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The law of demand explains that demand will change due to a change in the price of the
commodity. But it does not explain the rate at which demand changes to a change in price.
The concept of elasticity of demand measures the rate of change in demand. The concept of
elasticity of demand was introduced by Alfred Marshall.
DEFINITION OF PRICE ELASTICITY OF DEMAND:
According to him the elasticity (or responsiveness) of demand in a market is great or
small according as the amount demanded increases much or little for a given fall in price, and
diminishes much or little for a given rise in price.
Types of Elasticity of Demand
There are three types of elasticity of demand;
1. Price elasticity of demand;
2. Income elasticity of demand; and
3. Cross-elasticity of demand
1. Price elasticity of demand
The degree of responsiveness of quantity demanded to a change in price is called price
elasticity of demand
Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price
There are five types of price elasticity of demand. (Degree of elasticity of demand) Such as
perfectly elastic demand, perfectly inelastic demand, relatively elastic demand, relatively
inelastic demand and unitary elastic demand
change in price leads to small change in demand. In this case demand curve will be
steeper and e p=<1
3) Cross-elasticity of demand
The responsiveness of demand to changes in prices of related goods is called crosselasticity of demand (related goods may be substitutes or complementary goods). In other
words, it is the responsiveness of demand for commodity x to the change in the price of
commodity y.
The relationship between x and y commodities may be substitutive as in the case of tea and
coffee (or) complementary as in the case of pen and ink.
Measures of cross-elasticity of demand
Infinity - Commodity x is nearly a perfect substitute for commodity y
Zero - Commodities x and y are not related.
Negative - Commodities x and y are complementary.
Measurement of Elasticity
There are various methods for the measurement of elasticity of demand. Following are the
important methods:
1. Proportional or Percentage Method: Under this method the elasticity of demand is
measured by the ratio between the proportionate or percentage change in quantity demanded
and proportionate change in price. It is also known as formula method.
It can be computed as follows:
ed =
This method was developed by Marshall. Under this method, the elasticity is measured by
estimating the changes in total expenditure as a result of changes in price and quantity demanded.
This has three components
If the price changes, but total expenditure remains constant, unit elasticity exists.
If the price changes, but total expenditure moves in the opposite directions, demand is
elastic (>1).
If the price changes and total revenues moves in the same direction, demand is inelastic
(<1).
3. Geometric or Point method: This also developed by Marshall. This is used as a measure of
the change in quantity demanded in response to a very small change in the price. In this method
we can measure the elasticity at any point on a straight line demand curve by using the following
formula;
ed =
In the above diagram, AB is a straight line demand curve with P as its middle point. Further it is
assumed that AB is 6 cm. then, At point P, ed = PB/PA=3/3=1;At point P1, ed = P1B/P1A=
4.5/1.5= 3=>1;At point A, ed = AB/A= 6/0= (infinity);At point P2, ed = P2B/P2A = 1.5/4.5 =
1/3 = <1, At point B, ed = B/BA = 0/6 = 0.
4. Arc Method: The point method is applicable only when there are minute (very small) changes
in price and demand. Arc elasticity measures elasticity between two points. It is a measure of the
average elasticity According to Watson, Arc elasticity is the elasticity at the midpoint of an arc
of a demand curve. formula to measure elasticity is:
ed = Q/ P (P1+P2) (Q1+Q2)
Where, Q= change in quantity Q1= original quantity
P1 = original price Q2= new quantity
P2 = New price P= change in price