ELASTICITY

OF
DEMAND
Elasticity of Demand
How responsive is quantity to changes in prices?
• Price elasticity of demand: A measure of the responsiveness of quantity demanded
to price changes, holding other things constant.
• Price elasticity of demand: The ratio of percentage change in quantity demanded to
percentage change in price.
𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝐸𝑑
%∆𝑄𝑑 ∆𝑄𝑑 /𝑄𝑑
= =
%∆𝑃 ∆𝑃/𝑃

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Elasticity of Demand: Examples
• Example 1: A 10% decrease in price leads to 30% increase in quantity
demanded
• Percentage change in price (%∆𝑃): -10%
• Percentage change in quantity demanded (%∆𝑄): +30%
%∆𝑄
• Price elasticity of demand 𝐸𝑑 = : −3 (= +30%/−10%)
%∆𝑃

• Example 2: A 10% increase in price leads to 5% decrease in quantity

demanded
• Percentage change in price (%∆𝑃): +10%
• Percentage change in quantity demanded (%∆𝑄): -5%
%∆𝑄
• Price elasticity of demand 𝐸𝑑 = :−0.5 (= −5%/+10%)
%∆𝑃
Some properties
• Elimination of the minus sign
%∆𝑄 ∆𝑄/𝑄
• Use of the absolute value of the price elasticity of demand (∣ 𝐸𝑑 ∣= − =− )
%∆𝑃 ∆𝑃/𝑃

• Why use percentages?

• Using percentages makes elasticity invariant to the choice of unit. E.g. a ₹1 price change
1
(from ₹10 to ₹11) means a 10% (= × 100) price change when measured in rupees
10
100
and a 10% (= × 100) price change when measured in paisa.
1000

• Facilitates comparison of price elasticity of demand for different products E.g. a one
rupee price change of a ₹5 lakh car is very different from a one rupee price change of a
₹5 chocolate. Price changes in expressed in percentages standardises the change.
Calculating price elasticity of demand
• Point elasticity of demand vs. Arc elasticity of demand
Point Price Quantity demanded
(𝑫𝟎 )
𝑨 ₹140 0
𝑩 ₹120 200
𝑪 ₹100 400
𝑫 ₹80 600
𝑬 ₹60 800
𝑭 ₹40 1000
𝑮 ₹20 1200
Point elasticity of demand
𝑳𝒊𝒏𝒆𝒂𝒓 𝒅𝒆𝒎𝒂𝒏𝒅 𝒄𝒖𝒓𝒗𝒆: 𝑸 = 𝒂 − 𝒃𝑷

∆𝑃
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 = × 100
𝑃0

∆𝑄
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝑄0

∆𝑄 ∆𝑃 ∆𝑄 𝑃0 𝜕𝑄 𝑃0
𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣) = ÷ = × = ×
𝑄0 𝑃0 ∆𝑃 𝑄0 𝜕𝑃 𝑄0

𝜕𝑄 𝑃0 𝑃0
𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣) = × =𝑏×
𝜕𝑃 𝑄0 𝑄0
Point elasticity of demand
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
𝐹𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
= × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
= × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

Percentage change in quantity demanded

𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣) =
Percentage change in price
Calculating price elasticity of demand
Point elasticity of demand
• Elasticity of demand at point B
• The linear demand function
𝑸 = 𝟏𝟒𝟎𝟎 − 𝟏𝟎𝑷

• The price and quantity combination at point B is,

• Price: ₹120

• Quantity demanded: 200

• 𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 ∣ 𝐸𝑑 ∣ 𝑎𝑡 𝑝𝑜𝑖𝑛𝑡 𝐵,

120
= 10 × =6
200
Point elasticity of demand
• Elasticity of demand at point B’
• The linear demand function
𝑸 = 𝟏𝟒𝟎𝟎 − 𝟏𝟎𝑷

• The price and quantity combination at point B’ is,

• Price: ₹119

• Quantity demanded: 210

• 𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 ∣ 𝐸𝑑 ∣ 𝑎𝑡 𝑝𝑜𝑖𝑛𝑡 𝐵′,

119
= 10 × = 5.67
210
Point elasticity of demand
• Small movement along the demand curve from B to B’
• Price decreases from ₹120 to ₹119
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 119 − 120 1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 price = = × 100 = − × 100 = 0.83%
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 120 120

• Quantity demanded increases from 200 to 210 units

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
210 − 200 10
= × 100 = + × 100 = 5%
200 200
Percentage change in quantity demanded
𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) =
Percentage change in price
5%
= = 6.00
0.83%
Point elasticity of demand
• Small movement along the demand curve from B’ to B
• Price increases from ₹119 to ₹120
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 120 − 119 1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 price = = × 100 = + × 100 = 0.84%
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 119 119

• Quantity demanded decreases from 210 to 200 units

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
200 − 210 10
= × 100 = + × 100 = 4.76%
210 210
Percentage change in quantity demanded
𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) =
Percentage change in price
4.76%
= = 5.67
0.84%
Point elasticity of demand
• Small movement along the demand curve from B to B’
• 𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) = 6.00

• Small movement along the demand curve from B’ to B

• 𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) = 5.67

• Initial price and initial quantity are approximately similar in the two
situations
Point elasticity of demand
• Large movement along the demand curve from B to C
• Price decreases from ₹120 to ₹100
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 100 − 120 20
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 price = = × 100 = − × 100 = 16.67%
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 120 120

• Quantity demanded increases from 200 to 400 units

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
400 − 200 200
= × 100 = + × 100 = 100%
200 200
Percentage change in quantity demanded
𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) =
Percentage change in price
100%
= =6
16.67%
Point elasticity of demand
• Large movement along the demand curve from C to B
• Price increases from ₹100 to ₹120
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 120 − 100 20
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 price = = × 100 = + × 100 = 20%
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 100 100

• Quantity demanded decreases from 400 to 200 units

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
200 − 400 200
= × 100 = − × 100 = 50%
400 400
Percentage change in quantity demanded
𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) =
Percentage change in price
50%
= = 2.5
20%
Point elasticity of demand
• Situation 1: Movement along the demand curve from B to C
• 𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) = 6

• Situation 2: Movement along the demand curve from C to B

• 𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) = 2.5

• Initial price and initial quantity differs in the two situations

Arc elasticity of demand
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒

𝐹𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒

= × 100
𝐹𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
2

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

= × 100
𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
2

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣) =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Arc elasticity of demand
• Movement along the demand curve from B to C
• Price decreases from ₹120 to ₹100

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 100 − 120 20

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 price = = × 100 = − × 100 = 18.18%
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒 100 + 120 110
2

• Quantity demanded increases from 200 to 400 units

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
400 − 200 200
= × 100 = + × 100 = 66.67%
400 + 200 300
2

Percentage change in quantity demanded 66.67%

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) = = = 3.67
Percentage change in price 18.18%
Arc elasticity of demand
• Movement along the demand curve from C to B
• Price increases from ₹100 to ₹120

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 120 − 100 20

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 price = = × 100 = + × 100 = 18.18%
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒 100 + 120 110
2

• Quantity demanded decreases from 400 to 200 units

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
200 − 400 200
= × 100 = − × 100 = 66.67%
400 + 200 300
2

Percentage change in quantity demanded 66.67%

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) = = = 3.67
Percentage change in price 18.18%
Arc elasticity of demand
• Movement along the demand curve from B to C
• 𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) = 3.67

• Movement along the demand curve from C to B

• 𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (∣ 𝐸𝑑 ∣) = 3.67

• Average price and average quantity are the same in the two situations
Determinants of price elasticity of demand
• Availability of substitutes: The better the substitutes of a good, the more elastic the
demand for the good
• Percentage of consumer’s budget: Price elasticity of demand is directly related to the
percentage of consumer’s budget spent on the good. E.g. demand for cars is more
elastic than the demand for mangoes
• Time period of adjustment: The longer the time period of adjustment, the larger the
price elasticity of demand. Cars vs. subway for conveyance and rise in fuel prices
• Definition of market: Narrowly defined markets have a more elastic demand than
broadly defined markets. E.g. food vs. ice cream vs. vanilla ice-cream
• Luxuries vs. necessities: Elasticity is higher for luxuries than necessities.
Interpretation of price elasticity of demand
• Elastic demand (∣ 𝐸𝑑 ∣> 1): A percentage change in price leads to a larger
percentage change in quantity demanded
• A 1% increase in price leads to a 3% decrease in quantity demanded so that
3
∣ 𝐸𝑑 ∣= 3 =
1
.
Interpretation of price elasticity of demand
• Inelastic demand (∣ 𝐸𝑑 ∣< 1): A percentage change in price leads to a smaller
percentage change in quantity demanded
• A 2% increase in price leads to a 1% decrease in quantity demanded so that
1
∣ 𝐸𝑑 ∣= 0.5 =
2
.
Interpretation of price elasticity of demand
• Unit elasticity (∣ 𝐸𝑑 ∣= 1): A percentage change in price leads to an equal
percentage change in quantity demanded
• A 1% increase in price leads to a 1% decrease in quantity demanded so that
1
∣ 𝐸𝑑 ∣= 1 =
1
.
Interpretation of price elasticity of demand
• Perfectly inelastic (∣ 𝐸𝑑 ∣= 0): A percentage change in price leads to no change
in quantity demanded
• A 1% increase in price leads to a no change in quantity demanded so that
0
∣ 𝐸𝑑 ∣= 0 =
1
.
Interpretation of price elasticity of demand
• Perfectly elastic (∣ 𝐸𝑑 ∣= ∞): A percentage change in price leads to an infinite
change in quantity demanded
• A 1% increase in price leads to an infinite change in quantity demanded so
∞
that ∣ 𝐸𝑑 ∣= ∞ = 1
.
Total revenue and marginal revenue
• Total revenue (TR) is the price (P) of a good times quantity demanded (Q)
• 𝑇𝑅 = 𝑃 × 𝑄

• Marginal revenue (MR) is the change in total revenue per unit change in quantity sold
∆𝑇𝑅 𝜕𝑇𝑅
• 𝑀𝑅 = =
∆𝑄 𝜕𝑄

• Example 1: TR increases from 100 to 120 when Q rises from 8 to 9 units

• MR = (120-100)/(9-8) = (20)/(1) = 20

• Example 2: TR increases from 24000 to 40000 when Q rises from 200 to 400 units
• MR = (40000-24000)/(400-200) = (16000)/(200) = 80
Price elasticity and total revenue
• Effect of changing prices on total revenue
𝜕 𝑇𝑅 𝜕 𝑃 × 𝑄𝑑
=
𝜕𝑃 𝜕𝑃
𝜕 𝑄𝑑
= 𝑄𝑑 + 𝑃 ×
𝜕𝑃
𝑃 𝜕 𝑄𝑑 𝜕 𝑄𝑑 /𝑄𝑑
= 𝑄𝑑 + 𝑄𝑑 × = 𝑄𝑑 + 𝑄𝑑
𝑄𝑑 𝜕𝑃 𝜕𝑃/𝑃
𝜕 𝑄𝑑
𝑄𝑑
= 𝑄𝑑 1− −
𝜕𝑃
𝑃
= 𝑄𝑑 × (1 − ∣ 𝐸𝑑 ∣)
Price elasticity and total revenue
• Effect of an increase in the price and corresponding fall in quantity demanded
• Price effect: The increase in price (by 1%, say), ceteris paribus, increases total
revenue (by 1%).
• Quantity effect: The fall in quantity demanded (by 1%, say), ceteris paribus,
decreases total revenue (by 1%).

• Price effect vs. Quantity effect

 Price elasticity and total revenue
• Elastic demand (∣ 𝐸𝑑 ∣> 1): A percentage change in price leads to a larger percentage change in quantity
demanded
• A 1% increase in price (TR +1%) leads to a 3% decrease in quantity (TR -3%) (TR falls) (Qty. effect>Price effect)

• A 1% decrease in price (TR -1%) leads to a 3% increase in quantity (TR +3%) (TR rise) (Qty. effect>Price effect)

• Inelastic demand (∣ 𝐸𝑑 ∣< 1): A percentage change in price leads to a smaller percentage change in quantity
demanded
• A 5% increase in price (TR +5%) leads to a 2% decrease in quantity (TR -2%) (TR rise) (Qty. effect<Price effect)

• A 5% decrease in price (TR -5%) leads to a 2% increase in quantity (TR +2%) (TR falls) (Qty. effect<Price effect)

• Unit elasticity (∣ 𝐸𝑑 ∣= 1): A percentage change in price leads to an equal percentage change in quantity
demanded
• A 4% increase in price (TR +4%) leads to a 4% decrease in quantity (TR -4%) (Qty. effect=Price effect)

• A 4% decrease in price (TR -4%) leads to a 4% increase in quantity (TR +4%) (Qty. effect=Price effect)
Price elasticity and marginal revenue
𝜕 𝑇𝑅 𝜕 𝑃 × 𝑄𝑑
𝑀𝑅 = =
𝜕𝑄𝑑 𝜕𝑄𝑑
𝜕 𝑃 𝑄𝑑 𝜕 𝑃
= 𝑃 + 𝑄𝑑 × =𝑃 1+ ×
𝜕𝑄𝑑 𝑃 𝜕𝑄𝑑
𝜕 𝑃
𝑃 1 1
=𝑃 1+ =𝑃 1+ =𝑃 1−
𝜕𝑄𝑑 𝜕𝑄𝑑 𝜕𝑄𝑑
𝑄𝑑 𝑄𝑑 𝑄𝑑
−
𝜕 𝑃 𝜕 𝑃
𝑃 𝑃
1
⇒ 𝑀𝑅 = 𝑃 1 −
∣ 𝐸𝑑 ∣
Price elasticity, total revenue and marginal revenue
• When ∣ 𝐸𝑑 ∣> 1
• Total revenue increases with a fall in price and marginal revenue is positive. (A to B, B to C, C to D)

• Total revenue decreases with a rise in price and marginal revenue is positive. (B to A, C to B, D to C)

• When ∣ 𝐸𝑑 ∣= 1
• Total revenue is constant with a fall in price and marginal revenue is zero. (D to E)

• Total revenue is constant with a rise in price and marginal revenue is zero. (E to D)

• When ∣ 𝐸𝑑 ∣< 1
• Total revenue decreases with a fall in price and marginal revenue is negative. (E to F, F to G)

• Total revenue increases with a rise in price and marginal revenue negative. (F to E, G to F)
Price elasticity, total revenue and marginal revenue
Point Price Quantity Total %Change in %Change in Elasticity
Demanded (𝑫𝟎 ) Revenue Price Quantity ∣ 𝑬𝒅 ∣

𝐴 ₹140 0 0
15.38% 200.0% 13
𝐵 ₹120 200 24,000
18.18% 66.67% 3.67
𝐶 ₹100 400 40,000
22.22% 40.00% 1.8
𝐷 ₹80 600 48,000
28.57% 28.57% 1
𝐸 ₹60 800 48,000
40.00% 22.22% 0.56
𝐹 ₹40 1000 40,000
66.67% 18.18% 0.27
𝐺 ₹20 1200 24,000
Price elasticity, total revenue and marginal revenue
• Movement along the demand curve from B to C
• Price decreases from ₹120 to ₹100

• Quantity demanded increases from 200 to 400 units

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣)

400 − 200
400 + 200 × 100
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 2 66.67%
= = = = 3.67
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 100 − 120 18.18%
100 + 120 × 100
2
• TR at 𝐶: ₹40000 (= ₹100×400) > TR at 𝐵: ₹24000 (= ₹120×200)

• Marginal Revenue over 𝐵 to 𝐶: (40000-24000)/(400-200) = (16000)/(200) = 80

Price elasticity, total revenue and marginal revenue
• Movement along the demand curve from C to B
• Price increases from ₹100 to ₹120

• Quantity demanded decreases from 400 to 200 units

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣)

200 − 400
400 + 200 × 100
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 2 66.67%
= = = = 3.67
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 120 − 100 18.18%
100 + 120 × 100
2
• TR at 𝐵: ₹24000 (= ₹120×200) < TR at 𝐶: ₹40000 (= ₹100×400)

• Marginal Revenue over 𝐶 to 𝐵: (24000-40000)/(200-400) = (–16000)/(-200) = 80

Price elasticity, total revenue and marginal revenue
• Movement along the demand curve from D to E
• Price decreases from ₹80 to ₹60

• Quantity demanded increases from 600 to 800 units

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣)

800 − 600
800 + 600 × 100
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 2 28.57%
= = = =1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 60 − 80 28.57%
60 + 80 × 100
2
• TR at 𝐸: ₹48000 (= ₹60 × 800) = TR at 𝐷: ₹48000 (= ₹80 × 600)

• Marginal Revenue over 𝐷 to 𝐸: (48000–48000)/(800–600) = (0)/(200) = 0

Price elasticity, total revenue and marginal revenue
• Movement along the demand curve from E to D
• Price increases from ₹60 to ₹80

• Quantity demanded decreases from 800 to 600 units

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣)

600 − 800
600 + 800 × 100
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 2 28.57%
= = = =1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 80 − 60 28.57%
80 + 60 × 100
2
• TR at 𝐷: ₹48000 (= ₹80 × 600) = TR at 𝐸: ₹48000 (= ₹60 × 800)

• Marginal Revenue over 𝐸 to 𝐷: (48000–48000)/(600–800) = (0)/(-200) = 0

Price elasticity, total revenue and marginal revenue
• Movement along the demand curve from F to G
• Price decreases from ₹40 to ₹20

• Quantity demanded increases from 1000 to 1200 units

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣)

1200 − 1000
1200 + 1000 × 100
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 2 18.18%
= = = = 0.27
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 20 − 40 66.67%
20 + 40 × 100
2
• TR at 𝐺: ₹24000 (= ₹20 × 1200) < TR at 𝐹: ₹40000 (= ₹40 × 1000)

• Marginal Revenue over 𝐹 to 𝐺: (24000–40000)/(1200–1000) = (–16000)/(200) = -80

Price elasticity, total revenue and marginal revenue
• Movement along the demand curve from G to F
• Price increases from ₹20 to ₹40

• Quantity demanded decreases from 1200 to 1000 units

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(∣ 𝐸𝑑 ∣)

1000 − 1200
1000 + 1200 × 100
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 2 18.18%
= = = = 0.27
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 40 − 20 66.67%
40 + 20 × 100
2
• TR at 𝐹: ₹40000 (= ₹40 × 1000) > TR at 𝐺: ₹24000 (= ₹20 × 1200)

• Marginal Revenue over 𝐺 to 𝐹: (40000–24000)/(1000–1200) = (16000)/(-200) = -80

Price elasticity along the demand curve
Income Elasticity of Demand
• How much does an income change affect quantity demanded?
• Income elasticity of demand: A measure of the responsiveness of quantity
demanded to changes in income, holding other things constant.
• Income elasticity of demand: The ratio of percentage change in quantity
demanded to percentage change in income, holding other things constant.
𝐼𝑛𝑐𝑜𝑚𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝐸𝐼
%∆𝑄
=
%∆𝐼
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
Income Elasticity of Demand
• Income elasticity of demand is positive for a normal good 𝐸𝐼 > 0
• Quantity demanded and income are positively related

• Two types of normal good: Luxuries vs. necessities

• Income elasticity of demand is greater than one for luxuries 𝐸𝐼 > 1 . E.g. sports cars,
international travel etc.
• Income elasticity of demand is less than one for necessities 0 < 𝐸𝐼 < 1 . E.g. food,
clothing etc.

• Income elasticity of demand is negative for a inferior good 𝐸𝐼 < 0 . E.g. used
clothing/electronics, second-class railway travel etc.
• Quantity demanded and income are negatively related.
Point elasticity of demand
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒
𝐹𝑖𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒
= × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
= × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(𝐸𝐼 ) =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
Arc elasticity of demand
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑐𝑜𝑚𝑒

𝐹𝑖𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒

= × 100
𝐹𝑖𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒
2

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

= × 100
𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
2

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑(𝐸𝐼 ) =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
Cross-price Elasticity of Demand
• How much does a change in the price of a related good affect quantity demanded?
• Cross-price elasticity of demand: A measure of the responsiveness of quantity demanded for
a good (X) to changes in the price of a related good (R), holding other things constant.
• Cross-price elasticity of demand of good (X) with reference to a related good (R): The ratio
of percentage change in quantity demanded of good X to percentage change in the price of
a related good R, holding other things constant.
𝐶𝑟𝑜𝑠𝑠 − 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 𝐸𝑋𝑅
%∆𝑄𝑋
=
%∆𝑃𝑅

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
Cross-price Elasticity of Demand
• The sign of 𝐸𝑋𝑅 depends on the nature of relationship between goods X
and R.
• If the two goods X and R are substitutes 𝐸𝑋𝑅 > 0. E.g. Coke & Pepsi, Colgate &
Pepsodent etc.
• If the two goods X and R are complements 𝐸𝑋𝑅 < 0. E.g. Cars & Petrol,
Computer & Software etc.
• If the two goods X and R are independent 𝐸𝑋𝑅 = 0. E.g. Cars & Candles etc.
Point elasticity of demand
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅 = × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
𝐹𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
= × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

= × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

= × 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋
𝑃𝑜𝑖𝑛𝑡 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 (𝐸𝑋𝑅 )

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
Arc elasticity of demand
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅

𝐹𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅

= × 100
𝐹𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
2

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 = × 100
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

= × 100
𝐹𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋
2

𝐴𝑟𝑐 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋 (𝐸𝑋𝑅 )

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋

=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑅
Elasticity of Supply
• Price elasticity of supply: A measure of the responsiveness of quantity
supplied to price changes, holding other things constant.
• Price elasticity of supply: The ratio of percentage change in quantity
supplied to percentage change in price.
𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑠𝑢𝑝𝑝𝑙𝑦 𝐸𝑠
%∆𝑄𝑠 ∆𝑄𝑠 /𝑄𝑠
= =
%∆𝑃 ∆𝑃/𝑃

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑

=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Determinants of price elasticity of supply
• Availability of inputs: The price elasticity of supply is larger when inputs are
readily available and can be shifted into and out of production at a low cost
• Price elasticity of supply is low for goods involving scarce natural resources

• Time: Price elasticity of supply is larger when producers have more time to
respond to price change
• Price elasticity of supply is generally higher in the long-run than in the short-run
Interpretation of price elasticity of supply
Interpretation of price elasticity of supply
Interpretation of price elasticity of supply
Applications of Elasticity
Elasticity, bumper harvest & farm profits
Elasticity and the war on drugs
• Effectiveness of drug interdiction strategy
• Drug interdiction strategy restricts the supply of drugs which raises drug prices
• Given the inelastic demand curve, higher prices raises the revenue from drug sale
and incentivises drug sale

• Effectiveness of public education

• Educating the public on the perils of drug use lowers the demand for drugs
which lowers the sale and prices of drugs
• Lower prices and quantity demanded reduces the revenue from drug sale and
disincentives its sale
Elasticity and the war on drugs
Elasticity, the OPEC cartel and oil prices
• The OPEC, oil price hike in the 1970s & economic disruption
• Steady oil prices in the 1990s
• In the short-run, the demand and supply of oil is inelastic
• Stagnant consumer preferences results in an inelastic demand for oil
• Restricted supply of oil results in higher prices and revenue

• In the long-run, the demand and supply of oil is elastic

• Fuel-saving technologies and changing consumer preferences results in an elastic demand for oil
• Producers respond to high oil prices by increasing oil exploration and building new extraction
capacity

• Given an elastic demand for oil, cut in oil supply results in a small hike in oil prices and
a fall in revenue
Elasticity, the OPEC cartel and oil prices
Review Problem - I
Which good has a higher elasticity of demand

• Required textbooks or mystery novels

• Kishore Kumar’s songs or Bollywood songs in general

• SUVs in the next 6 months or SUVs in the next 6 years

• Coke or water

• Kitchen utensils or jewelleries

• Salt or mayonnaise sauce

• Restaurant meals or meals in general

• Business class air travel or economy air travel

Review Problem - II
• The COVID19 pandemic has increased the necessity for vaccines among the general
public. What happens to the price elasticity of demand for vaccines?
• An important breakthrough in technology lowers the cost of vaccine production.
Predict its implications for revenues of vaccine manufacturers assuming inelastic
demand.
• If import relaxations results in the easy availability of crucial raw materials for
vaccine production, what are its implications for price elasticity of supply for
vaccines?
• In the long run, natural immunity and more effective medications make Covid a less
severe public health hazard. Predict the implications of such a phenomenon on the
price elasticity of demand for vaccines.
Review Problem - III
Discuss the implications of the following factors on the price elasticity of demand for
Micromax mobile phones
• New manufacturers enter the market
• Government imposes steep import duties on foreign produced mobile phones
• Increased mobile telephony penetration makes it a necessity among the general public
• There is an increase in the population in the young age group and younger people use mobile
connectivity services more often
• Decline in the price of mobile phones over time means that purchasing mobile phones takes
up a smaller share of a consumer’s budget
• A lengthening in the time period of adjustment
THANK YOU