ELASTICITY OF DEMAND

Meaning of Price Elasticity of Demand

The degree of responsiveness of quantity demand due to changes in price of commodity is known as price
elasticity of Demand.

Percentage Method/ Flux Method

According to this method, price elasticity of demand is measured by dividing the percentage change in
quantity demanded by the percentage change in price.
Percentage Change in Quantity demanded
Ed=(-
Ed=(-)
Percentage Change in Price

∆
× 100
= (−)
∆
× 100

∆" #
! = (−) ×
∆# "

Where,
∆$
Percentage change in quantity demanded = $
× 100

∆%
Percentage change in price = × 100
%

∆Q = Change in quantity demanded P = Initial or Beta Price

∆P = Change in Price Q = Initial or Base Quantity

Degrees of Price Elasticity of Demand

There are five degrees of elasticity of demand.

(1) Unitary elastic demand:

If percentage change in quantity demanded is equal to percentage change in price of the
commodity, then ed = 1 and the result is known as unitary elastic demand.
Price Demand
10 100
5 150
 Negative sign indicate the inverse relationship between price and the quantity demanded. The
unitary elastic demand
D curve is rectangular hyperbola.
Price (Rs.)
Ed = 1 [Rectangular Hyperbola]
P
P1
D

O
Q Q1
Quantity Demanded
(2) More than unitary elastic demand or elastic demand:
If percentage change in quantity demanded is more than percentage change in price of the
commodity, then ed > 1 and the result is known as highly elastic demand.
Price Demand
10 100
5 180
Negative sign indicate the inverse relationship between price and the quantity demanded. The
highly elastic demand curve is flatter.
Price (Rs.)

D Ed > 1
P
P1
D

O
Q Q1
Quantity Demanded

(3) Less than unitary elastic demand or inelastic demand:

If percentage change in quantity demanded is less than percentage change in price of the
commodity, then ed < 1 and the result is known as less elastic demand.
Price Demand
10 100
5 130
Negative sign indicate the inverse relationship between price and the quantity demanded. The
less elastic demand curve is steeper.
 Price (Rs.)
D
Ed < 1
P
P1

D
O
Q Q1
Quantity Demanded

(4) Perfectly Elastic Demand:

If quantity demanded changes and price remains constant, then ed = ∞ and the result is known
as perfectly elastic demand.
Price Demand
4 10
4 20

Perfectly Elastic DD
Or
Horizontal DD Curve
Price (Rs.)

P Ed=∞

O
Q Q1
Quantity Demanded
(unit)

(5) Perfectly Inelastic Demand:

If price changes, and quantity demanded remains constant, then ed = 0 and the result is known
as perfectly inelastic demand.
Price Demand
2 10
4 10
 ed=0

P1 Perfectly

Price (Rs.)
Inelastic
P Or
Vertical DD
Curve

O
Q
Quantity Demanded
(unit)

Factors affecting elasticity of demand

1. Nature of commodity:
Elasticity of demand of commodity is influenced by its nature,
• The demand for necessities of life is less elastic. They are required for human survival and
they have to be purchased whatever maybe the price. Therefore, demand for necessities
of life does not fluctuate much with price changes. [like fan]
• Demand for luxury goods is more elastic. When the price of luxuries falls, consumers buy
more of them and when the price rises, demand contracts.[like AC]
• Demand for comfort goods is less elastic than luxuries and more elastic than
necessities.[like cooler]
2. Availability of substitutes :
• if close substitutes for a commodity is available, the demand for the commodity will be
elastic. The reason is that even a small rise in its prices will induce the buyers to go for its
substitutes.
• On the other hand, commodities with few or no substitutes have less price elasticity in
demand.
3. Income Level:
• Higher income level groups have less elasticity of demand for any commodity as
compared to the 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 the
result of, demand for lower income group is highly elastic.
4. Level of price:
• Costly goods like car, gold etc. have highly elastic demand as their demand is very
sensitive to changes in their prices.
• However, demand for inexpensive goods like thread, needle etc. is inelastic as change in
prices of such goods do not change their demand by a considerable amount.
5. Postponement of Consumption:
• Commodities whose demand is not urgent, have highly elastic demand as their
consumption can be postponed in case of an increase in their prices.
• However, commodities with urgent demand have inelastic demand because of their
immediate requirement.
6. Number of Uses:
• If the commodity has several uses, then its demand will be elastic. When price of such a
commodity increases, then it is generally put to only more urgent uses and, as a result, its
demand falls. When the prices fall, then it is used for satisfying even less urgent needs
and demand rises.
• On the other hand, a commodity with no or few alternative uses has less elastic demand.
7. Share in Total Expenditure:
Proportion of consumer’s income that is spent on a particular commodity also influences the
elasticity of demand for it.
• Greater the proportion of income spent on the commodity, more is the elasticity of
demand for it and vice-versa. Demand for goods like salt, needle, soap, match box, etc.
tends to be inelastic as consumers spent a small proportion of their income on such
goods. When prices of such goods change, consumers continue to purchase almost the
same quantity of these goods.
• However, if the proportion of income spent on a commodity is large, then demand for
such a commodity will be elastic.
8. Time Period:
Price elasticity of demand for a commodity also affected by time period.
• Demand is inelastic in the short period as consumers find it difficult to change their habits
during short period.
• However, demand is more elastic in long run as it is comparatively easier to shift to other
substitutes, if the price of the given commodity rises.
9. Habits:
• The demand for those goods that are habitually consumed is inelastic. The reason is that
such commodities become a necessity for the consumer, and even if prices change,
consumers continue to purchase and consume the commodity.
• However, if a person is not habitual, demand is elastic.