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Unit 5: Elasticity of Demand

The cross elasticity of demand is a numerical measure of the degree to which quantity Notes
demanded of a good responds to changes in the prices of other commodities, the other
determinants of demand being kept constant.

An understanding of elasticity is fundamental in understanding the response of supply
and demand in a market.

5.6 Keywords

Arc elasticity: It computed if the data is discrete and therefore incremental change is measurable.

Cross elasticity: Degree to which demand for one product is affected by the price of another
product.
Demand elasticity: Elasticity used to show the responsiveness of the quantity demanded of a
good or service to a change in its price.
Elasticity: It measures the degree of responsiveness of demand/supply to change in price.
Point elasticity: It computed if demand function is continuous and therefore only marginal
changes are calculable.

5.7 Self Assessment

1. Fill in the blanks:
(a) Elasticity of demand measures responsiveness of demand of a commodity to ………..,
…………… and ...................... .
(b) Such horizontal demand curves, where quantity demanded is infinitely responsive
to price changes, are called ........................ .

(c) Demand curves which have an elasticity coefficient as 1 are called ........................ .
(d) All such demand curves where quantity demanded is totally unresponsive to changes
in price are called .............. .
(e) The demand is ................ in the long run.

2. State true or false for the following statements:
(a) If we go by the Law of Demand, the price elasticity for most goods would be negative.
(b) The price elasticity of a straight line demand curve varies from zero to infinity.
(c) When the income elasticity is equal to 1, the good is said to be income inelastic.
(d) When the income elasticity is negative, the good is an inferior good.

(e) For complementary goods, the cross elasticity will always be positive.

5.8 Review Questions

1. Discuss the factors that determine elasticity of demand.
2. Explain price elasticity of demand with help of examples.
3. Assume that our current consumption of paperback books is 1000 per year at the average
price of 1.50 per book. The estimated coefficient of price elasticity is 0.75. The price
increase is 50 paise per book. Calculate the change in the quantity of books demanded,
other things being equal.

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