point method. According to this method, elasticity of demand will be different on
each point of a demand curve.

Thus, point method is the measure of the proportionate change in quantity demanded in
response to a very small (negligible)proportionate change in price. The concept of point
method is suitable when change in price and the consequent change in quantity
demanded are very small.
1. Linear demand curve case:

𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐝𝐞𝐦𝐚𝐧𝐝 𝒄𝒖𝒓𝒗𝒆

Ep at any point =
𝑼𝒑𝒑𝒆𝒓 𝒔𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝒕𝒉𝒆 𝒅𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆
Applying the above formula in the demand curve DD, we get:
𝑴𝑫𝟏
Ep at M = = 1(since point M is mid-point of demand curve)
𝑴𝑫
𝑨𝑫𝟏 Y
Ep at A = >1
𝑨𝑫
D (ep = ∞)
𝑩𝑫𝟏
Ep at B = <1
𝑩𝑫
A (ep >1)

Price
𝑫𝑫𝟏 (e = 𝟏)
Ep at D =
𝟎
=∞ M p

B (ep <1)
𝟎
Ep at D1 = =0 (ep = 𝟎)
𝑫𝑫𝟏
D1
0 X
Quantity Demand
Non-linear demand curve case
In the given figure, DD is a non-linear demand curve. Suppose we want to measure the
elasticity at point ‘R’ on the demand curve DD1. For this a line (AB) tangent is drawn
through point R. Now, price elasticity of demand can be measured as;
𝑹𝑩 Y
Ep at R = D1
𝑹𝑨
It means, A

𝐋𝐨𝐰𝐞𝐫 𝐬𝐞𝐠𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝒕𝒂𝒏𝒈𝒆𝒏𝒕

Price
Ep at any point = R
𝑼𝒑𝒑𝒆𝒓 𝒔𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝒕𝒉𝒆 𝒕𝒂𝒏𝒈𝒆𝒏𝒕

D
0 B X
Quantity Demand
Arc Method
When elasticity is measured between two separate points on the same demand curve, the concept is called
Arc elasticity. We use arc elasticity method when there are large changes in price and quantity. The arc
method uses the average of initial and final values of both price and quantity for calculating elasticity.
Therefore, this method of measuring elasticity of demand is also known as Average Elasticity Method.
In the figure, AB is an arc on the demand curve
DD1. Now, price elasticity of demand can be
measured as Y
𝑷𝟏+𝑷𝟐
D1
𝜟𝑸 𝟐 𝜟𝑸 𝑷𝟏+𝑷𝟐
ep = . 𝑸𝟏+𝑸𝟐 = X
𝜟𝑷 𝜟𝑷 𝑸𝟏+𝑸𝟐 A
𝟐 P1

Price
Where,
Δ𝑄 = Change in quantity B
P2
Δ𝑃 = Change in price
P1 = Initial price D
P2 = final price 0 Q1 Q2 X
Q1 = Initial quantity
Q2 = Final quantity Quantity Demand
Percentage Method
Percentage method is one of the commonly used approaches of measuring price elasticity of demand under which
price elasticity is measured in terms of rate of percentage change in quantity demanded to percentage change in
price. According to this method, price elasticity of demand can be mathematically expressed as

𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

Ep =
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

∆𝑸 𝑷
∴ Ep = x
∆𝑷 𝑸

Where, Ep = Price elasticity of demand

Q = Initial quantity demanded
∆Q = Change in quantity demanded
P = Initial price of goods
∆P = Change in price of goods
Measurement of Income Elasticity of Demand
1. Point Method
The method for measuring elasticity at a particular point on a demand curve is known as point method.
The slope of the income demand curve in terms of normal goods is positive and in terms of inferior goods
it is negative.
Y
a) Linear Demand Curve: D1

Income
In the figure, DD1, is upward slopping income demand B
curve. It is required to measure income elasticity at point B.
𝑨𝑸𝟏 D
Ey at point B =
𝑶𝑸𝟏

According to above figure, AQ1 is greater than OQ1.

A 0 Q1 X
Thus, income elasticity at point ‘B’ is greater than one Quantity
(Ey >1).

We conclude that if the extended income demand curve meets the X-axis to the left of the point of
origin, income elasticity will be greater than one.
If the extended income demand curve meets the X-axis to the point of origin, income elasticity will be
equal to one (Ey = 1). It is shown in the figure below:

Y
D1

Income
M

D
In the figure, DD1 is upward slopping demand
curve. It is required to measure income elasticity at 0 Q X
point ‘M’. Quantity
𝑶𝑸
Ey at point ‘M’ = =1
𝑶𝑸
If the extended income demand curve meets the X-axis to the right of the point of origin, income
elasticity will be less than one (Ey < 1). It is shown in the figure below;

Y
D1
In the figure, demand curve DD1, is positively

Income
sloped. It is required to measure income elasticity N
at point ‘N’. Thus,

𝑨𝑸 D
Ey at point ‘N’ =
𝑶𝑸
0 A Q X
According to above figure, OQ is greater than Quantity
AQ. Thus, income elasticity at point ‘N’ is less
than one (Ey < 1).
b) Non-Linear Demand Curve:

If the income demand curve is non-linear then the income elasticity of demand at a point can be
measured by drawing a tangent line to that point where the elasticity is measured. And apply the same
process of linear demand curve.

In the above figure, DD1, is the non-linear demand D1

M
Y
curve. Income elasticity at point A can be measured
by drawing a tangent RS through the point A. Then,

Income
𝑹𝑸𝟏 B S
Ey at point A =
𝑶𝑸𝟏
A
Since, RQ1 is greater than OQ1, income elasticity at D
point A is greater than one (Ey > 1). Similarly,
𝑵𝑸𝟐
Ey at point ‘B’ =
𝑶𝑸𝟐
R 0 N Q1 Q2 X
Since, NQ2 is less than OQ2, income elasticity at Quantity
point B is less than one (Ey < 1).
2. Arc Method:
When elasticity is measured between two separate points on the same demand curve,
the concept is called Arc elasticity. The arc method uses the average of initial and final
values of both income and quantity for calculating elasticity. Therefore, this method of
measuring elasticity of demand is also known as Average Elasticity Method.

Now, income elasticity of demand can be measured as,

𝐘𝟏+𝐘𝟐
𝜟𝑸 𝟐
Where,
Ey = . 𝑸𝟏+𝑸𝟐 Δ𝑄 = Change in quantity
𝜟𝒀
𝟐
Δ𝑌 = Change in income
Y1 = Initial income
𝜟𝑸 𝐘𝟏+𝐘𝟐
= x Y2 = final income
𝜟𝒀 𝐐𝟏+𝐐𝟐
Q1 = Initial quantity
Q2 = Final quantity
Measurement of Cross Elasticity of Demand
1. Point Method

a) Case of substitute goods: There is positive relationship between price of one good and
demand for another good, in case of substitute goods. Thus, demand curve for substitute goods is
upward slopping. It is shown in the figure below:
Y
D1
Cross elasticity at point R can be measured by extending

Price of Y
the demand curve downward so as to meet the x-axis at R
point ‘A’. Thus,
𝑨𝑸
Cross elasticity at point ‘R’ =
𝑶𝑸 D

Since AQ is less than OQ, cross elasticity at point R is

0 A Q X
less than one (Ec < 1).
The same process can be applied to calculate Ec at any Quantity demand for X
other point on the given demand curve.
b) Case of complementary goods: There is inverse relationship between price of one good and
demand for other goods in case of complementary goods. Thus, the demand curve for complementary
goods is downward slopping. It is shown in the figure below:
𝑳𝒐𝒘𝒆𝒓 𝒔𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆
Cross elasticity at point ‘M’ =
𝑼𝒑𝒑𝒆𝒓 𝒔𝒆𝒈𝒎𝒆𝒏𝒕 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆
Y
𝑴𝑩 A
=
𝑨𝑴

Price of Y
Since ’M’ is the mid-point of the demand curve, MB is M
equal to AM. The cross elasticity of demand is equal to
one (Ec= 1).

0 B X
The same process can be applied to calculate Ec at any
Quantity demand for X
other points on the given demand curve.
2. Arc Method

When elasticity is measured between two separate points on the same demand curve, the concept is called
Arc elasticity. The arc method uses the average of initial and final values of both price and quantity for
calculating elasticity. Therefore, this method of measuring elasticity of demand is also known as Average
Elasticity Method. Now, cross elasticity of demand can be measured as
𝐏𝐲𝟏+𝐏𝐲𝟐
𝚫𝑸𝒙 𝟐
Ec = . 𝑸𝒙𝟏+𝑸𝒙𝟐
𝚫𝑷𝒚
𝟐

𝚫𝑸𝒙 𝐏𝐲𝟏+𝐏𝐲𝟐
= x
𝚫𝑷𝒚 𝐐𝐱𝟏+𝐐𝐱𝟐
Where,
Δ𝑄𝑥 = Change in quantity of ‘X’
Δ𝑃𝑦 = Change in price of ‘Y’
Py1 = Initial price of ‘Y’
Py2 = final price of ‘Y’
Qx1 = Initial quantity of ‘X’
Qx2 = Final quantity of ‘X’
1. Consider the following table to calculate:

Combination A B C D
Price 10 14 18 20
Quantity demanded 20 15 8 2

a) Price elasticity of demand from A to B.

b) Price elasticity of demand from D to C.
c) Average elasticity of demand from B to D and interpret your results.
[2008 Fall]
2. Calculate price elasticity of demand at price Rs 100 for the demand curve P = 300 – Q/2 and
interpret the result.
[2007 Spring]
3. Suppose that price of coffee increases from Rs. 15 to Rs. 25 per cup and as a result, demand for
tea increases from 10 to 30 cups per week. Calculate the cross elasticity of demand.
4. Nirmala buys 50 units of commodity X at Rs. 5 per unit. The price elasticity of demand for
commodity X is (-2). At what price will she be willing to purchase 100 units commodity X?
5. As a result of 2% fall in price of food its demand rises by 8%. Find out price elasticity of
demand. [TU. 2072]
7. Suppose that demand for meat per month increases from 3 Kg to 5 Kg when income of the
consumer increases from Rs. 6000 to Rs.8000. Find income elasticity of demand.
8. Demand for business economics text is given by Q = 1000 – 3P. The book is initially priced at Rs.
150
a) Compute the point price elasticity at P = Rs. 150.
b) Compute the arc price elasticity for a price decrease from Rs. 150 to Rs. 100
9. Suppose that your demand schedule for compact discs is as follows:
Price (in Rs.) 8 10 12 14 16
Quantity demanded 40 32 24 16 8
(Income = Rs. 10,000)
Quantity demanded 50 45 30 20 12
(Income = Rs. 12,000)

a) Calculate your price elasticity of demand as the price of compact discs increases from Rs. 8 to
Rs. 10 if your income is Rs. 10,000.
b) Calculate income elasticity of demand as your income increases from Rs. 10000 to 12000 if
price is Rs. 14.
[2009 Fall]
10 A publishing company plans to publish a book. From the sales data of other publishers of similar
books, it works out the demand function for the book as Qd = 500 – 5P. find out:
i. Point – elasticity of demand at price Rs 20, and
ii. Arc elasticity for a fall in price from Rs 25 to Rs 20.
[2011 Spring]
11. Find the cross elasticity of demand between tea(X) coffee(Y) and tea(X) and sugar (Z)
fromthe data given below.
Product Before After
Price (Rs/Unit) Quantity Price (Rs/Unit) Quantity
demanded demanded
Coffee (Y) 30 300 20 400
Tea(X) 10 150 10 100
Sugar (Z) 15 100 20 90
Tea(X) 10 150 10 120
[2009 Spring]