Ela stic ity of dem and
le the dem an d curv e an d the law of dem and disc uss ed
. f
. hThe dem
2.6 . and sch edu , par ibus , with a cha nge in pnc e o
m t e prev~o~s sec tion all sho w that cete ris s or falls. In oth er wor ~s,
rise
a ~ommod1ty its qua ntit y dem and ed cha nge s, ie., ed mov e in the opposi~e
and
pnc e _of a COIJ?.modity and its ,qua ntit y dem
eno ugh to kno w tha t the_r~ is
direct1~ns. Ho~ever,_ for man y p'u rpo ses it is not
ntit y dem and ed or~ pos itiv e
a negat1v~ relat1on~h1p betw een pric e and its qua and othei;- det erm man ts of
y
(or neg ativ e) r~la tion ship be.t wee n the qua ntit
kno wle dge tha t tells us onl y t~e
d~ma1:1d, Tha t is, afte r all, only qua lita tive
fact ors affe ctin g dem and . It is
drrect10n '?f r~sp ons e to a cha nge in one of the
ons iven ess. For exa mpl e, one
not qu~ntltat1ve, telli ng us the size of the resp
ea~ e in tax will hav e on the
may wis h to kno w wha t effe ct, a 5 per cen t incr
dec reas e in tari ff will hav e_o n
dem and of tax e? com mod ity or~ 10 per cen t
incr eas e in th~ pric e ,o f fore ign
the dem and for 1mp orte d.~ ar or a 10 per cen t
~ pro duc ed goo ds. Sim ilar ly,
pro duc ed goo ds will hav e on the d~m and for qo~
ion of cha nge s in dem and _is a
ther e are so ma ny inst anc es whe re qua ntif icat
ntif icat ion or the size of ~he
maj or poli cy inte rest . In Eco nom ics, this qua
cep t of 'elasticity. Thi s sec tion
resp ons iven ess can be kno wn und er the con
elas ticit y, cro ss elas tici ty and
exp lore s the con cep ts of pric e elasticity, inco me · 1
elas tici ty of su~ stit utio n. · ·· •
(
rati o of the rela tive cha nge in ~
'
I• • '
2.6-1 Def init ion - In gel) eral , elas ticit y is the
ind epe nde nt.v arja ble. Rel ativ ~
dep end ent var iabl e to the rela tive cha nge in an
s, elas tici ty of dem and refe rs to
cha nge her e refe rs to per cen tag e cha nge . Thu
y dem and ed of a goo d t<;> th~
the rati o of the rela tiye cha nge in the qua ntit
ch dem and dep end s. Or we say
rela tive cha nge in one of the var iabl es on whi
and ed of a goo d div ide d by the
it is the per cen tag e chai:ige in the qua ntit y dem
of dem and . ;The ma in det erm i-
per cen tag e cha nge in one of the det erm ina nts
the rela ted com mo diti es and
nan ts are pric e of the com mod ity, pric e of
we hav e pric e elas tici ty,· cro ss
inc om e of the con sum ers. Cor resp ond ing ly,
om e elas tici ty. It sho uld , how -
elas tici ty and elas tici ty of sub stit utio n arid inc
of dem and , unl ess and oth erw ise
eve r, be not ed tha t wh en we talk of elas tici ty
e elas tici ty bf dem and .
sµ~ cifi call y men tion ed, we con side r it as pric~
• j I -,, I I l ' .: I • ' . •
I ' • ) J
the deg ree of resp ons ive nes s
:
•
2.6-2 Pri ce ela stic ity- Pric e elas tici ty me asu res
cha nge in its pric e, giv en the
of qua ntit y . dem and ed of a pro duc t to a
all oth er goo ds. Jn oth er wo rds , it
con sum er's inc om e, his tast es an~ pric es of
ntit y dem an_d ed 'div ide d by the
equ als ~he per cen t~g e cha ~ge in the qua
t. The pric e elas tici ty of dem and
per cen tag e cha nge 1n the pn~ e of the pro duc ·
·
for a pro duc t X is thu s wri tten as : · ' ' .· .
Cha nge in qua ntit y dem and ed of XI Ori ghl.
al qua ntit y
dem and ed of X · ·· · i
Pric e Ela stic ity = ., . . · ngi .· ·
., . , Cha nge 1n pnc e .of X/o nal pric e of.X . ''
I,
1
&qx/qx !
Or Ep = ~ -- - • \ • - ,I
.1px/Px ; ·' . . . . .
its pric e and .1 ind ica tes a cha ng-~.
whe re qx is the qua ntit y of X dem and ed. Px is
, ge t :
Rearranging th e expressjon we
aq ._ Px
E p = = -x -
qx .1px
.1q x Px
or = - - X - - ay s
qx I t "'d pri ce ela sti cit y is alw
.1p. l re afe l~sticity ·we no rm all y ign ore
an tit y are inv ers ely "f 2 r cen t
Sir.,...e price and qu h di the va ueal s o e .. ly. Th us ,""1 ~ _pe_
-~ re _en nge nu me ric va lue on
negativ e. _But fo r co mp m the
tiv e sig n an d co nsi de r th . d "th l per ce nt de cr ea se coal is
the nega oc iat e "':'1 as e in th e pr ice of
·nc r
· ea se in the pri ce of steel isdass me re,
2 pe r ce ntua nti ty of co al dcn1_andc , we g: t
d
l d d . the
quantity of steel de ma n e an e md qr es pe cti vd v s ho wm g the coal JS
ed wi th 2 pe r ce nt de cre afs ~ ' · · th
ass oc iat d c~aI as. hal · an on e ide red the 1111n 11s s1g ~, en w_e
I h d ns
cJasticity of stee an a r:~ las tic tha n co al [si nc
e r111nu~half ts
more ela sti c tha n ste el. Bu t_ l~ w_e co nv ent10n we
tha t st~ el is_ mo - ct He nc e bv .
would ha ve conc.lud ed t co1 re . . co nc lus ion s.
] which ,s no . ~ ·ty an d dr aw
greater than mrenuva s one . . 1 -
lu e of pn ce e as l1c1 "
co ns ide r absolut ., d,
cit y d' ff o s
2 6-2a Me as ur em en t o/ ela sti tha t crc nl go
I 1 . . b . ·n ob se rv ed rnu rc res po ns ive an d
J
. , al J..,f erlr od • t ch ,as u.: · S , -
J Tlt e Proportion ti to the ir pri ce anges. om csoar c
c m
. or e da sti c an d
. d d"f f E - . . ~s we sa y me ar
rcspon I erc n Y . 1n co no rn 1c. c ~omic ter mi no log y, ela sti c an d
somt: arc less res po nsi ve . D df . d
stl us tic thJ no 1h crs . lnf oc t.m t· o .
gs cm an 01 a go o
Sol ll ,,.,,1·e ·lcs ·. c. pr ~u •·
· •mc.:l
, •·st nm - . .. ~ h' ... ,.' bl \
·ine '""' ma nd s hav e co me tu ~ ,cq u11 f rs po ssJ e
lastic de of dcm ;1nd 1s gr ea ter tha n one. 1s
• . . . 'd 1 ·la ·tic if the da sti dtv
tic y d1.·mandcd is gr ea te r tha n
the ~e rcc nt~ ge
-~; t~t ag cd rnn gc in q~ an
~:1~ ~:1 p~ cc
pri ce of the com m, u~ i ty. Th u~ , i~ IO pc rc~ nt d~cr~cas~ rn the p~
change in the crensc m its qu an tit y dc m.a? dc
d, the pn ~e
n lea ds to 20 pe r c.:t: nt ~o
of tel ev isio
(20 0u / J 0% ) u' n ·~ he nc e we su y tha t tcJ cv1s10n ha s ela sti c
efosti city will be 2
demand [see fig . 7(a)].
dcm ru1 d for a go od is sai d to be inelastic if pr ice ela ~ti dty
o~1 the other hn nd ,
nta ge c~ an ge in qu an tit y de ma nd ed of a go od 1s les
s
is less thun on e or if pe rce rea se
pe rce nta ge ch an ge in its pri ce. Fo r ex am ple , if 10 pe r ce nt inc
than the in its qu an tit y de ma nd ed , pri
ce
ce nt d ec rea se
in pri ce of wh ea t ca us es 5 pe r d to ha ve ine las tic de ma nd [se e fig.
an d wh ea t is sai
elasticity is .5 () ·
7(b)].
ha ve un it ela sti cit y als o, ie. ,it co uld be eq ua l to on e. This
A co mm od ity co uld an tit y de ma nd ed eq ua ls pe rce nta
ge
pe rce nta ge ch an ge in qu
happens wh en mm od ity . Fo r ex am ple , if a 10 pe r
ce nt
pri ce of the co nc ern ed co
ch an ge in the qu an tit y
in the pri ce of ste el ca us es a 10 pe r ce nt inc rea se in its
de cre ase
it ela sti cit y [see fig. 7(c)].
de ma nd ed , we say steel ha s un s; still
o ex tre me cas es wh os e po ssi bility of ha pp en ing is ve ry Jes
Th ere are ~w cit y. This
tic al pu rpo ~e s, we stu dy the m. On e is the ca se of ze ro ela sti
for the ore pr od uc t in
wh en the re ~s ~o ch_ ang e in the qu an tit y de ma nd ed of a
ha pp en s
ge m its pn ce . Fo r ex am ple , if a 1Ope r ce nt de cre as e in the
re~ponse to a ch an in its qu an tit y de ma nd ed , we sa y sal
t
no t lea d ~o an y ch an ge
pn ce of salt d~e_s ctl y ine las tic [see fig. 7( ~] . ·
ha s ze ro ela sti cit y or sa lt 1s pe rfe
le the dem an d curv e an d the law of dem and disc uss ed
. f
. hThe dem
2.6 . and sch edu , par ibus , with a cha nge in pnc e o
m t e prev~o~s sec tion all sho w that cete ris s or falls. In oth er wor ~s,
rise
a ~ommod1ty its qua ntit y dem and ed cha nge s, ie., ed mov e in the opposi~e
and
pnc e _of a COIJ?.modity and its ,qua ntit y dem
eno ugh to kno w tha t the_r~ is
direct1~ns. Ho~ever,_ for man y p'u rpo ses it is not
ntit y dem and ed or~ pos itiv e
a negat1v~ relat1on~h1p betw een pric e and its qua and othei;- det erm man ts of
y
(or neg ativ e) r~la tion ship be.t wee n the qua ntit
kno wle dge tha t tells us onl y t~e
d~ma1:1d, Tha t is, afte r all, only qua lita tive
fact ors affe ctin g dem and . It is
drrect10n '?f r~sp ons e to a cha nge in one of the
ons iven ess. For exa mpl e, one
not qu~ntltat1ve, telli ng us the size of the resp
ea~ e in tax will hav e on the
may wis h to kno w wha t effe ct, a 5 per cen t incr
dec reas e in tari ff will hav e_o n
dem and of tax e? com mod ity or~ 10 per cen t
incr eas e in th~ pric e ,o f fore ign
the dem and for 1mp orte d.~ ar or a 10 per cen t
~ pro duc ed goo ds. Sim ilar ly,
pro duc ed goo ds will hav e on the d~m and for qo~
ion of cha nge s in dem and _is a
ther e are so ma ny inst anc es whe re qua ntif icat
ntif icat ion or the size of ~he
maj or poli cy inte rest . In Eco nom ics, this qua
cep t of 'elasticity. Thi s sec tion
resp ons iven ess can be kno wn und er the con
elas ticit y, cro ss elas tici ty and
exp lore s the con cep ts of pric e elasticity, inco me · 1
elas tici ty of su~ stit utio n. · ·· •
(
rati o of the rela tive cha nge in ~
'
I• • '
2.6-1 Def init ion - In gel) eral , elas ticit y is the
ind epe nde nt.v arja ble. Rel ativ ~
dep end ent var iabl e to the rela tive cha nge in an
s, elas tici ty of dem and refe rs to
cha nge her e refe rs to per cen tag e cha nge . Thu
y dem and ed of a goo d t<;> th~
the rati o of the rela tiye cha nge in the qua ntit
ch dem and dep end s. Or we say
rela tive cha nge in one of the var iabl es on whi
and ed of a goo d div ide d by the
it is the per cen tag e chai:ige in the qua ntit y dem
of dem and . ;The ma in det erm i-
per cen tag e cha nge in one of the det erm ina nts
the rela ted com mo diti es and
nan ts are pric e of the com mod ity, pric e of
we hav e pric e elas tici ty,· cro ss
inc om e of the con sum ers. Cor resp ond ing ly,
om e elas tici ty. It sho uld , how -
elas tici ty and elas tici ty of sub stit utio n arid inc
of dem and , unl ess and oth erw ise
eve r, be not ed tha t wh en we talk of elas tici ty
e elas tici ty bf dem and .
sµ~ cifi call y men tion ed, we con side r it as pric~
• j I -,, I I l ' .: I • ' . •
I ' • ) J
the deg ree of resp ons ive nes s
:
•
2.6-2 Pri ce ela stic ity- Pric e elas tici ty me asu res
cha nge in its pric e, giv en the
of qua ntit y . dem and ed of a pro duc t to a
all oth er goo ds. Jn oth er wo rds , it
con sum er's inc om e, his tast es an~ pric es of
ntit y dem an_d ed 'div ide d by the
equ als ~he per cen t~g e cha ~ge in the qua
t. The pric e elas tici ty of dem and
per cen tag e cha nge 1n the pn~ e of the pro duc ·
·
for a pro duc t X is thu s wri tten as : · ' ' .· .
Cha nge in qua ntit y dem and ed of XI Ori ghl.
al qua ntit y
dem and ed of X · ·· · i
Pric e Ela stic ity = ., . . · ngi .· ·
., . , Cha nge 1n pnc e .of X/o nal pric e of.X . ''
I,
1
&qx/qx !
Or Ep = ~ -- - • \ • - ,I
.1px/Px ; ·' . . . . .
its pric e and .1 ind ica tes a cha ng-~.
whe re qx is the qua ntit y of X dem and ed. Px is
, ge t :
Rearranging th e expressjon we
aq ._ Px
E p = = -x -
qx .1px
.1q x Px
or = - - X - - ay s
qx I t "'d pri ce ela sti cit y is alw
.1p. l re afe l~sticity ·we no rm all y ign ore
an tit y are inv ers ely "f 2 r cen t
Sir.,...e price and qu h di the va ueal s o e .. ly. Th us ,""1 ~ _pe_
-~ re _en nge nu me ric va lue on
negativ e. _But fo r co mp m the
tiv e sig n an d co nsi de r th . d "th l per ce nt de cr ea se coal is
the nega oc iat e "':'1 as e in th e pr ice of
·nc r
· ea se in the pri ce of steel isdass me re,
2 pe r ce ntua nti ty of co al dcn1_andc , we g: t
d
l d d . the
quantity of steel de ma n e an e md qr es pe cti vd v s ho wm g the coal JS
ed wi th 2 pe r ce nt de cre afs ~ ' · · th
ass oc iat d c~aI as. hal · an on e ide red the 1111n 11s s1g ~, en w_e
I h d ns
cJasticity of stee an a r:~ las tic tha n co al [si nc
e r111nu~half ts
more ela sti c tha n ste el. Bu t_ l~ w_e co nv ent10n we
tha t st~ el is_ mo - ct He nc e bv .
would ha ve conc.lud ed t co1 re . . co nc lus ion s.
] which ,s no . ~ ·ty an d dr aw
greater than mrenuva s one . . 1 -
lu e of pn ce e as l1c1 "
co ns ide r absolut ., d,
cit y d' ff o s
2 6-2a Me as ur em en t o/ ela sti tha t crc nl go
I 1 . . b . ·n ob se rv ed rnu rc res po ns ive an d
J
. , al J..,f erlr od • t ch ,as u.: · S , -
J Tlt e Proportion ti to the ir pri ce anges. om csoar c
c m
. or e da sti c an d
. d d"f f E - . . ~s we sa y me ar
rcspon I erc n Y . 1n co no rn 1c. c ~omic ter mi no log y, ela sti c an d
somt: arc less res po nsi ve . D df . d
stl us tic thJ no 1h crs . lnf oc t.m t· o .
gs cm an 01 a go o
Sol ll ,,.,,1·e ·lcs ·. c. pr ~u •·
· •mc.:l
, •·st nm - . .. ~ h' ... ,.' bl \
·ine '""' ma nd s hav e co me tu ~ ,cq u11 f rs po ssJ e
lastic de of dcm ;1nd 1s gr ea ter tha n one. 1s
• . . . 'd 1 ·la ·tic if the da sti dtv
tic y d1.·mandcd is gr ea te r tha n
the ~e rcc nt~ ge
-~; t~t ag cd rnn gc in q~ an
~:1~ ~:1 p~ cc
pri ce of the com m, u~ i ty. Th u~ , i~ IO pc rc~ nt d~cr~cas~ rn the p~
change in the crensc m its qu an tit y dc m.a? dc
d, the pn ~e
n lea ds to 20 pe r c.:t: nt ~o
of tel ev isio
(20 0u / J 0% ) u' n ·~ he nc e we su y tha t tcJ cv1s10n ha s ela sti c
efosti city will be 2
demand [see fig . 7(a)].
dcm ru1 d for a go od is sai d to be inelastic if pr ice ela ~ti dty
o~1 the other hn nd ,
nta ge c~ an ge in qu an tit y de ma nd ed of a go od 1s les
s
is less thun on e or if pe rce rea se
pe rce nta ge ch an ge in its pri ce. Fo r ex am ple , if 10 pe r ce nt inc
than the in its qu an tit y de ma nd ed , pri
ce
ce nt d ec rea se
in pri ce of wh ea t ca us es 5 pe r d to ha ve ine las tic de ma nd [se e fig.
an d wh ea t is sai
elasticity is .5 () ·
7(b)].
ha ve un it ela sti cit y als o, ie. ,it co uld be eq ua l to on e. This
A co mm od ity co uld an tit y de ma nd ed eq ua ls pe rce nta
ge
pe rce nta ge ch an ge in qu
happens wh en mm od ity . Fo r ex am ple , if a 10 pe r
ce nt
pri ce of the co nc ern ed co
ch an ge in the qu an tit y
in the pri ce of ste el ca us es a 10 pe r ce nt inc rea se in its
de cre ase
it ela sti cit y [see fig. 7(c)].
de ma nd ed , we say steel ha s un s; still
o ex tre me cas es wh os e po ssi bility of ha pp en ing is ve ry Jes
Th ere are ~w cit y. This
tic al pu rpo ~e s, we stu dy the m. On e is the ca se of ze ro ela sti
for the ore pr od uc t in
wh en the re ~s ~o ch_ ang e in the qu an tit y de ma nd ed of a
ha pp en s
ge m its pn ce . Fo r ex am ple , if a 1Ope r ce nt de cre as e in the
re~ponse to a ch an in its qu an tit y de ma nd ed , we sa y sal
t
no t lea d ~o an y ch an ge
pn ce of salt d~e_s ctl y ine las tic [see fig. 7( ~] . ·
ha s ze ro ela sti cit y or sa lt 1s pe rfe
