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Maharashtra State Board · HSC Commerce · Class 12 (Std XII)

Class 12 Economics Chapter 3B: Elasticity of Demand

Short notes, key concepts, quick revision and practice MCQs with answers

The law of demand gives only the direction of change, so this chapter uses elasticity to measure how much quantity demanded responds to price, income or other prices. It covers types and degrees of price elasticity, three measuring methods, influencing factors and practical importance.

Key concepts: Elasticity of Demand

Elasticity of demand
The degree of responsiveness of quantity demanded to a change in price or another factor. It is the ratio of percentage change in quantity demanded to the percentage change in the factor.
Income elasticity
Ey = % change in quantity demanded / % change in income. It is positive for normal goods, negative for inferior goods and zero for necessary goods.
Cross elasticity
Ec = % change in quantity of A / % change in price of B. Positive for substitutes (tea, coffee), negative for complements (tea, sugar), zero for unrelated goods.
Price elasticity and its five degrees
Ed = %change in Q / %change in P. Degrees: perfectly elastic (infinity), perfectly inelastic (0), unitary (1), relatively elastic (more than 1), relatively inelastic (less than 1).
Percentage (ratio) method
Ed = (change in Q / Q) x (P / change in P), using original price and quantity. The negative sign is ignored, and Ed is a pure number free of units.
Total expenditure method
Compare price x quantity before and after a price change. Outlay rises when price falls: Ed above 1; unchanged: Ed equals 1; falls: Ed below 1.
Point method
Ed at a point = lower segment / upper segment of the demand curve (or tangent) at that point. On a straight line Ed is infinite at the Y axis and zero at the X axis.
Factors and importance
Necessity, substitutes, uses, habits, durability, time and share of income affect elasticity. It guides producers' pricing, taxation, factor pricing, foreign trade and public utilities.

Quick revision: important points

Practice MCQs with answers

  1. What does elasticity of demand measure?

    1. The total quantity produced by a firm
    2. The fixed relation between income and saving
    3. The number of consumers in a market
    4. How responsive quantity demanded is to a change in price or another factor
    Show answer

    Answer: D. How responsive quantity demanded is to a change in price or another factor
    Elasticity shows the degree of responsiveness of quantity demanded, which the law of demand alone does not tell.

  2. Which economist explained the concept of elasticity of demand?

    1. Alfred Marshall
    2. Robert Giffen
    3. Adam Smith
    4. Benham
    Show answer

    Answer: A. Alfred Marshall
    Marshall developed elasticity to show the extent of change in demand that the law of demand leaves unexplained.

  3. Income elasticity of demand is expressed as

    1. % change in price / % change in quantity
    2. % change in income / % change in quantity
    3. % change in quantity of A / % change in price of B
    4. % change in quantity demanded / % change in income
    Show answer

    Answer: D. % change in quantity demanded / % change in income
    Ey = %change in quantity demanded divided by %change in income of the consumer.

  4. Goods whose demand falls when the consumer's income rises have

    1. positive income elasticity
    2. negative income elasticity
    3. zero income elasticity
    4. infinite income elasticity
    Show answer

    Answer: B. negative income elasticity
    Inferior goods show negative income elasticity, because demand decreases as income rises.

  5. Tea and coffee have which type of cross elasticity of demand?

    1. Positive
    2. Negative
    3. Zero
    4. Infinite
    Show answer

    Answer: A. Positive
    Substitute goods have positive cross elasticity: a price rise of one raises demand for the other.

All Class 12 Economics chapters

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