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Unit 4: Elasticity of Demand

On the other hand, an inelastic good or service is one in which changes in price witness only Notes
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.

Example: Rice, potatoes, onion, salt, medicines etc.

4.1 Concept of Elasticity: An Introduction

The law of demand tells us that consumers will respond to a price decline by buying more of a
product. It does not, however, tell us anything about the degree of responsiveness of consumers
to a price change. Demand elasticity indicates responsiveness of demand to a change in a
determinate like price, price of other goods and income.
Graphically, elasticity of demand can be represented by the appearance of the demand curve.

For our discussion, let’s assume that the independent variable is price.
In cases where demand is not very responsive to change in price, the rate of change in quantity
demanded of the good is less than the rate of change in its price. In such cases, the elasticity of
demand is less than 1. ( e <1). The demand for the good is said to be inelastic in nature.
d
Similarly, in cases where demand is responsive to change in price, the rate of change in quantity
demanded of the good is more than the rate of change in its price. In such cases, the elasticity of
demand is more than 1. ( e >1). The demand for the good is said to be elastic in nature.
d
Both these cases are shown in Figure 4.1.

Figure 4.1: Inelastic and Elastic Demand Curves

Price (p) Price (p) D

D

Quantity (q) Quantity (q)
Inelastic Demand Elastic Demand

In cases where a change in price does not have any influence on quantity demanded of the good,
the elasticity of demand is equal to zero. (e =0). The demand for the good is perfectly inelastic.
d
The demand curve for such a good is vertical.
In cases where, any change in price will see quantity demanded of the good fall to zero, the

elasticity of demand is equal to infinity. (e = ∞). The demand for the good is perfectly elastic. The
d
demand curve for such a good is horizontal.
Both these cases are shown in Figure 4.2.

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