3.3 Elasticity of Demand

“Explore the concept of elasticity of demand, a fundamental topic in microeconomics. This post delves into how demand responds to changes in price, income, and other factors, helping to understand consumer behavior, pricing strategies, and market dynamics.” This topic is equally important for the students of economics across all the major Boards and Universities such as FBISE, BISERWP, BISELHR, MU, DU, PU, NCERT, CBSE & others & across all the business & finance disciplines.

Elasticity of Demand

Elasticity of demand measures the change in quantity demand due to change in price. It is used to measure the effect of price on quantity demanded.

The price elasticity of demand measures how much the quantity demand responds to change in price. It is denoted by Ed. Its formula is given below:

$\mathbf{Ed =}\frac{\mathbf{\%\ change\ in\ quantity\ demanded}}{\mathbf{\%\ change\ in\ Price}}\$

$\mathbf{Ed =}\frac{\mathbf{\%\ \Delta Q}}{\mathbf{\%\ \Delta P}}\$

Elasticity has different types given below:

1. Elastic Demand (Ed > 1)

2. Inelastic Demand (Ed < 1)

3. Unitary Elastic or Proportionate Elastic Demand (Ed = 1)

4. Zero Elastic or Perfectly Inelastic Demand (Ed = 0)

5. Perfectly Elastic Demand (Ed = ∞)

Elastic Demand (Ed > 1)

When the change in quantity demand is greater than the change in price, elasticity of demand is called elastic demand. In this case Ed > 1. In this case demand line is more flatter. For explanation follow below table and diagram.

Table Elastic Demand

Q.D (x)	Price (x)
5	4
20	2

Figure Elastic Demand

$\mathbf{P.E.D = Ed =}\frac{\mathbf{\mathrm{\Delta}Q}}{\mathbf{\mathrm{\Delta}P}}\mathbf{\times}\frac{\mathbf{P}}{\mathbf{Q}}\$

$\mathbf{P.E.D = Ed =}\frac{\mathbf{15}}{\mathbf{2}}\mathbf{\times}\frac{\mathbf{4}}{\mathbf{5}}\$

$\mathbf{P.E.D = Ed =}\frac{\mathbf{60}}{\mathbf{10}}\mathbf{= 6}\$

$\mathbf{P.E.D = Ed = 6} > 1\$

Inelastic Demand (Ed < 1)

When the change in quantity demand is less than the change in price, elasticity of demand is called inelastic demand. In this case Ed < 1. In this case demand line is less flatter. For explanation follow below table and diagram.

Table Inelastic Demand

Q.D (x)	Price (x)
4	5
2	20

Figure Inelastic Demand

$\mathbf{P.E.D = Ed =}\frac{\mathbf{\mathrm{\Delta}Q}}{\mathbf{\mathrm{\Delta}P}}\mathbf{\times}\frac{\mathbf{P}}{\mathbf{Q}}\$

$\mathbf{P.E.D = Ed =}\frac{\mathbf{2}}{\mathbf{15}}\mathbf{\times}\frac{\mathbf{5}}{\mathbf{4}}\$

$\mathbf{P.E.D = Ed =}\frac{\mathbf{10}}{\mathbf{60}}\mathbf{= 0.166}\$

$\mathbf{P.E.D = Ed = 0.166} < 1\$

Unitary Elastic or Proportionate Elastic Demand (Ed = 1)

When proportionate change in quantity demanded is equal to the proportionate change in price, the elasticity is called Unitary Elastic or proportionate elastic. Its answer is always equals to 1 (Ed = 1). Its demand line is more flatter. For understanding, follow below given table and diagram:

Table Unitary/Proportionate Elastic Demand

Q.D (x)	Price (x)
4	2
2	4

Figure Unitary/Proportionate Elastic Demand

$\mathbf{P.E.D = Ed =}\frac{\mathbf{\%\ \Delta Q}}{\mathbf{\%\ \Delta P}}\$

$\mathbf{P.E.D = Ed =}\frac{\frac{\mathbf{2 - 4}}{\mathbf{2}}}{\frac{\mathbf{4 - 2}}{\mathbf{2}}}\mathbf{=}\frac{\mathbf{- 1}}{\mathbf{1}}\mathbf{= - 1 = 1}\$

$\mathbf{P.E.D = Ed = 1}\$

Change and Shift in Demand, Extension and Contraction in Demand, Rise and Fall in Demand

Perfectly Elastic Demand (Ed = ∞)

When there is a continuous change in quantity demand with respect to constant price, the elasticity of demand is called perfectly elastic demand. In perfectly elastic demand Ed = ∞. Its line is horizontal. For understanding, follow below given table and diagram:

Table Perfectly Elastic Demand

Q.D (x)	Price (x)
1	3
2	3
3	3
4	3
5	3

Figure Perfectly Elastic Demand

Perfectly Inelastic Demand/Zero Elastic Demand (Ed = 0)

When there is a no change in quantity demand with respect to continuous change in price, the elasticity of demand is called perfectly inelastic demand. In perfectly inelastic demand Ed = 0. Its line is vertical. For understanding, follow below given table and diagram:

Table Perfectly Inelastic Demand/Zero Elastic Demand

Q.D (x)	Price (x)
2	1
2	2
2	3
2	4
2	5

Figure Perfectly Inelastic Demand/Zero Elastic Demand

$\mathbf{PED = Ed =}\frac{\mathbf{\%\ \Delta Q}}{\mathbf{\%\ \Delta P}}\$

$\mathbf{PED = Ed =}\frac{\frac{\mathbf{2 - 2}}{\mathbf{2}}}{\frac{\mathbf{4 - 3}}{\mathbf{3}}}\mathbf{=}\frac{\mathbf{0}}{\frac{\mathbf{1}}{\mathbf{3}}}\mathbf{= 0}\$