ELASTICITY OF DEMAND

The degree of responsiveness of quantity demanded of a commodity to the change in price is called
elasticity of demand. Price elasticity of demand is popularly called elasticity of demand. It is the rate of
which quantity demanded changes in response to the change in price. Elasticity of demand expresses
the magnitude of change in quantity of a commodity.
Precisely stated, price elasticity demand is defined as the ratio of percentage change in quantity
demanded to a percentage change in price. Thus elasticity of demand can be expressed in form of the
following as price and quantity demanded move opposite.
Five cases of Elasticity of Demand:
1. Perfectly elastic demand
2. Perfectly inelastic demand
3. Relatively elastic demand
4. Relatively inelastic demand
5. Unitary elastic demand
1. Perfectly elastic demand: (e = )
The demand is said to be perfectly .elastic when a very insignificant change in
price leads to an infinite change in quantity demanded. A very small fall in price
causes demand to rise infinitely. Likewise a very insignificant rise in price reduces
the demand to zero. This case is theoretical which is never found in real life.

2. Perfectly inelastic demand: e = 0
The demand is said to be perfectly inelastic when a change in price produces no
change in the quantity demanded of a commodity. In such a case quantity
demanded remains constant regardless of change in price. The amount
demanded is totally unresponsive of change in price. The elasticity of demand is
said to be zero.

3. Relatively elastic demand: e>1
The demand is relatively more elastic when a small change in price causes a
greater change in quantity demanded. In such a case a proportionate change in
price of a commodity causes more than proportionate change in quantity
demanded. If price changes by 10% the quantity demanded of the commodity
change by more than 10% i.e. 25%. The demand curve in such a situation is
relatively flatter.

4. Relatively inelastic demand: e<1
It is a situation where a greater change in price leads to smaller change in quantity
demanded. The demand is said to be relatively inelastic when a proportionate
change in price is greater than the proportionate change in quantity demanded.
For example If price falls by 20% quantity demanded rises by less than 20% i.e
15%.

5. Unitary elastic demand: e=1
The demand is said to be unit when a change in price produces exactly the same
percentage change in the quantity demanded of a commodity. In such a situation
the percentage change in both the price and quantity demanded is the same. For
example if the price falls by 25% the quantity demanded rises by the same 25%. It
takes the shape of a rectangular hyperbola. Numerically elasticity of demand is
said to be equal to 1.

Income Elasticity of Demand
Demand for a commodity changes in response to a change in income of the consumer. In fact, income
effect is a constituent of the price effect. The income effect suggests the effect of change in income on
demand. The income elasticity of demand explains the extent of change in demand as a result of change
in income. In other words, income elasticity of demand means the responsiveness of demand to
changes in income. Thus, income elasticity of demand can be expressed as:
EY = Percentage change in demand
Percentage change in income

Cross Elasticity of Demand
We have observed that demand for a commodity depends not only on the price of that commodity but
also on the prices of other related goods. Thus, the demand for a commodity X depends not only on the
price of X but also on the prices of other commodities Y, Z.N etc. The concept of cross elasticity
explains the degree of change in demand for X as, a result of change in price of Y. This can be expressed
as:
EC = Percentage Change in demand for X
Percentage change in price of Y