Elasticity of Demand
What it really means
Elasticity of demand is a measurement of how much the quantity people buy responds when something shifts (price, income, or the price of a related good).
• Definition: The percentage change in quantity demanded divided by the percentage change in the causing factor.
• Zero unit: It's a pure ratio — no rupees, no kilos. That's why it's comparable across goods.
• Two flavours: own-price elasticity (most common), cross and income elasticity (when the trigger is not price of the same good).
The four main types
Textbooks classify elasticity by which driver you're testing.
• Price (PED): Response to a change in the good's own price. Most-tested.
• Income (YED): Response to a change in the buyer's income. Positive for normal goods, negative for inferior.
• Cross (XED): Response to a price change of a related good. Positive → substitutes (tea vs coffee), negative → complements (car vs petrol).
• Advertising (AED): Response to a change in the good's ad-spend. Almost always ≥ 0.
Elasticity of Demand
Try a more specific topic — e.g. 'diagram of the human heart'
Five degrees of PED
Depending on how the ratio comes out, economists label PED into five degrees.
| Degree | Value | Meaning |
|---|---|---|
Perfectly Elastic | ∞ | Infinite response — tiny price change wipes out demand |
Relatively Elastic | >1 | Demand falls sharply — luxury goods |
Unitary | =1 | Demand falls by same % as price — total spend unchanged |
Relatively Inelastic | <1 | Demand barely moves — necessities |
Perfectly Inelastic | 0 | Demand doesn't respond at all — life-saving medicine |
What makes demand elastic
Six factors decide whether a good's demand will bend a lot or hold firm.
• Substitutes available: More substitutes ⇒ more elastic. Coca-Cola vs salt.
• Necessity vs luxury: Necessity ⇒ inelastic. Luxury ⇒ elastic.
• Share of income: If a good eats a large slice of the budget, buyers react more.
• Time frame: Long-run demand is more elastic — people find replacements.
• Habit / addiction: Cigarettes stay inelastic despite price hikes.
• Durability: Durables (fridges) are more elastic than perishables (bread).
Everyday examples you'll recognise
- •Elastic: Restaurant meals, air travel, branded jeans — a 10% price bump and demand drops sharply.
- •Inelastic: Petrol (short-run), Insulin, Basic salt — 10% costlier, demand barely dips.
- •Unitary: Some tuition fees historically fall here — a 10% fee rise cuts admissions by ~10%.
Common exam traps
⚠️ Watch for these — every year some students lose marks here.
- •Confusing inelastic (<1) with perfectly inelastic (=0).
- •Writing ‘demand is elastic’ without stating which type (PED vs YED).
- •Forgetting the minus sign on PED for normal goods, then arguing about it later.
- •Using absolute change instead of percentage change in the formula.
Practice — real PYQ
Exam-ready write-up
Elasticity of demand quantifies how responsive quantity demanded is to a change in a determinant — usually price. Its four main types are Price (PED), Income (YED), Cross (XED) and Advertising (AED). PED itself has five degrees ranging from perfectly elastic (∞) through unitary (=1) to perfectly inelastic (0). Necessities like insulin are inelastic; luxuries like restaurant meals are elastic. Factors that determine elasticity include number of substitutes, share of income, time frame, and whether the good is a necessity or luxury.