Elasticity of

Demand
Elasticity

 Measures the sensitivity of one variable to another

 It is a number that tells us the percentage change that

will occur in one variable because of a one per cent
change in another variable

 For example, price elasticity of demand tells us by how

much quantity demanded will change because of a
one per cent change in price
Price Elasticity of Demand

 Ep = (%ΔQ/%ΔP)

 Ep = ΔQ/Q/ ΔP/P

 Ep= ΔQ/ΔP x P/Q

 The price elasticity of demand is usually a negative

number
Degrees of Price Elasticity of
Demand
 When price elasticity of demand is greater than 1 we say
that demand is price elastic

 When price elasticity of demand is lesser than 1 we say

that demand is price inelastic

 When price elasticity of demand is equal to 1 we say

that demand is unitary elastic
Point Elasticity of Demand

 The elasticity of demand at a particular point on the

demand curve- usually the linear demand curve

 Elasticity changes at every point along the demand

curve

 Perfectly elastic and perfectly inelastic demand

Arc Elasticity of Demand

 Elasticity calculated over a range of prices

 We use the average of the prices and quantities to

calculate the arc elasticity of demand

 Ep = (ΔQ/ΔP/P*/Q*)

 Where * stands for average

Other elasticities of Demand

 Income elasticity of demand- Percentage change in quantity

demanded because of one per cent change in income

 Ei = ΔQ/ΔI x I/Q

 Cross elasticity of demand- Change in the quantity demand

of b because of change in quantity demanded of m

 EQbPm = ΔQb/ ΔPm x Pm/Qb

Short run versus Long run Elasticity
of Demand
 Short run is usually less than a year, long run is more than
a year

 Short run demand curves look very different from long

run demand curves

 For many goods demand is more price elastic in the long

run than in the short run
Short run versus long run

 Income elasticities also differ between the short run and

the long run

 For most goods income elasticities in the long run are

larger than in the short run

 Cyclical industries- sales patterns of these industries

fluctuate with the business cycle patterns and get
magnified according to the cycles