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

Economics: Lecture 4 - Elasticity of Demand & Supply Notes | Study Microeconomics- Interaction between individual buyer-seller - Economics

The document Lecture 4 - Elasticity of Demand & Supply Notes | Study Microeconomics- Interaction between individual buyer-seller - Economics is a part of the Economics Course Microeconomics- Interaction between individual buyer-seller.
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 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 
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