ELASTICITY OF DEMAND

SYNOPSIS
•INTRODUCTION
• DEFINITION
•INCOME ELASTICTY OF DEMAND
•TYPES OF INCOME ELASTICTY OF DEMAND
•GROSS ELASTCITY OF DEMAND
•TYPES OF GROSS ELASTICITY OF DEMAND
•TYPES OF PRICE ELASTICITY OF DEMAND
ELASTICITY OF DEMAND
Responsiveness of the demand to change in price of
commodity is known as elasticity of demand.
Demand extends or contracts respectively with a fall
or rise in price. The quality of demand by virtue of
which changes (increases or decreases). When price
changes (increases or decreases) is called elasticity of
demand.
 DEFINITION
“The elasticity of demand in a market is
greater or small according to the amount
demanded increases much or little for a
given fall in price and diminishes much or
little for a given rise in price”.

-BY ALFRED
MARSHAL
TYPES OF PRICE ELASTICITY OF DEMAND
PERFECTLY INELASTIC DEMAND
Perfectly inelastic demand is one in which a change
in price cause no cause in the quantity demanded.
y

6
P
R 4
I
C 2
E

0
x
2 4 6
QUANTITY
PERFECTLY ELASTIC DEMAND
The perfectly elastic demand is one in which a slight
change in price will cause an infinite change in
demand. y

P 6
R
I E=∞
C 4
E

0 10 20 30
x
QUANTITY
UNITARY ELASTIC DEMAND
Unitary elastic demand is one in which percentage
change in price produces an equal percentage change
y
in demand .
P P
R E=1
I
C P1
E
M N
x
0
QUANTITY
MORE THAN UNIT ELASTIC
Demand is 1 in which a given percentage change in price
causes relatively more
y
percentage change in demand.

P1

0 x
M N
QUANTITY
LESS THAN OR UNIT ELASTIC DEMAND
Less than unitary elastic demand is one in which a given
percentage change in price
y
causes relatively less percentage
change in demand.
P
E<1

P1

M N x
0
QUANTITY
 INCOME ELASTICITY OF DEMAND

The change in demand because of change in

income of the consumer. It is not necessary that
there should be a change in price and then only
there shall be a change in demand for a
commodity. Quite often it is seen that an increase
or decrease in the income brings about a change
in demand of the commodity.
TYPE OF INCOME ELASTICITY OF DEMAND
ZERO INCOME ELASTICITY OF DEMAND
This refers to the situation where a given increase in consumers
income does not result in any increase of the quantity demanded
of a commodity.
NEGATIVE INCOME ELASTICITY OF DEMAND
This refers to the situation where a given increase in the
consumers income is followed by an actual fall in the quantity
demanded of the commodity. This happens in the case of
economically inferior goods.
POSITIVE INCOME ELASTICITY OF DEMAND
An increase in the income may lead to an increase in the quantity
demanded of the product. This happens in the case of superior goods.
CROSS ELASTICITY OF DEMAND.
It is ratio of proportionate change in the quantity demanded
of Y to a given proportionate change in the price of the
related commodity X. For example :- Change in the price
of tea causes change in the demand of the coffee. Mutual
relationship between quantity demanded of a good due to
change in price of an other good can be measured by cross
elasticity of demand.
TYPES OF CROSS
ELASTICITY OF DEMAND
POSITIVE

If X and Y are substitute a rise in price of Y will raise the

demand of X and in such a case the cross elasticity of
demand is positive.
NEGATIVE

In case of negative elasticity of demand. If X and Y are

complementary goods a rise in the price of Y will not only
reduce the demand of Y but also for X and in such a case the
cross elasticity of demand is negative.
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