Sugyanta Priyadarshini
KSOH, KIIT
Contents of Chapter
• PRICE ELASTICITY OF DEMAND
• TYPES OF PRICE ELASTICITY DEMAND
• INCOME ELASTICITY OF DEMAND
• CROSS ELASTICITY OF DEMAND
• GEOMETRICAL METHOD OF ELASTICITY
• MID POINT METHOD OF ELASTICITY
• TOTAL EXPENDITURE METHOD
• FACTORS AFFECTING ELASTICITY OF DEMAND
• NUMERICALS
Price elasticity of demand is an economic measure of the change in the
quantity demanded or purchased of a product in relation to its price change.
Expressed mathematically, it is:
Q1 – Final quantity
Q0- Initial Quantity
P1- Final Price
P0- Initial Price
Arc
Method/Mi
d-point
Method
Measuring Percentage
Total
Price /Proportio
Expenditure
Method elasticity nate/Flux
of demand Method
Point/Geo
metric
Method
QUESTION 1
When price of a good is 12 per unit, the consumer
buys 24 units of that good. When price rises to 14 per
unit, the consumer buys 20 units. Calculate Price
Elasticity of Demand.
QUESTION 2
A 5% fall in price of a good leads to 10% rise in
its demand. A consumer buys 40 units of a
good at a price of 10 per unit. How many units
will he buy at a price of 12 per unit? Calculate.
QUESTION 3
A 5% rise in price of a good leads to 5% fall in
its demand. A consumer buys 100 units of a
good when price is 5 per unit. At what price
will he buy 120 units? Calculate.
QUESTION 4
Price Elasticity of Demand of a good is (-) 2.
The consumer buys a certain quantity of this
good at a price of Rs 8 per unit. When the
price falls he buys 50% more quantity. What is
the new price?
Ed = ∞
Ed <1
QUESTION 5
If a consumer’s demand for a commodity
increases from 100 units/week to 200
units/week when his income rises from 2000
to 3000 Rs. Find income elasticity of demand.
Qo = 100
Q1 =200
∆Q = 100
Yo = 2000
Y1= 3000
∆Y = 1000
Ey = ∆Q/∆Y * Yo/Qo
= 100/1000 * 2000/100
=2
QUESTION 6
The price of X increases from Rs 50/kg to Rs
70/kg and as a result, the demand for Y
increases from 5kg to 10kg. What is the Cross
Elasticity of demand of Y for X? Which type of
goods are X and Y?
Qo = 5
Q1 =10
∆Q = 5
Po = 50
P1= 70
∆P = 20
Ep= ∆Q/ ∆P * Po/Qo
= 5/20 * 50/5
= 2.5
As elasticity of demand is positive so X and Y are substitute
goods.
N= 0/MN
B= BN/BM
P= PN/PM
A= AN/AM
M= MN/0
MID-POINT/ARC METHOD
OF ELASTICITY
Any two points on a demand curve make
an arc, and the coefficient of price
elasticity of demand of an arc is known as
arc elasticity of demand. This method is
used to find out price elasticity of
demand over a certain range of price and
quantity.
QUESTION 7
When price of a good rises from Rs 5 per unit
to 6 per unit, its demand falls from 20 units to
10 units. Compare expenditure on the good to
determine whether demand is elastic or
inelastic.
QUESTION 8
8 units of a good are demanded at a price of ?
7 per unit. Price Elasticity of Demand is (-) 1.
How many units will be demanded if the price
rises to ? 8 per unit? Use expenditure
approach of Price Elasticity of Demand to
answer this question.
QUESTION 9
A consumer buys 10 units of a good at a price
of ? 6 per unit. Price Elasticity of Demand is (-)
1. At what price will he buy 12 units? Use
expenditure approach of Price Elasticity of
Demand to answer this question
FACTORS AFFECTING PRICE ELASTICITY OF
DEMAND
• Nature of commodity
• Availability of substitutes
• Income Level
• Level of price
• Postponement of Consumption
• Time Period
• Habits
Nature of commodity
Elasticity of demand of a commodity is influenced by its nature. A
commodity for a person may be a necessity, a comfort or a luxury.
• When a commodity is a necessity like medicines, its demand is
generally inelastic as it is required for human survival and its
demand does not fluctuate much with change in price.
• When a commodity is a comfort like refrigerator, its demand is
generally elastic as consumer can postpone its consumption
• When a commodity is a luxury like AC, its demand is generally more
elastic as compared to demand for comforts.
The term ‘luxury’ is a relative term as any item (like AC), may be a
luxury for a poor person but a necessity for a rich person.
Availability of substitutes
• Demand for a commodity with large number of
substitutes will be more elastic. The reason is
that even a small rise in its prices will induce the
buyers to go for its substitutes.
• For example, a rise in the price of Pepsi
encourages buyers to buy Coke and vice-versa
Income Level
Elasticity of demand for any commodity is generally less
for higher income level groups in comparison to people
with low incomes. It happens because rich people are
not influenced much by changes in the price of goods.
But, poor people are highly affected by increase or
decrease in the price of goods. As a result, demand for
lower income group is highly elastic.
Level of Price
Costly goods like laptop, Plasma TV, etc. have highly elastic
demand as their demand is very sensitive to changes in their
prices.
Demand for inexpensive goods like needle, match box, etc. is
inelastic as change in prices of such goods do not change
their demand by a considerable amount.
Postponement of Consumption
Commodities like biscuits, soft drinks, etc. whose
demand is not urgent, have highly elastic demand as
their consumption can be postponed in case of an
increase in their prices.
Commodities with urgent demand like life saving drugs,
have inelastic demand because of their immediate
requirement.
TIME PERIOD
Elasticity of demand varies directly with the time period.
Demand is generally inelastic in the short period.
It happens because consumers find it difficult to change their
habits, in the short period, in order to respond to a change in
the price of the given commodity. However, demand is more
elastic in long rim as it is comparatively easier to shift to
other substitutes, if the price of the given commodity rises.
Habits
Commodities, which have become habitual
necessities for the consumers, have less elastic
demand. It happens because such a commodity
becomes a necessity for the consumer and he
continues to purchase it even if its price rises.
Alcohol, tobacco, cigarettes, etc. are some
examples of habit forming commodities.
QUESTION 10
Let demand function be Q=225-15P. Find
demand elasticity when price equals Rs 5.
If p=5, then
Q= 225-15*5 = 150
∆Q/ ∆P = -15
Ep= (-) (-15) * (5/150)
= 0.5
QUESTION 11
The demand for personal computers is characterized by the following:
Price elasticity= -1.9 ; Cross elasticity (within software)= -1.1 ; Income elasticity= +2.1
Answer the following with adequate explanations:
(i) A price reduction for personal computer will increase both the number of units demanded. Yes/No. Explain your
answer.
(ii) Given the above Cross elasticity, how much will be the change in quantity demanded to a
10% reduction in price.
(iii)What type of good does the Personal Computer represent. Explain your answer.
(iv) Falling price for software will definitely increase the number of computers brought. Yes/No. Explain your answer
(v) If the demand for personal computer has increased by 3.8%, what and how much was the
change in Price given?
Price elasticity= -1.9 ; Cross elasticity (within software)= -1.1 ; Income elasticity= +2.1
(i)Yes, the number of units demanded will increase as the price elasticity shows an inverse
relationship.
Revenue will increase because IepI =1.9. So demand is elastic , and so have an inverse relation
with price change.
(ii) Given the cross elasticity as -1.1, a 10% change in price will change the quantity by 11%.
(iii) Personal computers are elastic and luxury good as income elasticity = +2.1
(iv) Yes, because they are complementary goods as Ec = -1.1
(v) % change in quantity = 3.8% . So with price elasticity = -1.9, the percentage change in price
will be 2%.
Thank You…
