Elasticity of Demand
🟢 Lite — Quick Review (1h–1d)
Rapid summary for last-minute revision before your exam.
Elasticity of Demand — Key Facts for RPSC RAS
- Definition: Measures how responsive quantity demanded is to a change in price
- Formula: PED = (% Change in Quantity Demanded) / (% Change in Price)
- Interpretation:
- PED > 1 → Elastic (demand responds sharply to price changes)
- PED = 1 → Unitary
- PED < 1 → Inelastic (demand barely changes with price)
- PED = 0 → Perfectly Inelastic (vertical demand curve)
- PED = ∞ → Perfectly Elastic (horizontal demand curve)
- RPSC High-Yield: Numericals on PED formula; classification of goods; factors affecting elasticity
🟡 Standard — Regular Study (2d–2mo)
1. Types of Price Elasticity of Demand
| Type | PED Value | Meaning |
|---|---|---|
| Perfectly Elastic | ∞ | Any price rise kills all demand |
| Elastic | > 1 | Large quantity change for small price change |
| Unitary | = 1 | Quantity % change = Price % change |
| Inelastic | < 1 | Small quantity change for price change |
| Perfectly Inelastic | 0 | Quantity unchanged regardless of price |
2. Midpoint Formula (RPSC Favourite)
$$PED = \frac{(Q_2 - Q_1) / \text{Midpoint of } Q}{(P_2 - P_1) / \text{Midpoint of } P}$$
Example: If price falls from ₹10→₹8, demand rises 50→60 units:
- Midpoint Q = 55, Midpoint P = 9
- PED = (10/55) / (2/9) = 0.182 / 0.222 = 0.82 (Inelastic)
3. Factors Affecting Elasticity
- Availability of substitutes → More substitutes = more elastic
- Necessity vs Luxury → Necessities (salt, medicine) = inelastic; Luxury goods = elastic
- Proportion of income → Higher income share = more elastic
- Time period → Long run = more elastic (consumers can adjust)
- Habit-forming goods → Cigarettes, tea = relatively inelastic
4. Elasticity and Tax Incidence
- Inelastic demand → Consumers bear most of the tax burden (e.g., petrol, cigarettes)
- Elastic demand → Producers bear most of the tax burden
5. RPSC RAS Previous Year Pattern
- 1-2 questions from elasticity (3-5 marks)
- Common question: “If PED = 0.5, what does it signify? Explain with diagram”
- Numerical problems: Calculate PED using midpoint formula
⚡ Exam Tip: Draw a demand curve showing elastic vs inelastic. Label axes. This scores full marks.
🔴 Extended — Deep Study (3mo+)
Income Elasticity of Demand (YED)
$$YED = \frac{%\Delta Q_d}{%\Delta Y}$$
- Normal goods: YED > 0 (necessaries: 0<YED<1; luxuries: YED>1)
- Inferior goods: YED < 0
Cross Elasticity of Demand (XED)
$$XED = \frac{%\Delta Q_d \text{ of Good A}}{%\Delta P \text{ of Good B}}$$
- Substitutes (tea/coffee): XED > 0
- Complements (tea/sugar): XED < 0
- Independent goods: XED = 0
##ARC Elasticity
Used when price changes are large — same as midpoint formula above.
Relationship Between Elasticity and Revenue
| Type | Price ↓ Revenue | Price ↑ Revenue |
|---|---|---|
| Elastic (E>1) | Revenue ↑ | Revenue ↓ |
| Unitary (E=1) | Revenue constant | Revenue constant |
| Inelastic (E<1) | Revenue ↓ | Revenue ↑ |
📌 Remember: For monopoly pricing — MR = AR(1 - 1/|E|). Higher elasticity means lower MR.
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