### What is Elasticity of Demand ? Explain its Degrees and Different Methods of Measuring it .

## >> Thursday, May 21, 2009

*Definition of Elasticity of demand*Elasticity of demand may be defined as percentage changes in demand divided by percentage changes in prices . This is the simple measurement of the changes in the value of demand , if any changes happens in prices . Suppose if Ram purchased fruit 10 kgs at Rs. 5 per kg . If the price of fruit increase by Rs. 1 and demand of Ram decreases by 8 kgs it means demand of Ram is more elastic and its value can be found by elasticity of demand formula

**Formula for calculating elasticity of demand**

= % change in demand / % change in prices

**Degrees of elasticity of demand**

**1. Perfect elasticity of demand**

Perfect elasticity of demand can explain as highest changes in the value of demand due to changes in price if a little changes in price , the infinite changes will be done in demand . In other words except above definition , it is just define as E = ∞

**2. Unitary elasticity of demand**

If changes in prices and demand with equal proportion , then its elasticity of demand is equal to one .

Suppose Ram purchased one ice cream at rs. 2 and if the price will decrease by rs. 1 then the demand becomes more by purchasing one more quantity of ice cream. Then E = 1

**3. Less elasticity of demand**

Less elasticity of demand is less than one . E <1>

**4. More elasticity of demand**

If any changes in price will change the demand with high proportion , then this degree is called more elasticity of demand . It is E > 1

*Methods of measuring Elasticity of demand*There are three methods for measuring elasticity of demand .

**1. Total outlay or total expenditure method**

In this method , we measure elasticity of demand on the basis of total expenditure or total outlay . Total expenditure is the product of price and quantity purchased . If total expenditure will increase by increasing price , it is less elastic demand , If total expenditure does not change by changing demand . This is unitary elastic demand . If total expenditure decreased , if prices increases , then this is high elastic demand . We can also show elasticity of demand on graph paper under total outlay method .

**2. Point Method**

Under this method , we measure elasticity of demand on the based points on a graph . We know the formula for calculating elasticity of demand that is

= change in demand / change in prices X original price / original quantity

But when it show on graph its formula is

Lower part of demand curve / upper part of demand curve

Unitary elasticity of demand = PN / PM = 1

Less elasticity of demand = QN/ QM = E<>

More elasticity of demand = RN/RM = E > 1

**3. Arc method**

Under this method , we can calculate elasticity of demand between two points in any demand curve . The following formula will apply

**E**

**= change in demand / change in prices X ( original price + new price )/2 / ( original quantity + new quantity ) / 2**