Demand

A desire to have a good is called demand if the following two conditions are satisfied: 1) the
consumer must have necessary money to buy the good and 2) he or she must be willing to
spend his or her money on that good. Thus, if a person desires to have a Samsung Galaxy
mobile phone costing ` 30,000 but he does not have sufficient money to buy it or he has
sufficient money but he does not want to spend on the mobile phone, then his desire is just
desire not demand.

Quantity demanded

Quantity demanded means the number of units of a good which a consumer is ready to buy at
a particular price per unit of time. For example if a consumer is ready to buy 30 units of a
good at ` 40 per unit per month, then the quantity demanded per month for the good at a
particular price `40 per unit is 30 units.

Demand schedule and its types

A demand schedule is a table showing various quantities of a good at various prices. There are two
types of demand schedules:

1. Individual Demand Schedule or Individual demand

It shows various quantities demanded by an individual at various prices. Suppose
there is a consumer Sam who is ready to buy 5 units, 4 units, 3 units, 2 units and 1unit
of a good at the per unit prices of ` 1 , `2 , ` 3, ` 4 and ` 5 respectively. This
information is shown in the following table which is named as the demand schedule
of Sam (an individual) for the good.

Price per kg Quantity of apples

1 5
2 4
3 3
4 2
5 1

2. Market Demand Schedule or Market demand

 It shows various quantities demanded by a market at various prices. Suppose there
are three consumers in the market of a good- Gaurav, Ram and Vijay. The quantities
demanded by each of them at various prices are shown by the columns 2, 3 and 4.
While the last columns shows the horizontal summation of the quantities demanded at
a price. This table is named as the market demand schedule because it shows the
quantities demanded by all the consumers in a market at different prices.

Price per kg Gaurav Ram Vijay Market demand

1 5 6 4 15
2 4 5 3 12
3 3 4 2 9
4 2 3 1 6
5 1 2 0 3

Meaning of a demand curve and its types

A demand curve is a graphical display of a demand schedule. It shows various quantities of a good at
various prices. In fact a demand curve is a graphical representation of a demand schedule. A demand
curve is of two types:

1. Individual Demand Curve

It shows various quantities demanded of a good by an individual at various prices. Suppose

there is a consumer Sam who is ready to buy 5 units, 4 units, 3 units, 2 units and 1unit of a
good at the per unit prices of ` 1 , `2 , ` 3, ` 4 and ` 5 respectively. This information is
shown through the following curve which is named as the demand curve of Sam (an
individual) for the good.
6

3
Price

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
Quantity of good x
 2. Market Demand Curve

It shows various quantities demanded of a good by a market at various prices. Suppose at

prices ` 1 , ` 2 , ` 3, ` 4 and ` 5 the quantities demanded by all the consumers in the market
are 15 units, 12 units, 9 kg, 6 units and 3 units respectively. When these data are plotted on a
graph paper, then we get the following market demand curve.

16
14
12
10
8
Price

6
4
2
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
Quantity of good x

Law of demand

The law of demand, also known as the first law of purchase, means the behavior of a
consumer of buying lower quantity of a good when its price increases or buying higher
quantity when its price decreases keeping other factors constant. In other words, lower units
of a good are demanded when its price increases or more units are demanded when its price
decreases provided other things are constant. Thus, the law of demand establishes a negative
relationship between price and the quantity demanded.
In order to understand the demand law we consider the following demand schedule. In the
schedule when the price of a good rises from 1 to 2 to 3 to 4 to 5, then the quantity demanded
falls from 5 to 4 to 3 to 2 to 1 respectively. Therefore, there is a negative relationship between
the price and the quantity demanded.

Price of the good Quantity demanded

1 5
2 4
3 3
4 2
5 1
When the data of the above schedule are plotted on a graph paper, then we get a downward sloping
straight line DD which is known as demand curve. Thus, the demand law states that the slope of a
demand curve is negative.

3
Price

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
Quantity of good x

Mathematical definition of the demand law

Suppose that Q=f (P) is a demand function where Q is quantity demanded and P is the price
of a good. Then as per the demand law, the derivative of Qwith respect to price is negative
i.e.
dQ
<0
dP

Rationale of the law of demand / Reason of the law of demand / Logic of

the law of demand

Economists have attempted to answer the question i.e. why does the demand law exist? Or
why is there a negative relationship between the price and the quantity demanded of a good.
Below is the list of explanations presented by economists.

1. The law of diminishing marginal utility and the equilibrium

In the following diagram, MU curve is downward sloping due to the law of

diminishing marginal utility. At point A the consumer is in equilibrium because price
P1 is equal to MU1 and the quantity demanded is Q 1. Suppose, the price falls to P 2
causing the equilibrium point to disturb and then to attain equilibrium position again
our consumer would seek the marginal utility equal to P 2. This can be done by
demanding Q2 units and new equilibrium point will be B. One point must be noted
 here that in moving from point A to B the consumer has increased the quantity
demanded from Q1 to Q2 when price falls from P1 to P2 and this movement is nothing
but the demand law. Thus the conclusion is that the equilibrium condition and the law
of diminishing marginal utility curve explain the law of demand i.e. if the marginal
utility curve were upward sloping instead of downward, then demand would not have
increased rather fallen when price falls. Thus, the entire game behind the law of
demand is of the law of diminishing marginal utility and equilibrium condition.

Price

P1 A

P2 B

MU

0 Q1 Q2 Qty.

2. Modern View
Modern economists hold the substitution and the income effects are responsible for
the operation of the law of demand.

a. Substitution Effect
It means replacing a good with its substitute good when the price of the good
replaced increases. So, when the price of a good X rises, then this is replaced
by its substitute good Y because Y becomes now relatively cheaper. In this
way, the demand for X falls and the demand for Y rises.

b. Income Effect
It means increase in ability to buy more units of a good due to decline in the
price of a good. One point is very important here i.e. the income effect is
strong when the good concerned exhausts a major portion of consumer’s
income.

Factors affecting demand or determinants of demand

There are many determinants of demand. The main determiners are as follows:
1. Price of the good itself
The law of demand states about the effect of change in the price of a good over its
quantity demanded while keeping all other factors affecting demand constant. The law
states that there is negative relationship between the price and the quantity demanded
for a good and therefore, when the price of a good goes up, the quantity demanded
falls down provided other things remain unchanged.

2. Prices of related goods

Related goods are those goods which affect the demand for each other. There are two
types of related goods:

a. Substitute good / Competitive good

Two goods are said to be substitute goods when one of them can be used in place
of the other. Since, Frooti can be used in place of Slice or Maaza, Laptop can be
used in place of a desktop computer, Discovery channel can be watched in place
of National Geographic Channel, Metro rail can be used in place of a DTC bus
and many more such cases can be added to the list, therefore they are substitute
goods. The price of a substitute good affects the quantity demanded for its related
good because when the price of a good increases, then its substitute good becomes
relatively cheaper, therefore a consumer switches to the substitute good. As a
result, the increase in the price of a good causes the quantity demanded for the
substitute good to rise.

b. Complementary good
Two goods are said to be complementary goods when one of them cannot perform
without using the other good. Further, complementary goods are used in a fixed
ratio. Since, a computer hardware cannot be used without installing software, a car
cannot be driven without fueling it with diesel/petrol/CNG, a mobile handset
cannot be used without inserting a SIM card and so on and therefore they are
complementary goods. The price of a good affects the quantity demanded of its
complementary good because when the price of a good increases, then using it
becomes expensive, therefore a consumer decides to buy less of it and the quantity
 demanded for its Complementary good declines because there is no use the
Complementary good without the other good. As a result, an increase in the price
of a good causes the quantity demanded of the Complementary good to fall.

c. Income of the consumer

a. Normal Good

Other things remaining the same, a good is called normal good when the
income effect is positive i.e. there is a positive relationship between the
quantity demanded and consumer’s income. In other words, a normal good is
the one when consumer’s increases and the quantity demanded also increases
while keeping the other factors constant. Clothing is one of the best examples
of normal goods.

b. Inferior Good
Other things remaining the same, a good is called inferior good when the
income effect is negative i.e. there is a negative relationship between the
quantity demanded and consumer’s income. In other words, an inferior good is
the one when consumer’s increases and the quantity demanded decreases
while keeping the other factors constant. In other words, an inferior good is
the one when consumer’s increases and the quantity demanded for the good
decreases. Biri is an inferior good in comparison to Cigarette, Bajra is an
inferior good in comparison to Wheat.

c. Tastes and Preferences:

Tastes and preferences of consumers also affect the demand for a good. Tastes and
preferences are psychological topics and they depend upon various factors like
religion, fashion or trend, the income class of the consumer etc. Any change in such
factors affect the demand.

Substitute goods

Two goods are said to be substitute goods when one of them can be used in place of the other.
Since, Frooti can be used in place of Slice or Maaza, Laptop can be used in place of a desktop
computer, Discovery channel can be watched in place of National Geographic Channel,
Metro rail can be used in place of a DTC bus and many more can be added to the list,
therefore they are substitute goods. The price of a substitute good affects the quantity
demanded for its related good because when the price of a good increases, then its substitute
good becomes relatively cheaper, therefore a consumer switches to the substitute good. As a
result, an increase in the price of a good causes the quantity demanded of the substitute
good to rise.

Effect of rise in the price of a good on the quantity demanded of its

substitute good

We take two goods Frooti and Slice. We know that both are mango drinks and can be used in
place of other and therefore they are substitute goods. When the price of Frooti is P 1, then the
quantity demanded for Slice is Q1. This is shown by point A. Suppose the price of Frooti rises
to P2, then a consumer knows that Slice gives the same satisfaction as Frooti does, therefore
he or she would like to switch to Slice. As a result, the quantity demanded for Slice rises to
Q2. This is shown by point B. By joining points A and B we get the demand curve of Slice
with respect to the price of Frooti. This demand curve (denoted by d) is upward sloping.

Price of Frooti

d
B
P2

A
P1

0 Q1 Q2
Quantity demanded of Slice

Effect of fall in the price of a good on the quantity demanded of its

substitute good

We take two goods Frooti and Slice. We know that both are mango drinks and can be used in place of
other and therefore they are substitute goods. When the price of Frooti is P 1, then the quantity
demanded for Slice is Q1. This is shown by point A. Suppose, the price of Frooti falls to P 2, then a
consumer knows that Frooti gives the same satisfaction as Slice does, therefore he or she would like
to switch to Frooti. As a result, the quantity demanded for Slice falls to Q 2. This is shown by point B.
By joining points A and B we get the demand curve of Slice with respect to the price of Frooti. This
demand curve (denoted by d) is upward sloping.
 Price of Frooti

d
A
P1

B
P2

0 Q2 Q1
Quantity demanded of Slice

Complementary goods

Two goods are said to be complementary goods when one of them cannot perform without
using the other good. Since, a computer hardware cannot be used without installing software,
a car cannot be driven without fueling it with diesel/petrol/CNG, a mobile handset cannot be
used without inserting a SIM card and so on and therefore they are complementary goods.
The price of complementary good affects the quantity demanded for a good because when the
price of a good increases, then using it becomes expensive, therefore a consumer decides to
buy less of it and the quantity demanded for its complementary good declines because there
is no use the complementary good without the other good. As a result, the increase in the
price of a good causes the quantity demanded for the Complementary good to fall.

Effect of increase in the price of a good on the quantity demanded of its

complementary good

We take two goods a Lenovo computer and an operating system Windows 10. We know that
without an operating system a computer cannot work, therefore these two goods are
Complementary goods. Now, when the price of a Lenovo computer is P 1, then the quantity
demanded for a particular operating system, say, Windows 10 is Q 1 and this is shown by
point A. Suppose the price of the computer rises to P 2, then operating the computer is now
expensive than before and Windows 10 alone has no use, therefore the quantity demanded for
Windows 10 falls to Q2 and this is shown by point B. Joining points A and B with get the
demand curve of Windows 10 with respect to the price of its Complementary good Lenovo
computer. This demand curve denoted by d is downward sloping.

Price of a Lenovo
computer

P2 B

P1 A

0 Q2 Q1
Quantity demanded of Windows 10

Effect of fall in the price of a good on the quantity demanded for its
complementary good
We take two goods a Lenovo laptop and an operating system, say, Windows 10. . We know
that without an operating system a computer cannot work, therefore these two goods are
Complementary goods. Now, when the price of a Lenovo laptop is P 1, then the quantity
demanded of the operating system is Q 1 and this is shown by point A. Suppose the price of
the laptop falls to P2, then purchasing the laptop is now cheaper than before and therefore the
quantity demanded of Lenovo rises but it would need Windows 10 as well and therefore the
quantity demanded of Windows 10 also rises to Q 2 and this is shown by point B. By joining
points A and B with get the demand curve of Windows 10 with respect to the price of its
Complementary good Lenovo computer. This demand curve denoted by d is downward
sloping.
Price of a Lenovo
computer
A
P1

B
P2

0 Q1 Q2
Quantity demanded of Windows 10

Normal good

Other things remaining the same, a good is called normal good when the income effect is
positive i.e. there is a positive relationship between the quantity demanded and consumer’s
income. In other words, a normal good is the one when consumer’s increases and the
quantity demanded also increases while keeping the other factors constant. Clothing is one of
the best examples of normal goods. The relationship between the income and the quantity
demanded for a normal good can be understood through the following diagram. When the
income is I1, then the quantity demanded is Q 1. This is shown by point A. Suppose, the
income increases to I2, then the quantity demanded also increases to Q 2. This is shown by
point B. By joining points A and B we get an upward sloping demand curve d with
respect to income. This curve is also known as Engel’s curve.

Income

d
B
I2

A
I2
Positive income effect

0 Q1 Q2
Quantity demanded

Inferior goods

Other things remaining the same, a good is called inferior good when the income effect is
negative i.e. there is a negative relationship between the quantity demanded and consumer’s
income. In other words, an inferior good is the one when consumer’s increases and the
quantity demanded decreases while keeping the other factors constant. In other words, an
inferior good is the one when consumer’s increases and the quantity demanded for the good
decreases. Biri is an inferior good in comparison to Cigarette, Bajra is an inferior good in
comparison to Wheat. The relationship between the income and the quantity demanded for a
normal good can be understood through the following diagram. When the income is I 1, then
the quantity demanded is Q1. This is shown by point A. Suppose, the income increases to I 2,
then the quantity demanded decreases to Q2. This is shown by point B. By joining points A
and B we get a downward sloping demand curve d with respect to income. This curve is
also known as Engel’s curve.

Income

I2 B
 I1 A

d Negative income effect

0 Q2 Q1
Quantity demanded
Differences between a normal good and an inferior good

[Link]. Basis Normal good Inferior good

1 Meaning A good is called normal good A good is called inferior good when
when there is positive there is negative relationship between
relationship between the the consumer’s income and the quantity
consumer’s income and the demanded. Bajra in comparison to
quantity demanded. Clothing is Wheat is an example.
an example.

2 Direction of The income effect is positive. The income effect is negative.

income
effect
3 Demand
curve with The demand curve is upward The demand curve is downward
respect to sloping. sloping.
income
4 Relation A normal good can never be a An inferior good turns into a Giffen
with Giffen Giffen good. good when the income effect is stronger
good than the substitution effect.

Are all demand curves downward sloping?

All demand curves are not downward sloping. There are some cases where the existence of the law of
demand is questioned. These cases are known as the exceptions to the law of demand. These
exceptions are as follows:

1. Giffen goods
 Giffen goods are named after Robert Giffen who discovered these goods. A Giffen
good is a special type of an inferior good, therefore all inferior goods are not Giffen
goods. The most famous example of a Giffen good is the potato during the Irish
potato famine of the 19th century. A Giffen good exhausts a major portion of a
consumer’s income i.e. when its price increases, then the income effect is stronger
than the substitution effect which causes the demand curve upward sloping.

2. Veblen goods
These goods are named after an American economist Thorstein Bunde Veblen.
Veblen goods are those goods which are bought to create or enhance prestige or
social status and therefore they are also known as status symbol goods. The more
expensive the good is, the higher the prestige or social status its buyer feels.
Ornaments made of gold, silver, platinum, diamonds etc., luxurious cars like BMW,
Mercedes-Benz, I-Phone of Apple Inc., are some examples of Veblen goods.

3. Bandwagon effect
Bandwagon effect simply means people do something because others are doing so. It
has been observed in lots of cases that demand for a good has increased even at
higher prices just because others are demanding it.

4. Situations of war, riots, drought, natural attacks

In the situations of war, riots, drought, natural attacks like earth quake, flood,
tsunami etc. people behave abnormally. For example: If a country is suffering from a
civil war, then its people would be forced to buy more even at higher prices because
they may anticipate that the war would not stop in near future and a shortage or
black marketing may arise.

5. The common law of business balance or ignorance

There is a group of consumers who think that if a good is expensive, then this is a
qualitative good and if a good is not expensive, then producers may have
compromised with its quality. Therefore a consumer from this group buys more of a
good even at high price and the demand law does not hold good here.

Movement along a demand curve / increase and decrease in quantity

demanded
Movement along a demand curve means downward or upward movement of the consumer
equilibrium point on the same demand curve for a good due to decrease or increase in the
price of the good itself provided other things are kept constant. There are two types of
movement along a demand curve.

1. Extension in demand or Increase in the quantity demanded

Ceteris paribus, when a consumer increases the quantity demanded because of the fall
in the price of the good itself, then this is known as extension in demand. The
equilibrium point of the consumer moves downward on the same demand curve. In
the diagram, we have a demand curve d showing the initial consumer equilibrium
point A at which price is P 1 and quantity demanded Q1. Suppose, price falls from P1 to
P2, then by reason of the law of demand quantity demanded increases from Q 1 to Q2.
As a result new equilibrium point is B. The movement from A to B is known as
extension in demand.

Price

P1 A

P2 B

0 Q1 Q2 Qty.

2. Contraction in demand or Decrease in the quantity demanded

Ceteris paribus, when a consumer decreases the quantity demanded because of the
rise in the price of the good itself, then this is known as contraction in demand. The
equilibrium point of the consumer moves upward on the same demand curve. In the
diagram, we have a demand curve d showing the initial consumer equilibrium point A
at which price is P1 and quantity demanded Q1. Suppose, price rises from P1 to P2, then
by reason of the law of demand quantity demanded decrease from Q 1 to Q2. As a
result new equilibrium point is B. The movement from A to B is known as contraction
in demand.

Price

P2 B
 P1 A

0 Q2 Q1 Qty.

Change in demand / Shift in demand curve

When a consumer increases or decreases quantity demanded because of a factor other than
the price of the good itself, then this is known as shift in demand. There are two types of
changes in demand.

1. Increase in demand

When quantity demanded increases due to other factors not price, then this is known
as increase in demand and it causes the demand curve to shift rightward. In the figure,
it can be noticed that initial demand curve is d 1 and at price P the equilibrium point is
A where the quantity demanded is Q 1. Suppose, due to some reasons (discussed
below) the quantity demanded increases to Q2 while price remains at P, then the
equilibrium point A shifts to B on the new demand curve d 2. This shifting from A to B
is called increase in demand or rightward shift in demand.

Price

A B
P

d1 d2

0 Q1 Q2 Qty.

Reasons for increase in demand

a. Increase in income of the consumer due to promotion, new job, gifts, profits,
transfer payments etc.
b. Increase in the price of the substitute good.
c. Fall in the price of the Complementary good.
d. Positive change in tastes and preferences due to some reasons.
 e. Some announcements like media news/scientific research etc. causing the
demand to rise. For example, a scientific research concluding that carrot
prevents the chances of cancer, it may increase the demand for carrots.
f. Increase in the number of buyers or increase in the population.

2. Decrease in demand

When quantity demanded decreases due to other factors not price, then this is known
as decrease in demand and it causes the demand curve to shift leftward. In the figure,
it can be noticed that initial demand curve is d 1 and at price P the equilibrium point is
A where the quantity demanded is Q 1. Suppose, due to some reasons (discussed
below) the quantity demanded decreases to Q2 while price remains at P, then the
equilibrium point A shifts to B on the new demand curve d 2. This shifting from A to B
is called increase in demand or leftward shift in demand.

Price

B A
P

d2 d1

0 Q2 Q1 Qty.

Reasons for decrease in demand

a. Decrease in income of the consumer due to demotion, loosing job, losses etc.
b. Decrease in the price of the substitute good.
c. Increase in the price of the Complementary good.
d. Negative change in tastes and preferences due to some reasons.
e. Some announcements like media news/scientific research etc. causing the
demand to fall. The case of Maggi is a latest and classic example of this. The
demand for Maggi decreased dramatically when the media reports showed
that FSSAI (Food Safety and Standards Authority of India) found that
Maggi noodles are unsafe and hazardous for human consumption.
f. Decrease in the number of buyers or decrease in the population.
Differences between extension in demand and increase in demand

[Link]. Basis Extension in demand Increase in demand

1 Meaning
When there is rise in the When there is rise in the quantity
quantity demanded due to demanded due to factors other than
fall in the price of the good the price of the good itself, then this
itself while other factors is known as increase in demand.
remaining the same, then
this is known as extension in
demand.

2 Causes Fall in the price of the good 1. Increase in income of the

itself. consumer due to promotion,
new job, gifts, profits,
transfer payments etc.
2. Increase in the price of the
substitute good.
3. Fall in the price of the
Complementary good.
4. Positive change in tastes and
preferences due to some
reasons like age factor.
5. Some announcements like
media news/scientific
research etc. causing the
demand to rise. For
example, a scientific
 research concluding that
carrot prevents the chances
cancer, it may increase the
demand for carrots.
6. Increase in the number of
buyers or increase in the
population.

3
The consumer equilibrium The consumer equilibrium point
Effect on
consumer point shifts downward on shifts rightward from point A on the
equilibriu
the same demand curve from demand curve D1D1 to point B on
m
point A to point B on the demand curve D2D2 as shown in the
same demand curve DD as diagram.
shown in the diagram.

Price
D Price

D1 D2
A
P1

A B
B P
P2

00Q1 Q2 Qty. Q1 Q2 Qty. X D1 D2

00 Q21
Q1 Q Q2
Qty. Qty. X

Differences between contraction in demand and decrease in demand

[Link]. Basis Contraction in demand Decrease in demand

1 Meaning When there is fall in When there is fall in the quantity
the quantity demanded demanded due to factors other than the
due to rise in the price price of the good itself, then this is known
of the good itself while as decrease in demand.
other factors remaining
the same, then this is
known as contraction
in demand.

2 Causes Fall in the price of the 1. Decrease in income of the

good itself.
consumer due to demotion, loosing
job, losses etc.
2. Decrease in the price of the
substitute good.
3. Increase in the price of the
Complementary good.
4. Negative change in tastes and
preferences due to some reasons
like age factor.
5. Some announcements like media
news/scientific research etc.
causing the demand to fall. The
case of Maggi is a latest and
classic example of this. The
demand for Maggi decreased
dramatically when the media
reports showed that FSSAI (Food
Safety and Standards Authority of
India) found that Maggi noodles
are unsafe and hazardous for
human consumption.
6. Decrease in the number of buyers
or decrease in the population.
 3 Effect on The consumer The consumer equilibrium point shifts
consumer
equilibrium equilibrium point shifts leftward from point A on the demand
upward on the same curve D1D1 to point B on demand curve
demand curve from D2D2 as shown in the figure.
point A to point B on
the same demand curve
DD as shown in the
figure.

Price elasticity of demand

Price elasticity of demand means the degree of sensitivity of the demand for a good when its
price changes. In other words, price elasticity of demand is a numerical measurement of the
effect of change in the price of a good on its quantity demanded. Mathematically, price
elasticity of demand means the ratio of percentage change in the quantity demanded for a
good and the percentage change in the price. Therefore,

Percentage change∈the quantity demanded for a good

ed =
Percentage change∈the price of the good

∆Q P1
¿ ×
∆ P Q1
Where
∆ Q=Change∈the quntity demanded=Q2−Q 1; Q 2=New quantity ∧Q1=Old quantity
∆ P=Change∈the price=P2−P1 ; P 2=New price∧P 1=Old price

Various methods to calculate price elasticity of demand

The methods to calculate price elasticity of demand are as follows:

1. Total expenditure method.

2. Percentage or proportion method.
3. Point elasticity method.
4. Arc method.

Method 1

Total Expenditure Method / Total Outlay Method

Total expenditure is defined as the product of the quantity purchased and the price. Under this
method, the movement of the total expenditure incurred on a good is observed to estimate the
elasticity. Leibhafasky has suggested the following formula to calculate elasticity:

ed =1−
1 ∆E
( )
Q1 ∆ P
Where ∆ E=Change∈expenditure ; ∆ P = Change in price and Q1 = initial quantity
demanded
As per this method there are three cases i.e.

1. Inelastic demand
When the increase in the price causes the total expenditure to increase or the
decrease in the price causes the total expenditure to decrease, then the elasticity is
less than one and the demand is said to be inelastic. Therefore, when there is positive
relationship between the price and the total expenditure, then there is inelastic demand
and the degree of elasticity is less than one.

2. Unit elastic demand

When increase or decrease in the price does not affect the total expenditure, then there
is unit elastic demand and the degree of the elasticity is one.

3. Elastic demand
When the increase in the price causes the total expenditure to decrease or the
decrease in the price causes the total expenditure to increase, then the elasticity is
 greater than one and the demand is said to be elastic. Therefore, when there is
negative relationship between the price and the total expenditure, then there is elastic
demand and the degree of elasticity is greater than one.
The above three cases have been summarized in the following schedule.
Price Quantity Total Movement of Elasticity
` purchased Expenditure Total
` expenditure
1 10 10
2 9 18 Total Inelastic
3 8 24 expenditure demand
4 7 28 increases when
price increases
5 6 30 Total Unit elastic
6 5 30 expenditure demand
does not
change
7 4 28 Total
8 3 24 expenditure Elastic
9 2 18 decreases when demand
10 1 10 price increases

Method 2
Percentage method or Proportionate method
According to this method price elasticity is defined as the ratio of the percentage change in
the quantity demanded and the percentage change in the price. Therefore,

Percentage change∈the quantity demanded for a good

ed =
Percentage change∈the price of the good

∆Q P1
¿ ×
∆ P Q1
Where:
∆ Q=Change∈the quntity demanded=Q2−Q 1; Q 2=New quantity ∧Q1=Old quantity
∆ P=Change∈the price=P2−P1 ; P 2=New price∧P 1=Old price

According to this method there are 5 degrees of price elasticity of demand.

1. Perfect inelastic demand i.e. ed = 0

When the percentage change in the quantity demanded is zero irrespective of the
percentage change in the price, then there is perfect inelastic demand. In this case
the demand curve DD is parallel to the Y-axis as shown in the figure. This is
 an extreme case. In this case, it can be said that demand for a good is completely
insensitive to the changes in the price.

Price D

D
0 Q
Qty. demanded

2. Inelastic demand i.e. ed < 1

When the percentage change in the quantity demanded is less than the percentage
change in the price, then there is inelastic demand. In this case the demand curve
DD is steeper as shown in the figure. In this case it can be said that the demand
is not highly sensitive to the price changes.

Price
D

P2

P1

0 Q1 Q2
Qty. demanded

3. Unit elastic demand i.e. ed = 1

When the percentage change in the quantity demanded is equal to the percentage
change in the price, then there is unit elastic demand. In this case the demand
curve DD is shown the figure.

Price
D
P2

P1

0 Q1 Q2
Qty. demanded
 D

4. Elastic demand i.e. ed > 1

When the percentage change in the quantity demanded is greater than the
percentage change in the price, then there is elastic demand. In this case the
demand curve DD is flatter as shown in the figure. In this case it can be said
that demand is highly sensitive to the price changes.

Price

D
P2

P1 D

0 Q1 Q2
Qty. demanded

5. Perfect elastic demand i.e. ed = ∞

When a minor/small change in the price causes the quantity demanded to change
infinitely, then there is perfect elastic demand. In this case the demand curve DD
is parallel to the X-axis as shown in the figure. This is an extreme case.

Price

D D
P

0 Q1 Q2
Qty. demanded

Method 3

Point elasticity method or geometrical method

Under this method elasticity is calculated at a particular point on a given demand curve.
Suppose we have a straight demand curve with 5 points on it as shown in the figure below.
Then according to this method elasticity at each point can be calculated using the following
formula:

ed =lower segment withreference ¿ a point ¿ the point ¿

Upper segment withreference ¿

Price
A
B

E
0 Qty. demanded

Applying the above formula we have the following results

Point A

Elasticity at this point is infinite because the upper segment is infinity.

Point B

Elasticity at this point is greater than one because the lower segment is greater than the upper
segment.

Point C

Elasticity at this point is equal to one because the lower segment is equal to the upper segment.

Point D

Elasticity at this point is less than one because the lower segment is less the upper segment.

Point E

Elasticity at this point is zero because the upper segment is zero.

Method 4
Arc method of price elasticity of demand
Or
Mid-point formula of price elasticity of demand
Arc method is a refined version of the percentage method of price elasticity of demand.
According to the arc method the formula to calculate price elasticity of demand (ed) is as
follows:

−∆ Q ( P 1+ P 0 ) /2
ed = ×
∆P ( Q 1+ Q0 ) /2
Or
−∆ Q ( P 1+ P 0 )
ed = ×
∆P ( Q 1+ Q0 )

Where
∆ Q=Change∈quantity demanded
∆ P=Change∈ price
P 0 , P 1=Initial price∧later price respectively
Q 0 , Q1=Initial quantity∧later quantity respectively

The above formula is called mid-point formula of price elasticity of demand. In fact, this
formula is used when the change in price and quantity demanded is significant while the
formula of percentage method is used when the change in price and quantity demanded
is not significant.

Factors affecting price elasticity of demand

Factors affecting price elasticity of demand are as follows:

1. Price of a good itself

When there is high price, then the elasticity of demand is also higher. Therefore,
expensive goods have higher elasticity and cheap goods have lower elasticity.
2. Essentiality of goods
The elasticity of demand of essential goods like salt, water, wheat, rice etc. is lower
while the elasticity of demand of non-essential goods like jewellery, luxurious cars is
higher.
3. Availability of substitutes
If a good has many substitute goods, then the elasticity of demand is higher. The
goods having no substitute goods have lower elasticity of demand.
 4. Alternative uses of a good
If a good has various uses like milk which can be used for drinking; making tea,
coffee, sweets, curd etc., then the elasticity is higher. Thus, as the number of uses of a
good increases, then elasticity of demand also increases.
5. Postponement of use
If the consumption of a good can be postponed to future, then the elasticity of demand
must be higher and if the consumption cannot be postponed, then the elasticity must
be lower.

6. Habit of a consumer
If the habit of a consumer for a good is strong, then the elasticity of demand must be
lower and if the habit is weak, then the elasticity is higher. For example in case of a
drunk the elasticity of demand of liquor is lower.
7. Expenditure and Income ratio
If the ratio of the expenditure incurred on a good and the income of a consumer is
lower, then the elasticity of demand is also lower. If the ratio is higher, then the
elasticity is also higher.
8. Time
In short run the elasticity of demand is found to be lower while in long run this is
found to be higher.

Cross Elasticity of Demand

Cross Elasticity of demand (generally denoted by C XY) means the ratio of the percentage
change in the quantity demanded of a good X and the percentage change in the price of good
Y. Therefore,

Percentage change∈the quantity demanded for good X

C XY=
Percentage change ∈the price of good Y

∆Q X P Y
C XY= ×
∆ PY QX
Where
∆ Q X=Change in the quantity of good X
∆ P Y=Change in the price of good Y
P Y=Initial price of good Y
Q X=Initial quantity of good X

Significance of Cross elasticity of demand tells us how much the demand for a good X
responds when the price of its related good Y is changed.

Important points
1. If C XY >0 i . e . positive elasticity ,then it means that X and Y are substitute goods.
2. If C XY =0i . e . zero elasticity , then it means that X and Y are unrelated goods.

Income Elasticity of Demand

Income Elasticity of demand (generally denoted by I X) means the ratio of the percentage
change in the quantity demanded of a good X and the percentage change in the income of the
consumer. Therefore,

Percentage change∈the quantity demanded for good X

C XY=
Percentage change∈the income

∆Q X I
C XY= ×
∆I QX
Where
∆ Q X=Change in the quantity of good X
∆ I =Change in the income
I =Initial income
Q X=Initial quantity of good X

Significance of income elasticity of demand tells us how much the demand for a good X
responds when the income of the consumer is changed.

Important points
1. If 0< I X<1 , then the good is a normal good.
 2. If I X >1 ,then the good is a luxury good.
3. If I X <0 ,then the good is an inferior good.

Advertising Elasticity of Demand

Advertising Elasticity of demand (generally denoted by A X) means the ratio of the percentage
change in the quantity demanded of a good X and the percentage change in the expenditure
on advertising. Therefore,
Percentage change∈the quantity demanded for good X
C XY=
Percentage change ∈the expenditure on advertising

∆Q X A
C XY= ×
∆A QX

Where,
∆ Q X=Change in the quantity of good X
∆ A=Change in the expenditure on advertising
A=Initial expenditure on advertising
Q X=Initial quantity of good X

Significance of advertising elasticity of demand tells us how much the demand for a good
X responds when the expenditure on advertising is changed.