Elasticity of Demand

Presented by: Hasan Shoukat

Teacher: Sir Iqbal Panhwar
Course : Economics
Law of demand
 It states that if price of commodity is decreased then quantity demanded
will be increased and if price of commodity is increased then quantity
demanded will be decreased.
 It only tells us qualitative statement

Elasticity of Demand

 It tells us how much or to what extent quantity demanded will change in

response to change in price. It gives quantitative statement
Types
 1) Price Elasticity
 2) Income Elasticity
 3) Cross Price elasticity
1) Price Elasticity
 The Price Elasticity of Demand is commonly known as the elasticity of
demand, which refers to the degree of responsiveness of demand to the
change in the price of the commodity.
 Price Elasticity= Ep = % change in quantity demand
% change in Price
where,
 % change in quantity demand = change in demand × 100
original demand
% change in price = change in price × 100
original price
Q. When price apples was 10 Rs/kg the demand was 50 kg but now price has been
raised to 15Rs/kg and demand is decreased to 2kg. Calculate the price elasticity?
Types of Price elasticity of demand
1) Perfectly In-elastic (Ep =0)
2) In elastic (Ep =<1)
3) Unit elastic (Ep =1)

4) Perfectly Elastic (Ep = ∞)

5) Elastic (Ep >1)
1) Perfectly In-Elastic (Ep= 0)
 When there is no change in the demand for a product due to the change in
the price, then the demand is said to be perfectly inelastic.
 Here, the demand curve is a straight vertical line which shows that the
demand remains unchanged irrespective of change in the price., i.e. quantity
OQ remains unchanged at different prices, P1, P2, and P3.
2) In-elastic (Ep =<1)
 When the major change in the price of the product occurs but slight change in
denmand occurs then it is said to be in-elastic price of demand.
 The graph shows that the change in the quantity from Q0 to Q1 is relatively
smaller than the change in the price from OP1 to Op2.
3) Unit elastic (Ep =1)
 The demand is unitary elastic when the proportionate change in the price of a
product results in the same change in the quantity demanded
 The grape here which shows that area under the curve is equal to one.
4)Perfectly Elastic (Ep = ∞)
 When there is no change in the price for a product but change in the quantity
demand, then the demand is said to be perfectly elastic.
 In perfectly elastic demand the demand curve is a straight horizontal
line which shows, the flatter the demand curve the higher is the elasticity of
demand.
5)Elastic (Ep >1)
 The demand is said to be elastic when a slight change in the price of a
commodity causes a major change in its quantity demanded
2) Income Elasticity

 The income is the other factor that influences the demand for a product. Hence,
the degree of responsiveness of a change in demand for a product due to the
change in the income is known as income elasticity of demand. The formula to
compute the income elasticity of demand is:

 Ei = % change in demand
% change in income
Where,

 % change income = change in income × 100

original income
 % change in demand = change in demand × 100
original demand
 Q. When Ali had income of 10,000 ,He demanded 300 units of certain
product. Now his income has been increased to 15,0000 now he demands 500
units of that product. Calculate Elasticity of income?
3)Cross-Price Elasticity of Demand
 The cross elasticity of demand refers to the change in quantity demanded for
one commodity as a result of the change in the price of another commodity.
This type of elasticity usually arises in the case of the interrelated goods such
as substitutes
 Ec = % change in quantity demanded of good 1
%change in the price of good 2
Q. There is 20 % rise in the quantity demand of Coca cola and 50% increased in
the of Pepsi. Calculate the cross-price elasticity of demand?.