Page 70 - DECO405_MANAGERIAL_ECONOMICS

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Unit 5: Elasticity of Demand

Unit 5: Elasticity of Demand Notes

CONTENTS
Objectives
Introduction

5.1 Concept of Elasticity
5.1.1 Classification of Demand Curves according to their Elasticities
5.1.2 Numerical Measurement of Elasticity

5.1.3 Computation of Elasticity Coefficients
5.2 Price Elasticity of Demand
5.3 Income Elasticity

5.4 Cross Elasticity of Demand
5.5 Summary
5.6 Keywords

5.7 Self Assessment
5.8 Review Questions
5.9 Further Readings

Objectives

After studying this unit, you will be able to:
Calculate price elasticity of demand
Explain the income elasticity of demand concept
State how cross elasticities of demand are calculated

Introduction

Elasticity is the measure of responsiveness. It is the ratio of the percent change in one variable to
the percent change in another variable. The key thing to understand is that we use elasticity
when we want to see how one thing changes when we change something else. How does
demand for a good change when we change its price? How does the demand for a good change
when the price of a substitute good changes?

Elasticity varies among products because some products may be more essential to the consumer.
A good or service is considered to be elastic if a slight change in price leads to a sharp change in
the quantity demanded or supplied. Usually these kinds of products are readily available in the
market and a person may not necessarily need them in his or her daily life. For example, air
conditioners, televisions, movie tickets, branded clothes etc. On the other hand, an inelastic
good or service is one in which changes in price witness only modest changes in the quantity
demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to
the consumer in his or her daily life. For example, rice, potatoes, onion, salt, medicines etc.

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