ELASTICITY OF DEMAND

Elasticity of Demand

The extent to which the quantity demanded will rise (fall) due to fall (rise) in the price of the same good or a related good or due to the rise in the income of the consumer

Price Elasticity
The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change.

Categories of Price Elasticity of Demand

Perfect elastic demand Perfect inelastic demand Unit elasticity of demand Relatively elastic demand Relatively inelastic demand

Perfectly Elastic demand

There is no change in the price of commodity but quantity demanded changes
y P R I C E P Q2 Q Q1

Q2

Q1

QUANTITY

Perfectly Inelastic demand

There is no change in the quantity demand, whatever the change is in price
y P R I C E P1 P P2 P1 P P2

Q QUANTITY

Unit Elasticity of Demand

If percentage change in quantity demanded is equal to percentage change in price of commodity
y D P P1 D

Q1

Relatively Elastic Demand

If percentage change in quantity demanded is greater than percentage in price of commodity
y P R I C E P1 D P

Q QUANTITY

Q1

Relatively Inelastic Demand

If percentage change in quantity demand is less than percentage change in the price of the commodity

y P R I C E O P1 P

D Q QUANTITY Q1

Income elasticity of Demand

Proportionate change in the demand for a good in response to a change in income. It is reflected in how people change their consumption habits with changes in their income levels. In a growing economy (where income levels are rising) goods whose demand is highly income-dependent will sell more than the goods whose demand is not incomedependent. . For example, demand for staple food items normally does not increase with higher income levels; but demand for gourmet food or restaurant food does increase as individual's income grows. Also called income sensitivity of demand
It is mathematically expressed as percent change in quantity demanded percent change in income.

Factors affecting price elasticity of demand

Nature of goods
Responsiveness of consumer towards the change in price of commodity Proprtion to consumer Availability of substitute

Nature of goods
This is divided into two parts

Luxuries goods

Necessaries goods

Luxuries goods have more elastic demand due to the increase in the income of the consumer and on the otherhand necessaries goods will have less elastic demand

Responsiveness of consumer owards the change in the price of commodity

This is further divide into two parts

More responsive

Less responsive

More responsive of consumer towards the change in the price of commodity will have more ealstic demand. On the otherhand less responsive of consumer towards the change in the price of commodity will have less elastic demand

Proportion to consumer
Proportion is the part of the income spent by the consumer on the consumption of commodities This is further divided in to two parts

More proportion to consumer

Less proportion to consumer

Goods on which the consumer spent more proportion of his income will have moe elastic demand. On the otherhand goods on which the consumer spent less proportion of his income will have less elastic demand

Availability of substitues
This is divided into two parts

More substitues

Less substitue

Demand for those commodities which have more substitues have more elastic . On the otherhand demand for those commoities which have less substitues have less elastic