Elasticity

ELASTICITY It shows the degree of responsiveness of the change in the one variable due to the change in the quantity of the other variable. Elasticity = Percentage change in the one variable Percentage change in the other variable It is simply a way of quantifying cause of and effect relationship. The concept of elasticity can be used in demand and supply. ELASTICITY OF DEMAND We can study the elasticity of demand under the following categories.  Price elasticity of demand  Income elasticity of demand  Cross price elasticity of demand PRICE ELASTICITY OF DEMAND It shows the degree of responsiveness of the change in the quantity demanded due to the change in the price of the product PED = Percentage change in the Qd Percentage change in the P OR PED = ΔQ/ΔP× P/Q For example P Qd 20 70 15 100 PED = ΔQ/ΔP× P/Q

30/-5 × 20/70

= - 1.71 1 www.tutors2u.com © 2011 All Rights Reserved Price elasticity of demand is always with negative sign. This negative sign shows that the price and quantity are negatively related, so we can ignore this negative sign. According to the value of price elasticity of demand there are following types of elasticity. If PED > 1 Elastic Demand If PED < 1 Inelastic Demand If PED = 1 Unitary Elastic Demand If PED = 0 Perfectly Inelastic Demand If PED =∞ Perfectly elastic demand

Elastic Demand Demand is said to be price elastic if small proportionate change in the price brings a larger proportionate change in the quantity demanded.  In this case the value of PED is always greater than 1.  Shape of the demand curve is flatter.  Luxuries have elastic demand. P Qd 100 100