4 UNIT 1 ECONOMICS-II

Introduction
Law of demand states that Law of demand states that there is an inverse relationship between the price of a
there is an inverse commodity and its quantity demanded, all other factors remaining the same. In
relationship between the
other words, the law of demand explains that the demand for a commodity falls
price of a commodity and its
quantity demanded, all other when its price rises and vice versa. This law of demand shows only the direction
factors remaining the same. of change in demand for a commodity due to change in its price. But this law
In other words, the law of does not explain by how much quantity demanded of a commodity will change
demand explains that the
demand for a commodity falls in response to a change in its price. It remains silent on the amount of change in
when its price rises and vice demand. The information on how much or to what extent the quantity
versa. demanded of a commodity will change as a result of change in its price is
provided by the concept of elasticity of demand. On the other hand, law of
supply states, all other factors remaining the same, that there is positive
relationship between price of a commodity and its quantity supplied. This law
shows the direction of change in supply as a result of change in price. But this
law also does not explain by how much quantity supplied changes with change
in price. The answer of this question is given by elasticity of supply.
The price elasticity of demand is usually referred to as elasticity of demand. But
besides price elasticity of demand, there are various other concepts of elasticity
of demand such as income elasticity of demand, cross elasticity of demand, etc.
The subject matter of this chapter is the elasticity of demand and supply. This
chapter will begin with the review of demand and supply curves. Thereafter, we
will study the concept of elasticity of demand and its types (price, cross and
income elasticity of demand), degrees of price elasticity of demand, determining
factors of price elasticity of demand, and measurement of price elasticity of
demand by using total outlay and point methods. Finally, we will study
elasticity of supply and its various degrees or types.

Review of Demand and Supply Curves

Demand Curve
Demand Curve Demand curve is defined as the graphical representation of various quantities of
Demand curve is defined as a commodity demanded at different prices in a given period of time. In other
the graphical representation words, it is the graphical representation of demand schedule, which expresses
of various quantities of a
commodity demanded at the relationship between the price of a commodity and its quantity demanded.
different prices in a given The demand curve can be derived from the hypothetical demand schedule given
period of time. below:
Price (In Rs.) Quantity Demanded (In units)
TABLE 1.1 5 10
Demand Schedule 4 20
3 30
2 40
1 50
The Table 1.1 shows an inverse relationship between the price and the quantity
demanded for a commodity. At the price Rs. 5 per unit, the consumer purchases
 ELASTICITY AND ITS MEASUREMENT UNIT 1 5
10 units of the commodity. When the price decreases to Rs. 4 per unit, the
quantity demanded increases to 20 units. Similarly, when the price decreases to
Rs. 3, Rs. 2 and Re. 1, the quantity demanded increases to 30 units, 40 units, and
50 units respectively. On the basis of the demand schedule given above, we can
derive the demand curve as follows:

FIGURE 1.1 Y
Derivation of Demand
Curve D a
5
b
4
c
Price

3
d
2
e
1
D
O X
10 20 30 40 50
Quantity Demanded

In the Figure 1.1, X–axis represents the quantity demanded for a commodity and
Y–axis represents the price of the commodity. By plotting 10 units of the
commodity at the price Rs. 5 per unit, we get the point a in the figure. Likewise,
by plotting 20 units of the commodity at the price Rs. 4, we get the point b.
Similarly, the points c, d, and E are obtained. By joining these various points a, b,
c, d, and e, we get the curve DD, which is known as the demand curve. From the
figure, it is clear that the demand curve slopes downward from left to the right.
In other words, the demand curve has negative slope. The negative slope of the
demand curve shows the inverse relationship between the price of the
commodity and its quantity demanded.

Supply Curve
Supply Curve Supply curve is defined as the graphical representation of various quantities of a
Supply curve is defined as commodity supplied by a seller or firm at different prices in a given period of
the graphical representation
of various quantities of a
time. In other words, it is the graphical representation of the supply schedule,
commodity supplied by a which expresses the positive relationship between the price of a commodity and
seller or firm at different its quantity supplied. The supply curve can be derived from the hypothetical
prices in a given period of
supply schedule given below:
time.
TABLE 1.2 Price (In Rs.) Quantity Supplied (In units)
Supply Schedule 1 10
2 20
3 30
4 40
5 50

The Table 1.2 shows the positive relationship between the price of a commodity
and its quantity supplied. At the price Re. 1 per unit, the seller supplies 10 units
6 UNIT 1 ECONOMICS-II

of the commodity. When the price increases to Rs. 2 per unit, the quantity
supplied increases to 20 units. Similarly, when the price increases to Rs. 3, Rs. 4,
and Rs. 5, the quantity supplied increases to 3 units, 4 units, and 5 units
respectively. On the basis of the supply schedule given above, we can derive the
supply curve as follows:
FIGURE 1.2
Y
Derivation of Supply
Curve
e S
5
d
4
c
Price

3
b
2
a
1
S
O X
10 20 30 40 50
Quantity Supplied

In the Figure 1.2, X–axis represents the quantity supplied and Y–axis represents
the price of the commodity. By plotting 10 units of the commodity at the price
Rs. 1, we get the point A. Likewise, by plotting 20 units at the price Rs. 2, we get
the point b. Similarly, the points c, d, and e are obtained. Joining these points a,
b, c, d and e, we get the curve SS, which is known as the supply curve. From the
figure, it is clear that the supply curve slopes upward left to the right. In other
words, the supply curve has positive slope. The positive slope of the supply
curve shows the positive relationship between the price of the commodity and
its quantity supplied.

CONCEPT CHECK
 Define demand curve.
 Define supply curve.

Concept of Elasticity of Demand

Elasticity of Demand The concept of elasticity of demand was first introduced by the classical
A measure of responsiveness economists A.A. Cournot and J. S. Mill. Later on, neo-classical economist Alfred
of quantity demanded to the Marshall developed it in a scientific way in his book Principles of Economics
change in its determinants published in 1890. The elasticity of demand is the measure of responsiveness of
demand for a commodity to the change in any of its determinants like the price
of the same commodity, the price of the related commodity, the consumer’s
income, tastes, and preferences, the consumer’s expectation regarding the price,
etc.
The law of demand states an inverse relationship between the price and the
quantity demanded for a commodity. But this law does not state the degree of
change in demand due to the change in price. In order to measure the extent of
change in demand due to the change in the price, Alfred Marshall developed
the concept of elasticity of demand. He developed this concept with reference to
 ELASTICITY AND ITS MEASUREMENT UNIT 1 7
the price, i.e. to measure the change in demand due to the change in the price.
Therefore, the elasticity of demand generally refers to the price elasticity of
demand. However, there are as many types of elasticity of demand as many
determinants.
The concept of elasticity of demand can be cleared by the help of the following
definitions given by economists:
According to Alfred Marshall, "The elasticity of demand in a market is great or small
according as the amount demanded increases much or little for a given fall in the price
and diminishes much or little for a given rise in the price."
According to R.G. Lipsey, "Elasticity of demand may be defined as the ratio of the
percentage change in the demand to the percentage change in the price."
Thus, the elasticity of demand refers to the responsiveness of change in the
demand to the change in its determinants.

CONCEPT CHECK
 What do you mean by elasticity of demand?
 Who introduced the concept of elasticity of demand in economics?

Types of Elasticity of Demand

There are as many types of elasticity of demand as its determinants. However,
the most important types of elasticity of demand are as follows:
1. Price Elasticity of Demand
2. Income Elasticity of Demand, and
3. Cross Elasticity of Demand

Price Elasticity of Demand

Price Elasticity of The price elasticity of demand is defined as the measure of degree of
Demand (EP)
responsiveness of quantity demanded for a commodity to the change in its price.
A measure of degree of
responsiveness of quantity It is also defined as the ratio of percentage change in quantity demanded for a
demanded of a commodity to commodity to the percentage change in its price. It can be expressed in the
the change in its price.
following way:
Percentage change in quantity demanded
EP =
Percentage change in price
Change in quantity demanded
× 100%
Initial quantity demanded
EP =
Change in price
× 100%
Initial price

Q
× 100%
Q
=
P
× 100%
P

Q P
 EP = 
P Q

Where,
EP = Coefficient of price elasticity of demand
8 UNIT 1 ECONOMICS-II

Q = Initial quantity demanded

Q = Change in quantity demanded
P = Initial price
P = Change in price
Example 1. Find out price elasticity of demand when fall in the price from Rs. 10 to Rs. 8 results in
the rise of the quantity demanded from 40 units to 60 units.
SOLUTION
Given,
Initial Price (P) = Rs. 10 Initial Quantity (Q) = 40
New Price (P1) = Rs. 8 New Quantity (Q1) = 60
Here,
Change in price (∆P) = P1 – P = 8 – 10 = – 2
Change in quantity (∆Q) = Q1 – Q = 60 – 40 = 20
We know that,
∆Q P 20 10
EP = ∆P × Q =  – 2 × 40 = –2.5
 
Coefficient of price elasticity (EP) = –2.5
Interpretation: Since, the coefficient of price elasticity of demand is –2.5, one
percentage increase in the price results in 2.5 percentage decrease in the quantity
demanded and vice versa.

Types/Degrees of Price Elasticity of Demand

Types (Degrees) of There are five types of price elasticity of demand. They are as follows:
Price Elasticity of
Demand
1. Perfectly Elastic Demand (EP = )
1. Perfectly Elastic When negligible change in the price leads to infinite change in the quantity
Demand (EP = ) demanded, the demand for a commodity is said to be perfectly elastic. Visibly,
2. Perfectly Inelastic
no change in the price causes an infinite change in demand. Perfectly elastic
Demand (EP = )
3. Unitary Elastic Demand demand is a theoretical concept. It is hardly found in practice or real life.
(EP = ) Percentage change in quantity demanded
EP =
4. Relatively Elastic Percentage change in price
Demand (EP > ) 
5. Relatively Inelastic = = 
0
Demand (EP < ) It is graphically shown in the Figure 1.3.
FIGURE 1.3
Y
Perfectly Elastic
Demand

EP = ∞
Price

P1 D

X
O Q1 Q2 Q3
Quantity Demanded
 ELASTICITY AND ITS MEASUREMENT UNIT 1 9
In the Figure 1.3, the demand curve P1D represents perfectly elastic demand
curve. It is a horizontal straight line parallel to the X-axis or quantity axis. It
means that at price OP1, the quantity demanded may be OQ1 or OQ2 or OQ3.
2. Perfectly Inelastic Demand (EP = )
When the quantity demanded for a commodity does not change with the change
in its price, the demand for a commodity is said to be perfectly inelastic. For
example, medicine and salt have perfectly inelastic demand.
0
EP = = 
Any amount

It is graphically shown in the Figure 1.4.

FIGURE 1.4
Y
Perfectly Inelastic
Demand
D

P3
Price

P2 EP = 0

P1

X
O Q1
Quantity Demanded

In the Figure 1.4, demand curve Q1D represents perfectly inelastic demand. It is
vertical straight line parallel to the Y-axis or price axis. Even at different prices
OP1 or OP2 or OP3, the quantity demanded is constant, i.e. OQ1.
3. Unitary Elastic Demand (EP = )
When the percentage change in the quantity demanded is equal to the
percentage change in price, the demand for a commodity is said to be unitary
elastic. For example, if a 10% change in price causes 10% change in demand, it is
the case of unitary elastic demand.
10%
EP = =1
10%

It is graphically shown in the Figure 1.5.

10 UNIT 1 ECONOMICS-II

FIGURE 1.5
Y
Unitary Elastic
Demand
D

P1 EP = 1
10%
Price P2
D

10%

X
O Q1 Q2
Quantity Demanded

In the Figure 1.5, the rectangular hyperbola curve DD represents unitary elastic
demand. When the price falls from OP1 to OP2, the quantity demanded increases
from OQ1 to OQ2, i.e. the percentage change in price is equal to the percentage
change in quantity demanded.
4. Relatively Elastic Demand (EP > )
When the percentage change in the quantity demanded for a commodity is more
than percentage change in its price, it is called relatively elastic demand. Such
kind of elasticity of demand is found in case of luxury goods like LED television,
refrigerator, car, etc. If 10 percent change in the price results in 20 percent change
in the quantity demanded, it is the case of relatively elastic demand.
20%
EP = 10% = 2 > 1

It is graphically shown in the Figure 1.6.

FIGURE 1.6
Y
Relatively Elastic
Demand

P1
EP > 1
Price

10%

P2
D
20%

X
O Q1 Q2
Quantity Demanded
 ELASTICITY AND ITS MEASUREMENT UNIT 1 11
In the Figure 1.6, the demand curve DD represents relatively elastic demand
because it is flatter. Therefore, the percentage change in quantity demanded is
more than the percentage change in price. When price falls from OP1 to OP2, the
quantity demanded increases from OQ1 to OQ2, i.e. the percentage change in
quantity demanded is more than the percentage change in price.
5. Relatively Inelastic Demand (EP < )
When the percentage change in the quantity demanded of a commodity is less
than the percentage change in its price, it is called relatively inelastic demand. It
is found in case of necessity or basic goods like rice, vegetable, clothes, etc. For
example, when 20% change in price causes 10% change in quantity demanded, it
is the case of relatively inelastic demand.
10% 1
EP = 20% = 2 = 0.5 < 1

It is graphically shown in the Figure 1.7.

FIGURE 1.7 Y
Relatively Inelastic
Demand D

P1

EP < 1
Price

20%

P2

D
10%

X
O Q1 Q2
Quantity Demanded

In the Figure 1.7, the demand curve DD is steeper. It means that the percentage
change in price is more than the percentage change in quantity demanded.
When price falls from OP1 to OP2, the quantity demanded increases from OQ1 to
OQ2, i.e. the percentage change in the quantity demanded is less than the
percentage change in price. Therefore, it is the case of relatively inelastic
demand.

CONCEPT CHECK
 What is price elasticity of demand?
 What are the degrees of price elasticity of demand?
12 UNIT 1 ECONOMICS-II

Income Elasticity of Demand

Income Elasticity of Income elasticity of demand is defined as the responsiveness of change in
Demand (EY)
demand for a commodity to the change in income of the consumer. It is also
A measure of the
responsiveness of quantity defined as the ratio of the percentage change in the demand for a commodity to
demanded of a commodity to the percentage change in income of the consumer. It can be expressed in the
the change in income of the following way:
consumer
Percentage change in demand
EY =
Percentage change in income

Change in demand
× 100%
Initial demand
EY =
Change in income
× 100%
Initial income

Q
× 100%
Q Q Y
= = 
Y Y Q
× 100%
Y

Where,
EY = Coefficient of income elasticity of demand
Q = Initial demand
Q = Change in demand
Y = Initial income
Y = Change in income
The income elasticity of demand may be positive, negative or zero depending
upon the nature of a commodity. In case of normal goods, income elasticity of
demand is positive, i.e. demand for the commodity increases with the increase in
income and vice versa. On the other hand, income elasticity of demand for
inferior goods is negative, i.e. demand for the commodity decreases with the
increase in income of the consumer and vice versa. If the quantity demanded for
a commodity remains unchanged even with the change in income, the income
elasticity of demand is zero. Such a commodity is called neutral commodity.

Types of Income Elasticity of Demand

Types of Income Income elasticity of demand can be divided into the following three types:
Elasticity of Demand 1. Positive Income Elasticity of Demand (EY > 0)
1. Positive income elasticity
of demand (EY > 0)
If increase in income leads to increase in demand for a commodity and decrease
a. Income elasticity greater in income leads to decrease in demand for a commodity, it is called positive
than unity (EY > 1)
income elasticity of demand. The commodities which have positive income
b. Income elasticity less than
unity (EY < 1) elasticity of demand are called normal goods. Positive income elasticity can be
c. Income elasticity equal to divided into the following three types:
unity (EY = 1)
2. Zero income elasticity a. Income elasticity greater than unity (EY > 1): The income elasticity of
(EY = 0) demand is greater than unity when the percentage increase in demand is
3. Negative income elasticity
more than percentage increase in income and vice versa. Assuming prices
(EY < 0)
of all other goods as constant, if the income of the consumer increases by
5% and as a result, the demand for the commodity increases by 10%, then it
 ELASTICITY AND ITS MEASUREMENT UNIT 1 13
is the case of income elasticity greater than unity. In case of luxury goods,
income elasticity of demand is greater than unity.
10%
EY = =2>1
5%

It is graphically shown in the Figure 1.8.

FIGURE 1.8
Income Elasticity Y
Greater than Unity

EY > 1 D
Y2
Income

5%
Y1
D
10 %

X
O Q1 Q2
Quantity Demanded

In the Figure 1.8, the upward slopping demand curve DD shows income
elasticity of demand greater than unity. When the consumer’s income
increases by 5% from OY1 to OY2, the demand increases by 10% from OQ1
to OQ2.
b. Income elasticity less than unity (EY < 1): Income elasticity of demand is
less than unity when the percentage increase in demand is less than
percentage increase in income of the consumer and vice versa. If the
demand increases by 5% due to 10% rise in income, it is the case of income
elasticity of demand less than unity. In case of normal necessities, income
elasticity of demand is less than unity.
5%
EY = = 0.5 < 1
10%

It is graphically shown in the Figure 1.9.

FIGURE 1.9
Y
Income Elasticity less
than Unity

D
EY < 1
Y2

10 %
Income

Y1

D
5%

X
O Q1 Q2
Quantity Demanded
14 UNIT 1 ECONOMICS-II

In the Figure 1.9, the upward slopping demand curve DD shows income
elasticity less than unity because the increase in demand Q1Q2 by 5% is less
than the increase in income Y1Y2 by 10%.
c. Income elasticity equal to unity (EY = 1): Income elasticity is equal to unity
when the demand for a commodity increases by the same percentage as the
rise in income. For example, if 5% rise in income leads to 5% increase in
demand, it is the case of income elasticity equal to unity. In case of
comfortable goods, income elasticity of demand is equal to unity.
5%
EY = =1
5%

It is graphically shown in the Figure 1.10.

FIGURE 1.10
Y
Income Elasticity Equal
to Unity
D
EY = 1
Y2
Income

5%
Y1

D 5%

X
O Q1 Q2
Quantity Demanded

In the Figure 1.10, the upward slopping demand curve DD shows income
elasticity equal to unity. The consumer’s income increases by 5% from OY1
to OY2, which is exactly equal to increase in demand by 5% from OQ1 to
OQ2.
2. Zero Income Elasticity of Demand (EY = 0)
If there is no change in demand despite the change in income, it is called zero
income elasticity of demand. In case of neutral goods such as salt, medicine, etc.
income elasticity of demand is zero.
0
EY = =0
10%

It is graphically shown in the Figure 1.11.

 ELASTICITY AND ITS MEASUREMENT UNIT 1 15
FIGURE 1.11
Zero Income Elasticity
Y

Y3

Income Y2 EY = 0

Y1

X
O Q1
Quantity Demanded

In the Figure 1.11, the income rises from OY1 to OY2 and OY3 but the demand
remains the same at OQ1 units. Therefore, it is a case of zero income elasticity of
demand.
3. Negative Income Elasticity of Demand (EY < 0)
If demand for a commodity decreases with the rise in income of the consumer
and vice versa, the income elasticity of demand is said to be negative. In case of
inferior goods, the income elasticity of demand is negative. If 10% rise in income
leads to 5% decrease in demand, it is the case of negative income elasticity of
demand.
– 5%
EY = = – 0.5 < 0
10%

It is graphically shown in the Figure 1.12.

FIGURE 1.12
Y
Negative Income
Elasticity

Y2 Es < 0
Income

Y1

X
O Q2 Q1
Quantity Demanded

In the Figure 1.12, DD is a demand curve for the inferior goods. It is slopping
downward. When the income increases from OY1 to OY2, the demand decreases
from OQ1 to OQ2.
16 UNIT 1 ECONOMICS-II

CONCEPT CHECK
 What is income elasticity of demand?
 What are the types of income elasticity of demand?

Cross Elasticity of Demand

Cross Elasticity of Cross elasticity of demand is defined as the responsiveness of change in demand
Demand (EXY) for a commodity to the change in the price of a related commodity. It is also
A measure of the
defined as the ratio of percentage change in demand for a commodity to the
responsiveness of quantity
demanded of a commodity to percentage change in price of the related commodity. The cross elasticity of
the change in price of a demand between good–X and good–Y is expressed in the following way:
related commodity.
Percentage change in demand for commodity–X
EXY =
Percentage change in price of commodity–Y
Change in demand for commodity–X
× 100%
Initial demand for commodity–X
=
Change in price of commodity–Y
× 100%
Initial price of commodity–Y
QX
× 100%
QX
=
PY
× 100%
PY

QX PY
 EXY= ×
PY QX
Where,
EXY = Coefficient of cross elasticity of demand
QX = Change in the demand for commodity–X
PY = Change in the price of commodity–Y
PY = Price of commodity–Y,
QX = Quantity of commodity–X
If commodity X and Y are substitutes, EXY is positive. On the other hand, if
commodity X and Y are complements, EXY is negative. When goods are
unrelated, EXY will be 0.

Types of Cross Elasticity of Demand

Types of Cross There are three types of cross elasticity of demand. They are:
Elasticity of Demand
1. Positive Cross Elasticity of Demand (EXY > 0)
1. Positive cross elasticity
of demand (EXY > 0) When the demand for a commodity and the price of its related commodity
2. Negative cross elasticity change in the same direction, the cross elasticity of demand is positive. In case of
of demand (EXY < 0)
substitute goods, the cross elasticity of demand is positive. For example, tea and
3. Zero cross elasticity of
demand (EXY = 0) coffee are substitute goods. If the price of tea rises, it will lead to increase in the
demand for coffee. Similarly, a fall in the price of tea will cause a decrease in the
demand for coffee.
It is graphically shown in the Figure 1.13.
 ELASTICITY AND ITS MEASUREMENT UNIT 1 17

FIGURE 1.13
Y
Positive Cross
Elasticity of Demand

D
P2

Price of Tea
P1 EXY > 0

X
O Q1 Q2
Quantity of Coffee

In the Figure 1.13, the upward slopping demand curve DD shows the positive
relationship between the demand for coffee and the price of tea. When the price
of tea rises from OP1 to OP2, the demand for coffee increases from OQ1 to OQ2.
Therefore, tea and coffee are substitute goods.
2. Negative Cross Elasticity of Demand (EXY < 0)
When demand for a commodity and the price of its related commodity change
into opposite direction, the cross elasticity of demand is negative. In case of
complementary goods, the cross elasticity of demand is negative. For example,
car and petrol are complementary goods. If the price of car falls, assuming the
price of petrol remains constant, the demand for car and petrol both increases
because both are jointly used.
It is graphically shown in the Figure 1.14.
FIGURE 1.14
Y
Negative Cross
Elasticity of Demand
D
P1
Price of Car

EXY < 0

P2
D

X
O Q1 Q2
Quantity of Petrol

In the Figure 1.14, the downward slopping demand curve DD shows the
negative relationship between demand for petrol and price of car. When the
price of car falls from OP1 to OP2, the demand for petrol will increase from OQ1
to OQ2. Therefore, car and petrol are complementary goods.
18 UNIT 1 ECONOMICS-II

3. Zero Cross Elasticity of Demand (EXY = 0)

When the change in price of one commodity has no effect on the demand for
another commodity, the cross elasticity of demand is said to be zero. For
example, the price of car and demand for rice have zero cross elasticity of
demand. Such goods are known as unrelated goods.
It is graphically shown in the Figure 1.15.

FIGURE 1.15 Y

Zero Cross Elasticity of

Demand D
Price of Car

P2

P1 EXY = 0

X
O Q1
Demand for Rice

In the Figure 1.15, the vertical demand curve Q1D is parallel to Y–axis. It
represents zero cross elasticity of demand. The price of car is rising from OP1 to
OP2, but the demand for rice is remaining unchanged. Therefore, rice and car are
unrelated goods.
CONCEPT CHECK
 What is cross elasticity of demand?
 What are the types of cross elasticity of demand?

Measurement of Price Elasticity of Demand

Total Outlay Method

Total Outlay Method
Total outlay method is also known as the total expenditure method of measuring
According to this method, price elasticity of demand. This method was developed by Alfred Marshall. In
price elasticity of demand is this method, we compare total outlay or total expenditure of a consumer before
measured by the change in and after the change in price. Looking at the change in total expenditure due to
total expenditure due to the
change in price.
the change in price, we can say whether the demand for a commodity is elastic,
unitary elastic or inelastic. Total outlay or total expenditure is the price per unit
multiplied by the quantity purchased. Thus,
Total outlay (Total expenditure) = Price × Quantity purchased = P . Q

1. Elasticity greater than unity (EP > 1): It is also called elastic demand. When
total expenditure increases with the fall in price and decreases with the rise
in price, the demand is said to be elastic.
2. Elasticity equal to unity (EP = 1): It is also called unitary elastic demand.
When the total expenditure remains unchanged with a fall or rise in price,
the price elasticity of demand is said to be equal to unity.
 ELASTICITY AND ITS MEASUREMENT UNIT 1 19
3. Elasticity less than unity (EP < 1): It is also called inelastic demand. If with
the fall in price, the total expenditure decreases and with the rise in price,
the total expenditure increases, demand is said to be less than unity.
It can be clearly explained by the help of Table 1.3 and Figure 1.16.
TABLE 1.3 Price Quantity Demanded Total Expenditure Price Elasticity of
Situation
Schedule of Total (In Rs.) (In unit) TE = P.Q (In Rs.) Demand (EP)
Expenditure
6 1 6
I EP > 1
5 2 10
4 3 12
II EP = 1
3 4 12
2 5 10
III EP < 1
1 6 6
In the first situation, when the price falls from Rs. 6 to Rs. 5, the total
expenditure increases from Rs. 6 to Rs. 10. This situation shows the elasticity
greater than unity.
In the second situation, when the price falls from Rs. 4 to Rs. 3, the total
expenditure remains unchanged. Thus, change in price has no effect on total
expenditure. This situation shows the elasticity equal to unity.
In the third situation, when the price falls from Rs. 2 to Re. 1, the total
expenditure falls from Rs. 10 to Rs. 6. This situation shows the elasticity less than
unity.
The measurement of price elasticity of demand can also be graphically explained
by the help of Figure 1.16.
FIGURE 1.16 Y
Total Expenditure
Method
T
A
6 EP > 1

5 B

4 C

EP = 1
D
Price

2 E

EP < 1
1 F
G

0 X
2 4 6 8 10 12 14 16

Total Expenditure
20 UNIT 1 ECONOMICS-II

In the Figure 1.16, the total expenditure is measured on X-axis and the price on
Y-axis. TG curve is the total expenditure curve. The AC part of TG curve
represents the elasticity of demand greater than unity because the total
expenditure increases with the fall in the price. CD part of TG curve represents
unitary elastic demand because with the rise or fall in the price, the total
expenditure remains the same. DF part of TG curve represents the elasticity of
demand less than unity because the total expenditure decreases with the fall in
the price.

CONCEPT CHECK
 Who developed the total outlay method?
 How is price elasticity of demand measured by total outlay method?

Point Method
Point Method Point method is also an important method of measuring price elasticity of
This method is used when demand. It is also known as the geometric method or graphical method. This
there is a small change in
the price and the quantity
method was developed by Alfred Marshall for measuring price elasticity of
demanded. demand at a point on a demand curve. Therefore, this method is the measure of
price elasticity of demand at a particular point of demand curve. This method is
used when very small change in price of the commodity results in very small
change in its quantity demanded. In this case, the price elasticity formula can be
expressed as:

Q P
EP = × … (I)
P Q

Where,
EP = Price elasticity of demand
Q = Very small change in quantity demanded
P = Very small change in price
P = Initial price
Q = Initial quantity demanded
By using the above formula of the price elasticity of demand, i.e. (I),
geometrically we can derive the following formula to measure the price
elasticity of demand on a straight line demand curve or linear demand curve.
Lower segment of the demand curve
EP = … (II)
Upper segment of the demand curve

Thus, we can find out price elasticity at any point along a demand curve by the
help of the point method using above formula II. The price elasticity of demand
on a demand curve is different at its different points. The Figure 1.17 shows the
different price elasticity of demand at different points along the same demand
curve.
 ELASTICITY AND ITS MEASUREMENT UNIT 1 21

FIGURE 1.17 Y
Point Method of
Measuring Price A(EP = )
Elasticity of Demand
D(EP > 1)

Price
C(EP = 1)

E(EP < 1)

B(EP = 0)
O X

Quantity Demanded

In the Figure 1.17, X-axis represents quantity demanded and Y–axis represents
price of the commodity. The downward slopping curve AB represents linear
demand curve. Let us suppose C as the middle point of the demand curve AB.
Using the formula (II) of the point elasticity of demand, we can find out
coefficient of price elasticity of demand at different points of the demand curve
by using point method as follows:
Lower segment of the demand curve
EP at the point C =
Upper segment of the demand curve

CB
= = 1 (∵ CB = AC)
AC

Hence, at the point C, demand is unitary elastic.

Lower segment of the demand curve
EP at the point A =
Upper segment of the demand curve
AB
= =
0

Hence, at the point A, demand is perfectly elastic.

Lower segment of the demand curve
EP at the point D =
Upper segment of the demand curve
DB
= > 1 (∵ DB > AD)
AD

Hence, at the point D, demand is relatively elastic.

Lower segment of the demand curve
EP at the point E =
Upper segment of the demand curve

EB
= < 1 (∵ EB < AE)
AE

Hence, at the point E, demand is relatively inelastic.

Lower segment of the demand curve
EP at the point B =
Upper segment of the demand curve
0
= =0
AB

Hence, at the point B, demand is perfectly inelastic.

22 UNIT 1 ECONOMICS-II

Thus, using the formula of point elasticity or point method, we can calculate the
price elasticity of demand at different points of the demand curve. It is also clear
that the price elasticity of demand at different points of the demand curve is
different. It can also be said that the price elasticity of demand at the lower
points of the demand curve is less than unity and greater than unity at the
higher points.

CONCEPT CHECK
 When do you use point method to measure the price elasicity of demand?
 Write down the formula of the point elasticity.

Note: The proof of Point Formula is given at the end of this chapter in Appendix 1.1.

Determining Factors or Determinants of the Price Elasticity of Demand

Determinants of the The price elasticity of demand for a commodity is determined by a number of
Elasticity of Demand factors which are as follows:
1. Nature of the
commodity 1. Nature of the commodity: The elasticity of demand for any commodity
2. Substitutes depends upon the nature of the commodity, i.e. whether it is a necessity,
3. Goods having several comfort or luxury. The demand for necessities of life is generally less
uses
4. Joint demand elastic. The demand for comfortable goods like milk, fan, freeze, etc. is
5. Income of the consumer neither very elastic nor very inelastic because with the rise or fall in their
6. Postponement of the prices, the demand for them decreases or increases moderately. On the
consumption
7. Habits
other hand, the demand for luxury goods is more elastic because with a
8. Price level small change in their prices, there is a large change in their demand.
9. Time factor
2. Substitutes: Commodities having substitutes have more elastic demand
because with the change in the price of one commodity, the demand for its
substitute is immediately affected. For example, if the price of coffee rises,
assuming that price of tea remains constant, the demand for tea increases
and vice versa.
3. Goods having several uses: If a commodity has several uses, it has an
elastic demand. For example, electricity has multiple uses. It is used for
lighting, room heating, cooking, etc. If the tariffs on electricity increase, its
uses will be restricted to important uses. On the other hand, if its tariffs
decrease, it will be used for many uses like cooking, room heating, etc.
4. Joint demand: There are certain commodities, which are jointly demanded
such as car and petrol, pen and ink, bread and butter, etc. The elasticity of
demand of the second commodity depends upon the elasticity of demand
of the major commodity. For example, if the demand for car is less elastic,
the demand for petrol will also be less elastic.
5. Income of the consumer: The elasticity of demand also depends on income
of the consumers. If the income of consumers is high, the elasticity of
demand is less elastic. It is because change in the price will not affect the
quantity demanded by a greater proportion. But in low income groups, the
demand is elastic. It is because a rise or fall in the price of commodities will
 ELASTICITY AND ITS MEASUREMENT UNIT 1 23
decrease or increase the demand. But this does not apply in case of
necessities.
6. Postponement of the consumption: Those commodities whose
consumption can be postponed will be elastic. For example, demand for
constructing a house can be postponed. As a result, demand for bricks,
cement, sand, etc. will be elastic. On the other hand, goods whose demand
cannot be postponed, their demand will be inelastic.
7. Habits: People who are habituated to the consumption of a particular
commodity like coffee, tea, cigarette, etc. of a particular brand, the demand
will be inelastic.
8. Price level: The price level also influences the elasticity of demand. When
the price level is too high or too low, the demand will be comparatively
inelastic. But in case of middle range of prices, demand is elastic.
9. Time factor: Time factor plays an important role in influencing the
elasticity of demand. The elasticity of demand is greater in the long-run
than in the short-run because in the long-run, the consumer has enough
time to make adjustment in his/her scheme of consumption.

CONCEPT CHECK
 What are the factors affecting price elasticity of demand?
 What is the nature of elasticity for habitual necessities?

Elasticity of Supply
Elasticity of Supply The elasticity of supply is defined as the responsiveness of quantity supplied of
The elasticity of supply is a commodity due to change in its price. It is also defined as the ratio of
defined as the
responsiveness of quantity
percentage change in the quantity supplied and percentage change in the price
supplied of a commodity due of the commodity. Elasticity of supply is also known as the price elasticity of
to change in its price. supply. It is expressed in the following way:
Percentage change in quantity supplied
ES =
Percentage change in price
Change in quantity supplied
× 100
Initial quantity supplied
=
Change in price
× 100
Initial price

Q
× 100
Q Q P
= = ×
P P Q
× 100
P

Where,
P = Initial price
Q = Initial quantity supplied
∆P = Change in price
∆Q = Change in quantity supplied
ES = Coefficient of elasticity of supply or price elasticity of supply
Since, there is positive relationship between price and quantity supplied, the
coefficient of price elasticity of supply is positive.
24 UNIT 1 ECONOMICS-II

Example 2. Calculate the price elasticity of supply when the increase in the price of potato from Rs.
20 to Rs. 30 per kg rises its supply from 500 kg to 600 kg.
SOLUTION
Given,
Initial price (P) = Rs. 20
New price (P1) = Rs. 30
Change in price (P) = P1 – P = 30 – 20 = Rs. 10
Initial quantity supplied (Q) = 500 kg
New quantity supplied (Q1) = 600 kg
Change in quantity supplied (Q) = Q1 – Q = 600 – 500 = 100
We know that,
Q P 100 20 2
Es = × = × = 5 = 0.4
P Q 10 500
Interpretation: The coefficient of the price elasticity of supply is 0.4, which indicates
that 1 percentage change in price results in 0.4 percentage change in the quantity
supplied. Since ES is less than one, it is the case of relatively inelastic supply.

Types (Degrees) of Elasticity of Supply

Types (Degrees) of Elasticity of supply or price elasticity of supply can be divided into five types as
Elasticity of Supply follows:
1. Perfectly elastic supply
(Es = ) 1. Perfectly elastic supply (Es = )
2. Perfectly inelastic
If negligible change in the price results in the infinite or unlimited change in the
supply (Es = 0)
3. Unitary elastic supply quantity supplied, it is said to be perfectly elastic supply. In this case, the supply
(EY = 1) curve becomes horizontal straight line parallel to X–axis. It shows different
4. Relatively elastic supply quantities of a commodity supplied at the same price.
(Es > 1)
5. Relatively inelastic Percentage change in quantity supplied
ES =
supply (Es < 1) Percentage change in price

∞
= =∞
0

It is graphically shown in the Figure 1.18.

FIGURE 1.18 Y
Perfectly Elastic
Supply

ES = ∞
Price

P1 S

X
O Q1 Q2 Q3
Quantity Supplied
 ELASTICITY AND ITS MEASUREMENT UNIT 1 25
In the Figure 1.18, P1S is the perfectly elastic supply curve, which is horizontal
straight line parallel to the X-axis. It means that at the same price OP1, there are
different quantities supplied OQ1, OQ2, and OQ3.

2. Perfectly inelastic supply (ES = 0)

If there is no change in the quantity supplied despite the change in the price of
the commodity, it is said to be perfectly inelastic supply. In this case, the supply
curve becomes vertical straight line parallel to Y–axis.
0
ES = =0
Any amount

It is graphically shown in the Figure 1.19.

FIGURE 1.19
Perfectly Inelastic Y
Supply
S

P3
Price

P2
ES = 0

P1

X
O Q1
Quantity Supplied

In the Figure 1.19, Q1S is the perfectly inelastic supply curve, which is vertical
straight line parallel to the Y-axis. It shows the same or constant quantity
supplied OQ1 at different prices OP1, OP2 and OP3.

3. Unitary elastic supply (ES = 1)

If the percentage change in the quantity supplied is equal to the percentage
change in the price of the commodity, the supply is said to be unitary elastic. For
example, if 10% change in the price causes 10% change in the quantity supplied,
it is the case of unitary elastic supply.
10%
Es = =1
10%

It is graphically shown in the Figure 1.20.

26 UNIT 1 ECONOMICS-II

FIGURE 1.20
Unitary Elastic Supply Y

P2

Price
10%

P1 ES = 1

10%
S

X
O Q1 Q2
Quantity Supplied

In the Figure 1.20, SS represents unitary elastic supply. When the price rises from
OP1 to OP2, quantity supplied also rises from OQ1 to OQ2 where the percentage
change in the price and the quantity supplied are equal, i.e. 10 percentage.

4. Relatively elastic supply (Es > 1)

If the percentage change in the quantity supplied of a commodity is more than
the percentage change in the price of the commodity, it is called relatively elastic
supply. For example, if 5% change in the price results in 10% change in the
quantity supplied, it is the case of relatively elastic supply.
10%
Es = =2>1
5%

It is graphically shown in the Figure 1.21.

FIGURE 1.21 Y
Relatively Elastic
Supply

S
P2
Price

5%

P1 ES > 1
S
10%

X
O Q1 Q2
Quantity Supplied

In the Figure 1.21, the supply curve SS is flatter. Therefore, it represents

relatively elastic supply. When price rises from OP1 to OP2, the supply increases
from OQ1 to OQ2 where the percentage change in the quantity supplied is
greater than the percentage change in the price.
 ELASTICITY AND ITS MEASUREMENT UNIT 1 27

5. Relatively inelastic supply (Es < 1)

If the percentage change in the quantity supplied of a commodity is less than the
percentage change in the price of the commodity, it is called relatively inelastic
supply. For example, when 10% change in the price causes 5% change in the
quantity supplied, it is the case of relatively inelastic supply.
5% 1
ES = = = 0.5 < 1
10% 2

It is graphically shown in the Figure 1.22.

FIGURE 1.22
Y
Relatively Inelastic
Supply
S
P2

10%
Price

ES < 1
P1

5%
S

X
O Q1 Q2
Quantity Supplied

In the Figure 1.22, the supply curve SS is steeper. Therefore, it represents

relatively inelastic supply. When the price increases from OP1 to OP2, the
quantity supplied increases from OQ1 to OQ2 where the percentage change in
the price is greater than the percentage change in the quantity supplied.

CONCEPT CHECK
 Define price elasticity of supply.
 What are the different types of price elasticity of supply?

Summary
 Elasticity of Demand Percentage change in quantity demanded
EP = Percentage change in price
Elasticity of demand measures the extent to which
the quantity demanded for a commodity increases Q P
= ×
or decreases in response to the increase or P Q
decrease in any of its determinants.  Types of Price Elasticity of Demand
 Price Elasticity of Demand 1. Perfectly elastic demand (EP = )
Price elasticity of demand relates to the 2. Perfectly inelastic demand (EP = )
responsiveness of the quantity demanded of a 3. Unitary elastic demand (EP = )
commodity to the change in its price. In other
words, the price elasticity of demand is defined as 4. Relatively elastic demand (EP > )
"the percentage change in the quantity demanded 5. Relatively inelastic demand (EP < )
divided by the percentage change in the price".
28 UNIT 1 ECONOMICS-II

 Income Elasticity of Demand Point Method

Income elasticity of demand shows the degree of Point method is also known as the geometric
responsiveness of the quantity demanded for a method or graphical method. This method was
commodity to the change in the income of the developed by Alfred Marshall for measuring the
consumer. The income elasticity of demand is also price elasticity of demand at a point on a demand
defined as the ratio of the percentage change in curve. Therefore, this method is the measure of
demand for a commodity to the percentage price elasticity of demand at a particular point on
change in income. the demand curve. This method is used when very
Percentage change in demand Q Y small change in the price of a commodity results in
EY = Percentage change in income = × very small change in its quantity demanded. In this
Y Q
case, the price elasticity formula can be expressed
 Types of Income Elasticity of Demand
as,
1. Positive income elasticity of demand (EY > 0) Lower segment of the demand curve
a. Income elasticity greater than unity (EY > 1) EP = Upper segment of the demand curve
b. Income elasticity less than unity (EY < 1)  Determinants of Elasticity of Demand
c. Income elasticity equal to unity (EY = 1)
1. Nature of the commodity
2. Zero income elasticity (EY = 0)
2. Substitutes
3. Negative income elasticity (EY < 0)
3. Goods having several uses
 Cross Elasticity of Demand
4. Joint demand
Cross elasticity of demand is defined as the 5. Income of the consumer
responsiveness of the change in demand for a
6. Postponement of the consumption
commodity to the change in the price of related
7. Habits
commodity. It is also defined as the ratio of the
8. Price level
percentage change in demand for a commodity to
the percentage change in the price of the related 9. Time factor
commodity. The cross elasticity of demand
between commodity–X and commodity–Y is  Elasticity of Supply
expressed as, Elasticity of supply is defined as the
Percentage change in demand for commodity–X responsiveness of the quantity supplied of a
EXY = Percentage change in price of commodity–Y
commodity due to the change in its price. It is also
QX PY defined as the ratio of the percentage change in
= × the quantity supplied and the percentage change
PY QX
 Types of Cross Elasticity of Demand in the price of the commodity. Elasticity of supply
is also known as the price elasticity of supply. It is
1. Positive Cross Elasticity of Demand (EXY > 0) expressed as,
2. Negative Cross Elasticity of Demand (EXY < 0) Percentage change in quantity supplied
3. Zero Cross Elasticity of Demand (EXY = 0) ES = Percentage change in price
 Measurement of Price Elasticity of Demand Q P
= ×
Total Outlay Method P Q
Alfred Marshall developed this method to  Types of Elasticity of Supply
measure the price elasticity of demand. According 1. Perfectly elastic supply (Es = )
to this method, we compare the total outlay of a 2. Perfectly inelastic supply (Es = 0)
consumer before and after the variations in price.
3. Unitary elastic supply (EY = 1)
Looking at the change in total expenditure due to
4. Relatively elastic supply (Es > 1)
the change in price, we can say whether the
demand for a commodity is elastic, unitary elastic, 5. Relatively inelastic supply (Es < 1)
or inelastic.
i. Elasticity greater than unity (EP > 1)
ii. Elasticity less than unity (EP < 1)
iii. Elasticity equal to unity (EP = 1)
 ELASTICITY AND ITS MEASUREMENT UNIT 1 29

Meanings of Key Terms

 Complementary goods: Goods which have  Neutral goods: Goods which have zero income
negative cross elasticity of demand or goods elasticity of demand or goods whose demand
which are needed together in order to fulfill the does not change with change in income
single desire. For example: sugar, tea, and milk  Normal goods: Goods which have positive
are complementary goods. income elasticity of demand or goods whose
demand rises with rise in income and falls with fall
 Cross elasticity of demand: Percentage change in income
in demand for one commodity due to the given
 Normal necessities: High quality necessity goods
percentage change in the price of another
commodity. It is found only in case of related like meat, fruits, etc. which are demanded more at
goods. the higher income and vice versa
 Elasticity: Responsiveness of one variable due to  Price elasticity of demand: Percentage change
the change in another variable in the quantity demanded due to one percentage
 Income elasticity of demand: Percentage change in the price of the commodity
change in demand for a commodity due to one  Price level: Average price of all the goods and
percentage change in the income of the consumer services which are consumed in the economy
 Inferior goods: Goods which have negative  Substitute goods: Goods which have positive
income elasticity of demand or goods whose cross elasticity of demand or one can be used in
demand rises with fall in income and vice versa the absence of the other in order to satisfy the
similar desire. For example: tea and coffee are
substitute goods.

Very Short Answer Type Questions with Answers

Percentage change in demand Q Y
1. Define demand curve. EY = Percentage change in income = ×
Y Q
 Demand curve is defined as the graphical representation
of various quantities of a commodity demanded at 6. Define cross elasticity of demand
different prices in a given period of time.  Cross elasticity of demand is defined as the percentage
change in the quantity demanded of X commodity
2. Define supply curve resulting from a percentage change in the price of Y
 Supply curve is defined as the graphical representation of commodity. The cross elasticity of demand between
various quantities of a commodity supplied by a seller or commodity X and Y is given below:
firm at different prices in a given period of time. Percentage change in demand for commodity–X
EXY = Percentage change in price of commodity–Y
3. Define elasticity of demand.
 Elasticity of demand is the measure of responsiveness of QX PY
= ×
demand for a commodity to the change in any of its PY QX
determinants like the price of the same commodity, the 7. Point out any four determinants of price elasticity
price of the related commodity, the consumer’s income, of demand.
tastes and preferences of the consumer, the consumer’s  The four determinants of price elasticity of demand are as
expectations regarding prices, etc. follows:
a. Nature of the commodity
4. Define price elasticity of demand. b. Substitute
 Price elasticity of demand measures the degree of c. Goods having several uses
responsiveness of the quantity demanded for a commodity d. Income of the consumer
to the change in its price. It can be expressed as, 8. What is elasticity of supply?
Percentage change in quantity demand Q P  Elasticity of supply is defined as the measure of
Ep = = 
Percentage change in price P Q responsiveness of the change in the quantity supplied to
5. What is meant by income elasticity of demand?
the change in the price of the commodity:
Percentage change in quantity supplied Q P
 Income elasticity of demand shows the degree of ES = = ×
responsiveness of the quantity demanded for a commodity
Percentage change in price P Q
to the change in the income of the consumer.
30 UNIT 1 ECONOMICS-II

Exercise - 1
VERY SHORT ANSWER TYPE QUESTIONS
1. Define demand curve.
2. Define supply curve.
3. Define elasticity of demand.
4. Define price elasticity of demand.
5. What is meant by income elasticity of demand?
6. Define cross elasticity of demand.
7. Point out any four determinants of price elasticity of demand.
8. Define elasticity of supply.

SHORT ANSWER TYPE QUESTIONS

1. Explain the various types or degrees of price elasticity of demand.
2. Explain the types of income elasticity.
3. Explain the types of cross elasticity.
4. How do you measure price elasticity of demand by using total outlay method?
5. How do you measure price elasticity of demand by using point method?
6. What are the determinants of elasticity of demand?
7. Explain the various types of elasticity of supply.

LONG ANSWER TYPE QUESTIONS

1. What is price elasticity of demand? What are its types or degrees?
2. What is income elasticity of demand? Explain its types.
3. What is cross elasticity of demand? Discuss the positive and the negative cross elasticity of
demand.
4. What is price elasticity of demand? How is it measured by using total outlay method?
5. What is price elasticity of demand? How is it measured by using point method?
6. What is price elasticity of demand? What are its determinants?
7. What is price elasticity of supply? Explain its different types or degrees.

Appendix 1.1

Derivation of Formula of Point Method of Measuring Price Elasticity of

Demand
Let us suppose, linear or straight line demand curve AB is given in the
Figure 1.23 and it is required to measure price elasticity of demand at point C on
the demand curved. It is also clear that at price OP, the quantity demanded is
OQ. The measure of price elasticity of demand is given by:
dQ P
EP = × … (I)
dP Q
 ELASTICITY AND ITS MEASUREMENT UNIT 1 31
Where,
P = Initial price
Q = Initial quantity demanded
dQ = Very small change in quantity demanded
dP = Very small change in price

FIGURE 1.23
Y
Point Elasticity of a
Linear Demand Curve
A

C
Price

X
O Q B
Quantity Demanded

dQ
The first term of this formula, namely, dP is the reciprocal of the slope of the
dP
demand, dQ curve AB.

Thus,
1 P
EP = .
( )
dP Q
dQ

1 P
 EP = . … (II)
Slope Q

In the right angled triangle AOB, the slope of the demand curve AB is
dP AO AP
dQ , which is equal to BO and again it is equal to PC . The initial price (P) is OP
and the initial quantity (Q) is OQ. Substituting these values in the above
formula, we get,
1 OP
EP = .
( )
AP OQ
PC
PC OP
 EP = . … (III)
AP OQ
In the Figure 1.23, PC equals to OQ. Putting the value of PC in (III), we get,
OQ OP
EP = .
AP OQ
OP
or, EP = … (IV)
AP
32 UNIT 1 ECONOMICS-II

OP BC
In the right angled triangle AOB, the ratios AP and CA are equal. Putting
OP BC
AP = CA in the equation (IV), we get,
BC
EP =
CA
Hence,
Lower segment of the demand curve
EP =
Upper segment of the demand curve
Alternative Method
In this method, we take a point on a linear demand curve and measure the
elasticity of demand between two points. Let a linear demand curve AB be given
and it is required to measure elasticity at point R on this curve,

FIGURE 1.24
Y
Point Elasticity of a
Linear Demand Curve
A
Price

P R
P
P1 R1
M

Q

B
X
O Q Q1
Quantity

In the Figure 1.24, AB is a straight line or linear demand curve. It touches both
the axes. Initial price is OP and the quantity demanded is OQ.
When the price falls from OP to OP1, the quantity demanded increases from OQ
to OQ1. This change in price (∆P) by PP1 causes change in the quantity
demanded (∆Q) by QQ1.
Substituting these in the following formula of price elasticity of demand, we get
dQ P
EP = ×
dP Q
QQ1 OP
= × … (i)
PP1 OQ
Since, in Fig. QQ1 = MR1, PP1 = MR, and OP = QR
MR1 QR
EP = x … (ii)
MR OQ
Now, taking triangles RMR1 and RQB,
MR1R =  QBR (corresponding angles)
 RMR1 =  RQB (Right angles)
 MRR1 is common to both the triangles
 ELASTICITY AND ITS MEASUREMENT UNIT 1 33
Therefore, ∆RMR1 and ∆RQB are similar triangles. A property of similar
triangles is that their corresponding sides are proportional to each other.
Therefore,
MR1 QB
=
RM QR

QB MR1
Substituting QR in place of RM in equation (ii), we get,

QB QR
EP = ×
QR OQ
QB
 EP = ... (iii)
OQ

Now, ∆QRB and ∆PAR are similar triangles because their corresponding angles
are equal.
QB RB
 = ... (iv)
PR RA

In the Figure 1.24, PR = OQ. Thus, substituting OQ for PR in equation (iv), we

have,
QB RB
EP = =
OQ RA

Hence, we find that price elasticity at the point R on the straight line demand
curve DD1 is:
RB Lower segment
EP = =
RA Upper segment

Thus, we can find out elasticity at any point along a demand curve by the help of
the point method using above formula. The point elasticity of demand on a
linear demand curve is different at different points of the demand curve. The
Figure 1.24 shows the different price elasticity of demand at different points
along the same demand curve.
۞
34 UNIT 1 ECONOMICS-II