Class 5 measurements and types of elasticity of demand

Elasticity of Demand

Definition of Elasticity

A general definition:

• “Elasticity” is a measure of the degree of sensitivity ( or responsiveness) of one variable to changes in another variable.

• Elasticity is defined as a ratio of the percentage change in the dependent variable to the percentage change in the independent variable

• The price elasticity of Demand : The price elasticity of demand is a measure of the degree of sensitivity of demand to changes in the price of product –X.

Types in Elasticity of Demand

1. Price Elasticity of Demand (Ep)

2. Income Elasticity of Demand (EI )

3. Cross Elasticity of Demand (Ec)

4. Advertising Elasticity of Demand (Ea)

Measurement of Elasticity

1. Perfectly Elastic Demand

2. Relatively Elastic Demand

3. Unity Elastic Demand

4. Relatively Inelastic Demand

5. Perfectly Inelastic Demand

Measurements : Types of ElasticityMeasurements of Elasticity

Perfectly Elastic Demand

Relatively Elastic Demand

Unity Elastic Demand

Relatively Inelastic Demand

Perfectly Inelastic Demand

Types of

Elasticity of Demand

Price Elasticity of Demand

Perfectly Price Elasticity of Demand

Relatively Price Elasticity of Demand

Unity Price Elasticity of Demand

Relatively Price Inelasticity of Demand

Perfectly Price Inelasticity of Demand

Income Elasticity of DemandCross Elasticity of DemandAdvertising Elasticity of Demand

How to Measure Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of demand to changes in price. The price elasticity of demand for a commodity is the rate at which quantity bought changes as the price changes. It is denoted by (Ep)

2 1

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EP PP

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demandedquantitytheinechangeoportionatE p Pr

Pr

Perfectly Price Elasticity of Demand• It is one in which a no or very small change in price

will cause a large change in amount demanded. A no or very small rise in price reduces the demand to zero. A small decrease in price leads to a big expansion in demand.

(Ep=∞)

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EP PP

Relatively Price Elasticity of Demand

• The demand is said to be relatively elastic when the change in demand is more than the change in price.

(Ep>1)

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EP PP

Unity Price Elasticity of Demand• In this type of demand a given percentage change in

price leads to exactly the same percentage change in amount demanded. As there is no change in the demand and price it is called as unitary demand.

(Ep=1)

2 1

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EP PP

Relatively Price Inelasticity of Demand

• When the change in demand is less than the change in price, then the demand is said to be inelastic.

(E<1)

2 1

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EP PP

Perfectly Price Inelasticity of Demand

• This is one which shows that whatever the change in price may be the amount demanded remains same.

(Ep=0)

2 1

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2 1

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EP PP

Problems : Elasticity of Demand

@Determine the price elasticity of demand given that the quantity demanded for product M is 1000 units at a price of Rs. 100 and the price decline to Rs. 70, the quantity demanded increases to 1100 units.

@Determine the Income elasticity of demand given that the quantity demanded for product R is 1000 units at a daily income of consumer is Rs. 100 and the daily income of consumer is declined to Rs. 80, the quantity demanded decreases to 700 units.

Types & Measurements: Elasticity of Demand

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