Q.1 Mention the demand function. What is the elasticity of demand?

Describe the determinants of elasticity of demand.

Ans. Demand:- The concept “Demand” refers to the quantity of a goods or

service that consumer are willing and able to purchase at various price
during a period of time.

Demand = Desire to buy + Ability to pay + Willingness to pay.

The following are some of the important feature of demand-

• It is backed up by adequate purchasing power.

• It is always at a price.
• It should always be expressed in terms of specific quantity.
• It is related to time.

Consumer creates demand. Demand basically depends on utility of a

product. There is a direct relation between the i.e. higher the utility, higher
would be demand and lower the utility, lower be the demand.

Demand Curve:- A demand curve is a locus of points showing various

alternative price – quantity combinations. In short, the graphical
presentation of the demand schedule is called as a demand curve.

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Price 8
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0 100 200 300 400 500 X

Demand
 Demand Function:-

The demand for a product or service is affted by its price, the income of
the individual, the price of other substitutes, population, habit etc. thus we
can say that demand is a function of the price of the product.
Demand function is a comprehensive formulation which specifies the
factors that influence the demand for a product. Mathematically, a demand
function can be represented in the following manner,

Dx = f ( Px, Ps, Pc, Ep, Y, Ey, T, W, A, U...etc). Where,

Dx = Demand for commodity X
Px = Price of the Commodity X
Pc = Price of the complements
Ps = Price of the substitutes
Ep = Expected future price
Ey = Expected income in future
Y = Income of the consumer
T = Tastes and preferences
A = Advertisement and its impact
W = Wealth of the consumer
U = All other determinants

Elasticity of Demand

Meaning and Definition: - The term elasticity was developed by Alfred

Marshall, and is used to measure the relationship between price and quantity
demanded. The law states that the price of a commodity falls, the quantity
demanded of that commodity will increase, i.e. it explains only the direction
of change in demand and not the extent of change.This deficiency is
removed by the concept of elasticity of demand.

Elasticity means responsiveness. Elasticity of demand refers to the

responsiveness of quantity demanded of a commodity to change in its price.

Elasticity of demand is generally defined as the responsiveness or

sensitiveness of demand to a given change in the price of a commodity.

Types of elasticity of demand:-

These are three types of elasticity—

 1) Price Elasticity of Demand
2) Income Elasticity of Demand
3) Cross Elasticity

1) Price Elasticity of Demand-

Price elasticity of demand may be defined as the

degree of responsiveness of quantity demanded of a commodity in
response to change in its price i.e. it measures how much a change in price
of a good affects demand for that good, all other factors remaining constant.
It is calculated by dividing the proportionate change in quantity demanded
by the proportionate change in price.

Ep = Proportionate change in quantity demandProportionate

change in price

2) INCOME ELASTICITY-

Income Elasticity is a measure of responsiveness of potential

buyers to change in income. It shows how the quantity demanded will
change when the income of the purchaser changes, the price of the
commodity remaining the same. It may be defined thus: The Income
Elasticity of demand for a good is the ratio of the percentage change in the
amount spent on the commodity to a percentage change in the consumer’s
income, price of commodity remaining constant. Thus,

Ei = % change in quantity demand% change in income

3)CROSS ELASTICITY-

Here, a change in the price of one good causes a change in the demand for
another. It is measured as the percentage change in demand for the first
good that occurs in response to a percentage change in price of the second
good.
For example, if, in response to a 10% increase in the price of fuel, the
demand of new cars that are fuel inefficient decreased by 20%, the cross
elasticity of demand would be −20%/10% = −2.
Ec = % change in demand pf product A% change in price on
product B