To understand the meaning of Elasticity of demand To know various types of elasticity of demand Calculating the different types of elasticity

of demand Interpretation of Values of elasticity of demand

Definition
as the responsiveness of the quantity demanded of a good changes in one of the variables on which demand depends Or it is the percentage change in quantity demanded divided by the percentage in one of the variables on which demand depends

Price Elasticity of Demand:

Percentage Change in Quantity Demanded Divided by the Percentage Change in Price Other things Remaining Same

Price Elasticity of Demand

% Change in Q.D. Ep = % Change in Price

Change in Quantity Original Price Ep = Change in Price Original Quantity

Perfectly Elastic Demand:

A Little Change in Price will Cause an Infinite Change in Demand A very little Rise in Price causes the Demand to Fall to Zero A very little Fall in Price causes Demand to Extend to Infinity

Y 6 D E = infinite D

Price (Rs.)

10 20

30

Quantity

Perfectly Inelastic Demand:

A Change in Price Produces No Change in the Quantity Demanded Elasticity of Demand is Zero

Y E=0 D

Price (Rs.)

2 D 0 2 4 Quantity 6 X

Unitary Elastic Demand:

Is a Percentage Change in Price Produces an Equal Percentage Change in Demand This type of Demand Curve is called Rectangular Hyperbola

Y D

Price (Rs.) (%)

P E=1

N Quantity (%)

Greater than Unitary Elastic Demand

Percentage Change in Price Produces Relatively more percentage Change in Demand In this case Elasticity of Demand is Greater than Unitary

Y
D P E>1 Price (Rs.) (%) T

M N Quantity (%)

Less than Unitary Elastic Demand:

is one in which a given Percentage Change in Price Produces Relatively Less Percentage Change in Demand Elasticity of Demand is Less then Unitary

Y D P Price (Rs.) (%) E< 1

T D

N Quantity (%)

Point Elasticity of Demand:

Refers to Measuring the Elasticity at a Particular Point on Demand Curve Makes Use of Derivative Changes Rather than Finite Changes in Price & Quantity

Defined as:

Elasticity at a point on the demand curve

Y t R

P r I c e

T Quantity

Y E= M E>1 Price (Rs) A E =1 P E<1 Mid Poin t O B N Quantity E =0 X

 as we Move from N to M, Elasticity Goes on Increasing at Mid Point, Ep = 1 at Point N Ep = 0 & at Point M Ep =

When Elasticity is to be found between 2 Points, we use Arc Elasticity

Y
A P1 Arc Elasticity

Price (Rs)

B P2

Q1

Q2

X Quantity

Where, p1 = Original Price q1 = Original Quantity p2 = New Price q2 = New Quantity

This Method was evolved by Alfred Marshall To Measure the Elasticity of Demand
it is Essential to Know How Much In What Direction the Total Expenditure has changed as a Result of Change in the Price of a Good

Is the Degree of Responsiveness of Quantity Demanded of a Good to a Small Change in the Income of Consumer

Ey =

% Change in Quantity Demanded % Change in Income

Change in the Demand of One Good in Response to a Change in the Price of Another Good

Where

Ec = Cross Elasticity qx = Original Q.D. of X qx = Change in Q.D. of X py = Original Price of Y py = Change in Price of Y

Substitutes Products
The cross demand curve slopes upwards More of quantities will be demanded whenever there is a rise in price of substitute commodity Example: When the demand for coffee increases the demand for coffee become less due to operations of the law of demand The price of the tea is assumed to be constant

Substitutes Products
Y P1 D

Substitutes

D O M M1

Quantity Demanded of Tea

Complementary Goods
A change in price of a good will have an opposite reaction on the demand of other commodity which is closely related Example An increase in demand for pen will necessarily increase the demand for ink So also bread and butter There is an inverse relationship between the price of a commodity Other things remaining same

Y
D P Complementary Price of Pen T

X M N Quantity Demand of Ink

The horizontal demand curve parallel to xaxis implies that the elasticity of demand is Zero Infinite Equal to one Greater than zero but less than infinity

a. b. c. d.

The horizontal demand curve parallel to xaxis implies that the elasticity of demand is

a. Zero b. Infinite c. Equal

to one d. Greater than zero but less than infinity

When quantity demanded changes by larger percentage than does price, elasticity is termed as: Inelastic Elastic Perfectly elastic Perfectly inelastic

a.

b.
c. d.

When quantity demanded changes by larger percentage than does price, elasticity is termed as:

a. Inelastic b. Elastic c. Perfectly

elastic d. Perfectly inelastic

If the goods are perfect substitutes for each other than cross elasticity is Infinite One Zero None of the above

a. b. c. d.

If the goods are perfect substitutes for each other than cross elasticity is

a. Infinite b. One c. Zero d. None

of the above

When the elasticity of demand will be zero?

Quantity demand remains unchanged irrespective of any change in price Percentage change in quantity demand is more than percentage change in price No change in price and quantity demand None of the above

a. b. c. d.

When the elasticity of demand will be zero?

a. Quantity

demand remains unchanged irrespective of any change in price b. Percentage change in quantity demand is more than percentage change in price c. No change in price and quantity demand d. None of the above


a. b. c. d.

Elasticity of demand is greater than one is The percentage change in quantity demand is less than percentage change in price The percentage change in quantity demand is equal to the percentage change in price The percentage change in quantity demand is greater than percentage change in price No change in quantity demand when price changes.

Elasticity of demand is greater than one is a. The percentage change in quantity demand is less than percentage change in price b. The percentage change in quantity demand is equal to the percentage change in price c. The percentage change in quantity demand is greater than percentage change in price d. No change in quantity demand when price changes.

Perfectly elastic means elasticity of demand is One Zero Greater than zero but less than one Infinity

a. b. c. d.

Perfectly elastic means elasticity of demand is

a. One

b. Zero
c. Greater d. Infinity

than zero but less than one

Total outlay method is also known as

Total revenue method Total expenditure method Revenue and expenditure method None of the above

a.

b.
c. d.

Total outlay method is also known as

a. Total

revenue method b. Total expenditure method c. Revenue and expenditure method d. None of the above

The demand for common salt is

Elastic Inelastic Equal to one Greater than one

A.

B.
C. D.

The demand for common salt is

A. Elastic

B. Inelastic
C. Equal

to one D. Greater than one

Price elasticity can be measured

At a point of a demand curve Outside the demand curve Middle point of the demand curve None of these

a.

b.
c. d.

Price elasticity can be measured

a. At

a point of a demand curve b. Outside the demand curve c. Middle point of the demand curve d. None of these

If two goods are perfect substitutes then cross elasticity demand is Finite Infinite Income Price

a. b. c. d.

If two goods are perfect substitutes then cross elasticity demand is

a. Finite b. Infinite c. Income d. Price