× #1 Microeconomics vs. Macroeconomics #2 Definition and Scope of Economics #3 Positive and Normative Economics #4 Scarcity, Choice, and Opportunity Cost #5 Law of Demand and Determinants #6 Market Equilibrium and Price Mechanism #7 Elasticity of Demand and Supply #8 Utility Analysis: Total and Marginal Utility #9 Indifference Curve Analysis #10 Consumer Equilibrium #11 Revealed Preference Theory #12 Factors of Production #13 Production Function: Short-run and Long-run #14 Law of Variable Proportions #15 Cost Concepts: Fixed, Variable, Total, Average, and Marginal Costs #16 Perfect Competition: Characteristics and Equilibrium #17 Monopoly: Price and Output Determination #18 Monopolistic Competition: Product Differentiation and Equilibrium #19 Oligopoly: Kinked Demand Curve, Collusion, and Cartels #20 Theories of Rent: Ricardian and Modern #21 Wage Determination: Marginal Productivity Theory #22 Interest Theories: Classical and Keynesian #23 Profit Theories: Risk and Uncertainty Bearing #24 Concepts: GDP, GNP, NNP, NDP #25 Methods of Measuring National Income: Production, Income, Expenditure #26 Real vs. Nominal GDP #27 Limitations of National Income Accounting #28 Distinction between Growth and Development #29 Indicators of Economic Development: HDI, PQLI #30 Theories of Economic Growth: Harrod-Domar, Solow #31 Sustainable Development and Green GDP #32 Functions and Types of Money #33 Theories of Money: Quantity Theory, Keynesian Approach #34 Banking System: Structure and Functions #35 Role and Functions of Central Bank (RBI) #36 Objectives and Instruments: CRR, SLR, Repo Rate #37 Transmission Mechanism of Monetary Policy #38 Inflation Targeting Framework #39 Effectiveness and Limitations of Monetary Policy #40 Components: Government Revenue and Expenditure #41 Budgetary Process in India #42 Fiscal Deficit, Revenue Deficit, Primary Deficit #43 FRBM Act and Fiscal Consolidation #44 Types and Causes of Inflation #45 Effects of Inflation on Economy #46 Measures to Control Inflation: Monetary and Fiscal #47 Deflation: Causes, Consequences, and Remedies #48 Types: Frictional, Structural, Cyclical, Seasonal #49 Measurement of Unemployment #50 Causes and Consequences #51 Government Policies to Reduce Unemployment #52 Measurement of Poverty: Poverty Line, MPI #53 Causes of Poverty in India #54 Income Inequality: Lorenz Curve and Gini Coefficient #55 Poverty Alleviation Programs in India #56 Principles of Taxation: Direct and Indirect Taxes #57 Public Expenditure: Types and Effects #58 Public Debt: Internal and External #59 Deficit Financing and its Implications #60 Theories: Absolute and Comparative Advantage #61 Balance of Payments: Components and Disequilibrium #62 Exchange Rate Systems: Fixed, Flexible, Managed Float #63 International Monetary Fund (IMF): Objectives and Functions #64 World Bank Group: Structure and Assistance Programs #65 World Trade Organization (WTO): Agreements and Disputes #66 United Nations Conference on Trade and Development (UNCTAD) #67 Characteristics of Indian Economy #68 Demographic Trends and Challenges #69 Sectoral Composition: Agriculture, Industry, Services #70 Planning in India: Five-Year Plans and NITI Aayog #71 Land Reforms and Green Revolution #72 Agricultural Marketing and Pricing Policies #73 Issues of Subsidies and MSP #74 Food Security and PDS System #75 Industrial Policies: 1956, 1991 #76 Role of Public Sector Enterprises #77 MSMEs: Significance and Challenges #78 Make in India and Start-up India Initiatives #79 more longer Growth and Contribution to GDP #80 IT and ITES Industry #81 Tourism and Hospitality Sector #82 Challenges and Opportunities #83 Transport Infrastructure: Roads, Railways, Ports, Airports #84 Energy Sector: Conventional and Renewable Sources #85 Money Market: Instruments and Institutions #86 Public-Private Partnerships (PPP) in Infrastructure #87 Urban Infrastructure and Smart Cities #88 Capital Market: Primary and Secondary Markets #89 SEBI and Regulation of Financial Markets #90 Recent Developments: Crypto-currencies and Digital Payments #91 Nationalization of Banks #92 Liberalization and Entry of Private Banks #93 Non-Performing Assets (NPAs) and Insolvency and Bankruptcy Code (IBC) #94 Financial Inclusion: Jan Dhan Yojana, Payment Banks #95 Life and Non-Life Insurance: Growth and Regulation #96 IRDAI: Role and Functions #97 Pension Reforms and NPS #98 Challenges in Insurance Penetration #99 Trends in India’s Foreign Trade #100 Trade Agreements and Regional Cooperation #101 Foreign Exchange Reserves and Management #102 Current Account Deficit and Capital Account Convertibility #103 Sectoral Caps and Routes #104 FDI Policy Framework in India #105 Regulations Governing FPI #106 Recent Trends and Challenges #107 Difference between FDI and FPI #108 Impact of FDI on Indian Economy #109 Impact on Stock Markets and Economy #110 Volatility and Hot Money Concerns #111 Determination of Exchange Rates #112 Role of RBI in Forex Market #113 Rupee Depreciation/Appreciation: Causes and Impact #114 Sources of Public Revenue: Taxes, Fees, Fines #115 Types of Public Expenditure: Capital and Revenue #116 Components of the Budget: Revenue and Capital Accounts #117 Types of Budget: Balanced, Surplus, Deficit #118 Fiscal Deficit, Revenue Deficit, Primary Deficit #119 Implications of Deficit Financing on Economy #120 Performance and Challenges #121 Current Account and Capital Account #122 Causes and Measures of BoP Disequilibrium #123 Fixed vs. Flexible Exchange Rates #124 Purchasing Power Parity (PPP) Theory #125 Absolute and Comparative Advantage #126 Heckscher-Ohlin Theory #127 Free Trade vs. Protectionism #128 Tariffs, Quotas, and Subsidies #129 Concepts and Indicators #130 Environmental Kuznets Curve #131 Renewable and Non-Renewable Resources #132 Tragedy of the Commons #133 Economic Impact of Climate Change #134 Carbon Trading and Carbon Tax #135 Kyoto Protocol, Paris Agreement #136 National Action Plan on Climate Change (NAPCC) #137 Factors Affecting Productivity #138 Green Revolution and Its Impact #139 Abolition of Intermediaries

ECONOMICS

Introduction

In economics, understanding how sensitive buyers and sellers are to changes in prices, income, or other economic variables is crucial for policy-making, business strategy, and market analysis. This sensitivity is captured by the concept of elasticity.

Elasticity measures the responsiveness of quantity demanded or supplied when there is a change in another variable, such as price, income, or the price of related goods. It plays a central role in both microeconomic theory and applied decision-making.


Elasticity of Demand

Elasticity of demand refers to the degree to which quantity demanded of a good responds to changes in various factors such as price, consumer income, or the prices of related goods.

1. Price Elasticity of Demand (PED)

Definition:
Price Elasticity of Demand measures how much the quantity demanded of a good changes in response to a change in its price.

Formula:
Price Elasticity of Demand (PED) =
% Change in Quantity Demanded / % Change in Price

Types of PED:

  • Elastic Demand (PED > 1): Demand changes more than proportionately to price.

  • Inelastic Demand (PED < 1): Demand changes less than proportionately to price.

  • Unitary Elastic Demand (PED = 1): Demand changes exactly in proportion to price.

  • Perfectly Elastic Demand (PED = ∞): Consumers will buy only at one price.

  • Perfectly Inelastic Demand (PED = 0): Quantity demanded does not change regardless of price.

Graphically:
A flatter demand curve indicates more elastic demand; a steeper curve shows inelastic demand.

Determinants of PED:

  • Availability of Substitutes: More substitutes → higher elasticity.

  • Nature of the Good: Necessities tend to be inelastic; luxuries are more elastic.

  • Proportion of Income Spent: Goods that take a larger share of income are more elastic.

  • Time Period: Demand becomes more elastic over time as consumers adjust.

  • Addiction or Habitual Consumption: Goods like tobacco or alcohol tend to be inelastic.

Applications of PED:

  • Pricing Strategies: Businesses may lower prices for elastic goods to boost revenue.

  • Tax Policy: Governments impose taxes on inelastic goods (e.g., petrol) to maximize revenue.

  • Public Transport Policy: If demand for public transport is elastic, fare hikes may reduce revenue.


2. Income Elasticity of Demand (YED)

Definition:
Measures how quantity demanded changes in response to a change in consumer income.

Formula:
YED =
% Change in Quantity Demanded / % Change in Income

Types:

  • Positive YED (> 0): Normal goods. Demand increases with income.

  • Negative YED (< 0): Inferior goods. Demand decreases as income rises.

  • YED > 1: Luxury goods.

  • 0 < YED < 1: Necessities.

Application:
Income elasticity helps businesses forecast demand based on economic cycles and helps governments identify which sectors need subsidies or price controls during recessions.


3. Cross-Price Elasticity of Demand (XED)

Definition:
Measures how the quantity demanded of one good responds to a change in the price of another good.

Formula:
XED =
% Change in Quantity Demanded of Good A / % Change in Price of Good B

Types:

  • Positive XED: Substitutes (e.g., tea and coffee).

  • Negative XED: Complements (e.g., cars and petrol).

  • Zero XED: Unrelated goods.

Application:
Understanding XED helps firms anticipate the impact of competitors’ pricing and helps policymakers understand interdependencies between markets.


Elasticity of Supply

Elasticity of supply refers to how responsive the quantity supplied of a good is to changes in its price.

Price Elasticity of Supply (PES)

Definition:
Price Elasticity of Supply measures the responsiveness of quantity supplied to a change in the price of the good.

Formula:
PES =
% Change in Quantity Supplied / % Change in Price

Types of PES:

  • Elastic Supply (PES > 1): Supply responds more than proportionally to price.

  • Inelastic Supply (PES < 1): Supply responds less than proportionally.

  • Unitary Elastic Supply (PES = 1): Supply changes in exact proportion.

  • Perfectly Elastic Supply (PES = ∞): Suppliers can supply unlimited quantity at one price.

  • Perfectly Inelastic Supply (PES = 0): Supply remains constant regardless of price.

Determinants of PES:

  • Time Period: Short-run supply tends to be inelastic; long-run supply is more elastic.

  • Availability of Inputs: Easier access to inputs means more elastic supply.

  • Production Flexibility: If production can be scaled quickly, supply is more elastic.

  • Spare Capacity: Firms with unused capacity can respond quickly to price changes.

Applications of PES:

  • Agriculture: Supply is often inelastic in the short term due to growing seasons.

  • Energy Sector: Supply of oil or electricity may be slow to respond, leading to volatility.

  • Policy Planning: Elasticity helps anticipate shortages or surpluses when prices fluctuate.


Importance of Elasticity in Economics and Policy

For Businesses:

  • Guides pricing decisions.

  • Helps in estimating the effect of promotional campaigns.

  • Assists in forecasting revenue under different market conditions.

For Government Policy:

  • Determines the burden of taxation (more falls on inelastic goods).

  • Assists in designing subsidies and price supports.

  • Helps evaluate the impact of regulation on industries.

In International Trade:

  • Countries may specialize in producing goods with inelastic global demand to ensure stable export revenue.

  • Helps understand the terms of trade effects when global commodity prices fluctuate.


Real-Life Examples

Petrol (Inelastic Demand):
Despite rising fuel prices, demand changes very little in the short run, making petrol highly inelastic. Hence, governments often tax petrol to generate revenue.

Luxury Cars (Elastic Demand):
High-income elasticity means that during a recession, demand for luxury cars falls significantly.

Agricultural Produce (Inelastic Supply):
A bumper crop can cause prices to crash because supply increases but cannot be absorbed proportionally due to demand being inelastic.

Streaming Services (Elastic Demand):
If prices for Netflix increase slightly, consumers might cancel subscriptions and shift to competitors, indicating elastic demand.


Conclusion

The concept of elasticity of demand and supply is a cornerstone of economic theory and policy. It provides valuable insights into how markets respond to changes in price, income, and external factors. For IAS aspirants, it forms a key part of the economics syllabus in both the prelims and mains examinations. For MBA students, it is foundational for strategic pricing, market segmentation, and revenue management.

Elasticity is not just a theoretical construct—it has real-world applications in taxation, international trade, business planning, and consumer behavior analysis. A clear understanding of elasticity equips individuals with the tools to interpret market signals and make informed economic and business decisions.