Economics Exam  >  Economics Notes  >  Microeconomics- Interaction between individual buyer-seller  >  Lecture 4 - Elasticity of Demand & Supply

Lecture 4 - Elasticity of Demand & Supply | Microeconomics- Interaction between individual buyer-seller PDF Download

Download, print and study this document offline
Please wait while the PDF view is loading
 Page 1


Elasticity Of Demand & Supply 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Elasticity Of Demand & Supply 
Lesson Developer: S.K Gupta 
College/Department: Dept. of Eco, University of Delhi
Page 2


Elasticity Of Demand & Supply 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Elasticity Of Demand & Supply 
Lesson Developer: S.K Gupta 
College/Department: Dept. of Eco, University of Delhi
Elasticity Of Demand & Supply 
2 
Institute of Lifelong Learning, University of Delhi 
 
1. LEARNING OUTCOMES 
 After you have read this chapter, you should be able to  
? define elasticity of demand and supply 
? understand different types of elasticity of demand  
? identify different determinants of elasticity of demand  
? apply the knowledge of elasticity of demand and supply in real file.  
2.  INTRODUCTION  
 Amount of a commodity demanded per unit of time is a function of many variables 
such  as price of that commodity, price of  related commodities, income of the consumer, 
 wealth of the buyers, distribution of income & wealth among buyers, number of 
buyers.  A change in any one of the above mentioned variables (independent variable) 
is likely to  bring a change in the amount of commodity purchased (dependent variable) 
per unit of  time. The elasticity of demand measures the relative responsiveness in the 
amount of the  commodity purchased per unit of time to a change in any one of the 
variables while  keeping the other variables constant. Thus the coefficient of elasticity 
of demand may be  defined as the proportionate change in the demand for a commodity 
divided by the  proportionate change in the price of the commodity, related 
commodity or the income of  the consumer    
 Alfred Marshall defined “Elasticity of demand as the percentage change in the 
quantity  demanded divided by the percentage change in the price.” 
 Elasticity of demand is found to be of three kinds (1) Price Elasticity of Demand (2) 
cross  Elasticity of Demand (3) Income Elasticity of Demand  
3. PRICE ELASTICITY OF DEMAND  
 Other things being constant price elasticity of demand is the ratio of percentage 
charge in  demand due to the percentage change in the price of the commodity. The 
concept of  price-elasticity of demand is expressed as under:  
       
price its in e ch percentage or e oportionat
demanded ity com of amount the in e ch percentage or e oportionat
E
p
arg ) / ( Pr
mod arg ) / ( Pr
? 
 Since there exists an inverse relation between the change in quantity demanded 
 (extension or contraction) and the change in price of the commodity, price elasticity 
of  demand is represented by negative sign (-). In the words of Lipsey “Because of the 
Page 3


Elasticity Of Demand & Supply 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Elasticity Of Demand & Supply 
Lesson Developer: S.K Gupta 
College/Department: Dept. of Eco, University of Delhi
Elasticity Of Demand & Supply 
2 
Institute of Lifelong Learning, University of Delhi 
 
1. LEARNING OUTCOMES 
 After you have read this chapter, you should be able to  
? define elasticity of demand and supply 
? understand different types of elasticity of demand  
? identify different determinants of elasticity of demand  
? apply the knowledge of elasticity of demand and supply in real file.  
2.  INTRODUCTION  
 Amount of a commodity demanded per unit of time is a function of many variables 
such  as price of that commodity, price of  related commodities, income of the consumer, 
 wealth of the buyers, distribution of income & wealth among buyers, number of 
buyers.  A change in any one of the above mentioned variables (independent variable) 
is likely to  bring a change in the amount of commodity purchased (dependent variable) 
per unit of  time. The elasticity of demand measures the relative responsiveness in the 
amount of the  commodity purchased per unit of time to a change in any one of the 
variables while  keeping the other variables constant. Thus the coefficient of elasticity 
of demand may be  defined as the proportionate change in the demand for a commodity 
divided by the  proportionate change in the price of the commodity, related 
commodity or the income of  the consumer    
 Alfred Marshall defined “Elasticity of demand as the percentage change in the 
quantity  demanded divided by the percentage change in the price.” 
 Elasticity of demand is found to be of three kinds (1) Price Elasticity of Demand (2) 
cross  Elasticity of Demand (3) Income Elasticity of Demand  
3. PRICE ELASTICITY OF DEMAND  
 Other things being constant price elasticity of demand is the ratio of percentage 
charge in  demand due to the percentage change in the price of the commodity. The 
concept of  price-elasticity of demand is expressed as under:  
       
price its in e ch percentage or e oportionat
demanded ity com of amount the in e ch percentage or e oportionat
E
p
arg ) / ( Pr
mod arg ) / ( Pr
? 
 Since there exists an inverse relation between the change in quantity demanded 
 (extension or contraction) and the change in price of the commodity, price elasticity 
of  demand is represented by negative sign (-). In the words of Lipsey “Because of the 
Elasticity Of Demand & Supply 
3 
Institute of Lifelong Learning, University of Delhi 
 
 negative slope of the demand curve, price and quantity will always change in 
opposite  direction. One change will be positive and the other negative.”    
 In practice, negative sign is not used before showing the coefficient price elasticity of 
 demand.  In general while comparing two elasticities we compare only their absolute 
 numbers and not algebraic values.  
 A 20 percentage change in price of a commodity if it causes 10 percentage change in 
 quantity demanded, it means  
5 . 0 ) (
20
10
? ? ?
price in Percentage
demand quantity in change Percentage
E
P
 
 Thus price elasticity of demand is measured by a ratio; the percentage change in 
quantity  demanded divided by the percentage change in price. For a negatively sloping 
demand  curve, elasticity is negative and the size of the elasticity is measured by 
comparing the  absolute values of demand and price.  
 In symbols, the definition of price elasticity of demand can be expressed as  
 
q
p
p
q
change
change
p
p
q
q
E or E
P d
?
?
?
? ?
? ?
?
?
?
%
%
% %
%
%
 
 Where E
d
 or E
P
 is price elasticity of demand  
     P = initial price  
     q = quantity demanded at initial price  
     ?p =  % change in price  
     ?q =  % change in quantity demanded  
 This formula can be explained with the help of an example:- let us assume at a price 
of  Rs. 20 per loaf of bread 10 breads are bought when the price is reduced to Rs 18 per 
 bread, 15 breads are bought.  
Page 4


Elasticity Of Demand & Supply 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Elasticity Of Demand & Supply 
Lesson Developer: S.K Gupta 
College/Department: Dept. of Eco, University of Delhi
Elasticity Of Demand & Supply 
2 
Institute of Lifelong Learning, University of Delhi 
 
1. LEARNING OUTCOMES 
 After you have read this chapter, you should be able to  
? define elasticity of demand and supply 
? understand different types of elasticity of demand  
? identify different determinants of elasticity of demand  
? apply the knowledge of elasticity of demand and supply in real file.  
2.  INTRODUCTION  
 Amount of a commodity demanded per unit of time is a function of many variables 
such  as price of that commodity, price of  related commodities, income of the consumer, 
 wealth of the buyers, distribution of income & wealth among buyers, number of 
buyers.  A change in any one of the above mentioned variables (independent variable) 
is likely to  bring a change in the amount of commodity purchased (dependent variable) 
per unit of  time. The elasticity of demand measures the relative responsiveness in the 
amount of the  commodity purchased per unit of time to a change in any one of the 
variables while  keeping the other variables constant. Thus the coefficient of elasticity 
of demand may be  defined as the proportionate change in the demand for a commodity 
divided by the  proportionate change in the price of the commodity, related 
commodity or the income of  the consumer    
 Alfred Marshall defined “Elasticity of demand as the percentage change in the 
quantity  demanded divided by the percentage change in the price.” 
 Elasticity of demand is found to be of three kinds (1) Price Elasticity of Demand (2) 
cross  Elasticity of Demand (3) Income Elasticity of Demand  
3. PRICE ELASTICITY OF DEMAND  
 Other things being constant price elasticity of demand is the ratio of percentage 
charge in  demand due to the percentage change in the price of the commodity. The 
concept of  price-elasticity of demand is expressed as under:  
       
price its in e ch percentage or e oportionat
demanded ity com of amount the in e ch percentage or e oportionat
E
p
arg ) / ( Pr
mod arg ) / ( Pr
? 
 Since there exists an inverse relation between the change in quantity demanded 
 (extension or contraction) and the change in price of the commodity, price elasticity 
of  demand is represented by negative sign (-). In the words of Lipsey “Because of the 
Elasticity Of Demand & Supply 
3 
Institute of Lifelong Learning, University of Delhi 
 
 negative slope of the demand curve, price and quantity will always change in 
opposite  direction. One change will be positive and the other negative.”    
 In practice, negative sign is not used before showing the coefficient price elasticity of 
 demand.  In general while comparing two elasticities we compare only their absolute 
 numbers and not algebraic values.  
 A 20 percentage change in price of a commodity if it causes 10 percentage change in 
 quantity demanded, it means  
5 . 0 ) (
20
10
? ? ?
price in Percentage
demand quantity in change Percentage
E
P
 
 Thus price elasticity of demand is measured by a ratio; the percentage change in 
quantity  demanded divided by the percentage change in price. For a negatively sloping 
demand  curve, elasticity is negative and the size of the elasticity is measured by 
comparing the  absolute values of demand and price.  
 In symbols, the definition of price elasticity of demand can be expressed as  
 
q
p
p
q
change
change
p
p
q
q
E or E
P d
?
?
?
? ?
? ?
?
?
?
%
%
% %
%
%
 
 Where E
d
 or E
P
 is price elasticity of demand  
     P = initial price  
     q = quantity demanded at initial price  
     ?p =  % change in price  
     ?q =  % change in quantity demanded  
 This formula can be explained with the help of an example:- let us assume at a price 
of  Rs. 20 per loaf of bread 10 breads are bought when the price is reduced to Rs 18 per 
 bread, 15 breads are bought.  
Elasticity Of Demand & Supply 
4 
Institute of Lifelong Learning, University of Delhi 
 
5
10
20
2
5
? ? ? ?
?
?
?
q
p
q
q
E
P
 
 Two extreme situations of price elasticity of demand need to be mentioned before 
 discussing normal situations of price elasticity of demand.  
 Two Extreme situations of Price Elasticity of Demand are Zero and Infinity.  
(1) Zero Price Elasticity of Demand (Perfectly Inelastic) is there where due to any 
change in  price of the commodity, no change is noticed in the quantity demanded of 
that  commodity this situation in expressed as Perfectly Inelastic Demand. This can be 
 represented with the help of following Fig 1.  
 
  
 In Figure 1, vertical straight line DD shows that , there may be any change in the 
price  of the commodity but the quantity demanded remains OD. Thus the demand curve 
DD  shows neither any extension nor contraction.  
(2) Infinite Price Elasticity of Demand (Perfectly Elastic Demand) is found when due to a 
 negligible change in price of the commodity, there is infinite change in the quantity 
 demanded. (Fig 2.) 
 
 
At  price OP, any amount of commodity can be bought 
which is represented by PD horizontal straight line. 
There is infinite change in quantity demanded due to 
negligible or no change in price.  
Page 5


Elasticity Of Demand & Supply 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
Subject: Microeconomics 
Lesson: Elasticity Of Demand & Supply 
Lesson Developer: S.K Gupta 
College/Department: Dept. of Eco, University of Delhi
Elasticity Of Demand & Supply 
2 
Institute of Lifelong Learning, University of Delhi 
 
1. LEARNING OUTCOMES 
 After you have read this chapter, you should be able to  
? define elasticity of demand and supply 
? understand different types of elasticity of demand  
? identify different determinants of elasticity of demand  
? apply the knowledge of elasticity of demand and supply in real file.  
2.  INTRODUCTION  
 Amount of a commodity demanded per unit of time is a function of many variables 
such  as price of that commodity, price of  related commodities, income of the consumer, 
 wealth of the buyers, distribution of income & wealth among buyers, number of 
buyers.  A change in any one of the above mentioned variables (independent variable) 
is likely to  bring a change in the amount of commodity purchased (dependent variable) 
per unit of  time. The elasticity of demand measures the relative responsiveness in the 
amount of the  commodity purchased per unit of time to a change in any one of the 
variables while  keeping the other variables constant. Thus the coefficient of elasticity 
of demand may be  defined as the proportionate change in the demand for a commodity 
divided by the  proportionate change in the price of the commodity, related 
commodity or the income of  the consumer    
 Alfred Marshall defined “Elasticity of demand as the percentage change in the 
quantity  demanded divided by the percentage change in the price.” 
 Elasticity of demand is found to be of three kinds (1) Price Elasticity of Demand (2) 
cross  Elasticity of Demand (3) Income Elasticity of Demand  
3. PRICE ELASTICITY OF DEMAND  
 Other things being constant price elasticity of demand is the ratio of percentage 
charge in  demand due to the percentage change in the price of the commodity. The 
concept of  price-elasticity of demand is expressed as under:  
       
price its in e ch percentage or e oportionat
demanded ity com of amount the in e ch percentage or e oportionat
E
p
arg ) / ( Pr
mod arg ) / ( Pr
? 
 Since there exists an inverse relation between the change in quantity demanded 
 (extension or contraction) and the change in price of the commodity, price elasticity 
of  demand is represented by negative sign (-). In the words of Lipsey “Because of the 
Elasticity Of Demand & Supply 
3 
Institute of Lifelong Learning, University of Delhi 
 
 negative slope of the demand curve, price and quantity will always change in 
opposite  direction. One change will be positive and the other negative.”    
 In practice, negative sign is not used before showing the coefficient price elasticity of 
 demand.  In general while comparing two elasticities we compare only their absolute 
 numbers and not algebraic values.  
 A 20 percentage change in price of a commodity if it causes 10 percentage change in 
 quantity demanded, it means  
5 . 0 ) (
20
10
? ? ?
price in Percentage
demand quantity in change Percentage
E
P
 
 Thus price elasticity of demand is measured by a ratio; the percentage change in 
quantity  demanded divided by the percentage change in price. For a negatively sloping 
demand  curve, elasticity is negative and the size of the elasticity is measured by 
comparing the  absolute values of demand and price.  
 In symbols, the definition of price elasticity of demand can be expressed as  
 
q
p
p
q
change
change
p
p
q
q
E or E
P d
?
?
?
? ?
? ?
?
?
?
%
%
% %
%
%
 
 Where E
d
 or E
P
 is price elasticity of demand  
     P = initial price  
     q = quantity demanded at initial price  
     ?p =  % change in price  
     ?q =  % change in quantity demanded  
 This formula can be explained with the help of an example:- let us assume at a price 
of  Rs. 20 per loaf of bread 10 breads are bought when the price is reduced to Rs 18 per 
 bread, 15 breads are bought.  
Elasticity Of Demand & Supply 
4 
Institute of Lifelong Learning, University of Delhi 
 
5
10
20
2
5
? ? ? ?
?
?
?
q
p
q
q
E
P
 
 Two extreme situations of price elasticity of demand need to be mentioned before 
 discussing normal situations of price elasticity of demand.  
 Two Extreme situations of Price Elasticity of Demand are Zero and Infinity.  
(1) Zero Price Elasticity of Demand (Perfectly Inelastic) is there where due to any 
change in  price of the commodity, no change is noticed in the quantity demanded of 
that  commodity this situation in expressed as Perfectly Inelastic Demand. This can be 
 represented with the help of following Fig 1.  
 
  
 In Figure 1, vertical straight line DD shows that , there may be any change in the 
price  of the commodity but the quantity demanded remains OD. Thus the demand curve 
DD  shows neither any extension nor contraction.  
(2) Infinite Price Elasticity of Demand (Perfectly Elastic Demand) is found when due to a 
 negligible change in price of the commodity, there is infinite change in the quantity 
 demanded. (Fig 2.) 
 
 
At  price OP, any amount of commodity can be bought 
which is represented by PD horizontal straight line. 
There is infinite change in quantity demanded due to 
negligible or no change in price.  
Elasticity Of Demand & Supply 
5 
Institute of Lifelong Learning, University of Delhi 
 
Normal situations of price elasticity of demand can be presented as under: 
(3) Unitary Elasticity of Demand when Elasticity of Demand = 1 
Unitary Elastic Demand is said to be there when the ratio of proportionate change in 
quantity demand to the proportionate change in price is equal to one.  
 
Total Expenditure = Price ? Quantity, P= Price, Q = 
Quantity. DD demand curve represents unitary Elastic 
Demand curve. At price OP
1
,  quality demanded is OQ
1
. So 
total Expenditure = OP
1
AQ
1
 When price falls to OP
2
, then 
total expenditure becomes OQ
2
BP
2
. Area of OP
1
AQ
1
 = 
OQ
2
BQ
2
. From this it becomes clear that change in price 
does not cause any change in total expenditure. Therefore 
Elasticity of demand = 1. 
 
(4) Greater then unitary Elastic Demand (E
P
 ? 1), is there 
when due to a change in the  price of the commodity, 
the total expenditure to be  incurred on that commodity 
changes in the opposite  direction.  Fig 4..  .  In the 
adjoining Fig.4, DD demand  curve is showing greater 
than unitary elastic demand.  When the price in OP
1
, 
then total expenditure is OP
1
AQ
1
  & when price falls to OP
2
 
then the total expenditure  becomes OP
2
BQ
2
. Area of OP
2
BQ
2
 
? OP
1
AQ
1
. Due to  fall in price total expenditure incurred on 
that  commodity increases. From this it becomes clear that 
DD demand curve in Fig. 4  represents greater than unitary 
elastic demand. the DD curve in relatively flat  
(5) Less than unitary Elastic Demand  (E
P
 ? 1), is 
there when due to a change in the price of the 
product, the total expenditure to be incurred on that 
commodity changes in the same direction as of the 
price. It means that due to a fall in the price of a 
commodity total expenditure to be incurred on that 
commodity declines and with an increase in the price 
of the commodity, total  expenditure to be incurred on 
that commodity increases. In Fig. 5, DD demand curve 
represents less than unitary elastic demand. When the 
price is OP
1
 quantity is demanded and the total 
Read More
12 docs

FAQs on Lecture 4 - Elasticity of Demand & Supply - Microeconomics- Interaction between individual buyer-seller

1. What is elasticity of demand and supply in economics?
Ans. Elasticity of demand and supply is a measure of how responsive the quantity demanded or supplied of a good or service is to changes in its price. It helps us understand the sensitivity of buyers and sellers to price changes. A high elasticity indicates that demand or supply is very responsive to price changes, while a low elasticity indicates less responsiveness.
2. How is the elasticity of demand calculated?
Ans. The elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. The formula for price elasticity of demand is: Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price) This formula gives us a numerical value that tells us how sensitive demand is to price changes. If the value is greater than 1, demand is elastic; if it is less than 1, demand is inelastic; and if it is equal to 1, demand is unitary elastic.
3. What factors affect the elasticity of demand?
Ans. Several factors can affect the elasticity of demand, including the availability of substitutes, the necessity of the good or service, the proportion of income spent on the good, and the time period under consideration. If there are many substitutes available for a good, demand tends to be more elastic because consumers can easily switch to alternatives if the price increases. On the other hand, if there are few substitutes, demand tends to be inelastic. Goods that are considered necessities, such as food or healthcare, tend to have inelastic demand because consumers are less likely to change their consumption patterns even if prices change. The proportion of income spent on a good also affects elasticity. If a good represents a large portion of a consumer's income, demand tends to be more elastic because price changes have a significant impact on their budget. Finally, the time period under consideration is important. In the short run, demand tends to be more inelastic as consumers may not have enough time to adjust their consumption patterns. In the long run, demand becomes more elastic as consumers have more flexibility to make changes.
4. How is the elasticity of supply calculated?
Ans. The elasticity of supply is calculated by dividing the percentage change in quantity supplied by the percentage change in price. The formula for price elasticity of supply is: Elasticity of Supply = (Percentage Change in Quantity Supplied) / (Percentage Change in Price) Similar to the demand elasticity, this formula gives us a numerical value that indicates the responsiveness of supply to price changes. If the value is greater than 1, supply is elastic; if it is less than 1, supply is inelastic; and if it is equal to 1, supply is unitary elastic.
5. What factors affect the elasticity of supply?
Ans. The elasticity of supply can be influenced by several factors, including the availability of inputs, production timeframes, and the ability to adjust production levels. If inputs required for production are readily available, supply tends to be more elastic because producers can easily increase or decrease production in response to price changes. However, if inputs are scarce or difficult to obtain, supply becomes more inelastic as producers struggle to adjust production levels. The timeframe considered also affects supply elasticity. In the short run, supply tends to be more inelastic as producers may not have enough time to adjust their production processes or find alternative inputs. In the long run, supply becomes more elastic as producers have more flexibility to make changes. Additionally, the ability to adjust production levels plays a role in supply elasticity. If production can be easily ramped up or scaled down, supply tends to be more elastic. However, if production capacity is limited or fixed, supply becomes more inelastic.
12 docs
Download as PDF
Explore Courses for Economics exam
Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
10M+ students study on EduRev
Related Searches

Viva Questions

,

Lecture 4 - Elasticity of Demand & Supply | Microeconomics- Interaction between individual buyer-seller

,

Extra Questions

,

Lecture 4 - Elasticity of Demand & Supply | Microeconomics- Interaction between individual buyer-seller

,

shortcuts and tricks

,

pdf

,

Exam

,

past year papers

,

Previous Year Questions with Solutions

,

ppt

,

Summary

,

Free

,

Lecture 4 - Elasticity of Demand & Supply | Microeconomics- Interaction between individual buyer-seller

,

Semester Notes

,

video lectures

,

Important questions

,

practice quizzes

,

Sample Paper

,

study material

,

Objective type Questions

,

MCQs

,

mock tests for examination

;