Meaning of Elasticity of Demand

The Law of Demand (studied in the previous chapter, Demand Analysis) tells us only the DIRECTION in which quantity demanded moves when price changes — it says demand falls when price rises, and rises when price falls, other things remaining constant. It says nothing about HOW MUCH quantity demanded changes for a given change in price. A 10% rise in the price of salt hardly dents how much salt a household buys, while a 10% rise in the price of a soft drink can sharply cut the quantity bought. Elasticity of demand is the concept economists use to measure this degree of responsiveness precisely.

Elasticity of demand is defined as the degree of responsiveness (or sensitiveness) of quantity demanded of a commodity to a change in one of the factors that determine demand — its own price, the consumer's income, or the price of a related commodity. Because demand can respond to three distinct factors, elasticity of demand is studied in three forms in the Maharashtra HSC (MSBSHSE) Std XII Economics syllabus: Price Elasticity of Demand (response to a change in the commodity's own price), Income Elasticity of Demand (response to a change in the consumer's income), and Cross Elasticity of Demand (response to a change in the price of a related commodity). This chapter builds each of these three measures in turn, along with the factors that determine how elastic or inelastic a commodity's demand tends to be, and why the concept matters to real pricing and tax decisions.