This article about elasticity of demand includes following contents.
 Elasticity of Demand
 Price elasticity of demand
 Measurement of Elasticity by percentage method
 Types of price elasticity of demand
 Flatter and steeper demand curve
 Elasticity in absolute terms
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Elasticity of Demand
The law of Demand does not indicate degree of change in demand due to
change in price of a commodity. It only shows the direction i.e. demand
decreases with increase in price and viceversa but it is very important to
know about degree of change for analyzing. Hence the concept of elasticity of demand is formulated in economics.
Due to changes in factors of demand other than own price
of the commodity, degree of responsiveness of demand
is known as elasticity of demand.
Let me clear you with an example. If price of related good
changes by 2%, demand of the commodity changes by 3%, it means demand is
changed 1.5 times. Such measurement is known as elasticity of demand.If you want a presentation of elasticity of demand, click here to download.
Click to watch lecture in Hindi
Price Elasticity of Demand
Here, we measure the degree of responsiveness of quantity demand of a commodity due to
change in own price of the commodity.
Such measurement is known as price elasticity of demand.
It shows the magnitude of change in quantity demanded as a
result of change in price.
Measurement of Price Elasticity of Demand
We are measuring price elasticity of demand by percentage method
or proportionate method.
Where,
Percentage change in quantity demanded = (Q1 –Q/P1 – P) *100
Q1 =
Latter quantity (after change)
Q = Initial Quantity
P1 =
Latter Price
P = Initial price
Note Minus () sign before the
values is ignored in economics.
#Types/Degrees of Price Elasticity of Demand
Unitary Elastic Demand (Ed =1)
If percentage change in the quantity demanded is equal to percentage
change in price, it is known as unitary elastic demand.
More than unitary elastic (Elastic) Ed>1
If percentage change in the quantity demanded is greater than percentage
change in price, it is known as elastic demand.
Less than unitary elastic demand (Inelastic) Ed<1
If percentage change in the quantity demanded is less than percentage
change in price, it is known as inelastic demand.
Perfectly Elastic Demand (Ed=∞)
In this case price remains constant but quantity demand
changes. Demand curve is horizontal straight line parallel to X axis. Quantity Demand
may increase or decrease with no limits.
Perfectly Inelastic Demand ( Ed=0)
In this case even price changes but quantity demanded does
not change. We get vertical demand curve parallel to Y axis in this type of
elasticity.
#Factors affecting Price Elasticity of Demand
Nature of Commodity
Elasticity of demand of a commodity depends upon its nature.
If commodity is necessity for life, it is inelastic because human ignores price
changes in case of necessities. Whatever the prices, he has to purchase these
commodities.
In case of Luxury goods, demand is elastic. When price of
luxury goods fall, people buy more and when price rises, people buy less
substantially.
Availability of Substitute Goods
If substitute good is available, people shift quickly and
change their demand easily. Hence it can be said that demand of such type of
goods is elastic. If substitute goods are not available then people have to buy
same good whatever the prices, hence demand in this case is inelastic.
Income Level
The goods have inelastic demand that are purchased by higher
income person because such person ignores the price change and continues
purchasing. Low income group has more elastic demand.
Habits
The demand for goods that are consumed habitually is
inelastic because even price change, consumer continues to purchase and consume
that commodity. Examples, Alcohol, Tobacco etc.
Level of own price of good
Higher own price of a good like car, gold etc have elastic
demand because their demand is very sensitive to change in price and viceversa.
Measurement of Price
Elasticity by Total Expenditure Method
We measure elasticity of demand on basis of change in total
expenditure in response to a change in price. This method was given by
Professor Alfred Marshall.
Total
expenditure = Quantity demanded * Price
Following points should be noted to measure elasticity of
demand by expenditure method.
When Price Increases
1. If expenditure remains
same

Ed = 1

Unitary
Elastic demand

2. If Expenditure falls

Ed >1

More
than unitary elastic

3. If Expenditure
increases

Ed<1

Less
than unitary

When price falls
1. If expenditure remains
same

Ed = 1

Unitary
Elastic demand

2. If Expenditure falls

Ed <1

More
than unitary elastic

3. If Expenditure
increases

Ed>1

Less
than unitary

Never measure elasticity in absolute terms
Never measure elasticity of
demand is terms of an absolute change in quantity in response to a given change
in price of the commodity.
Now the question arises that
what is absolute change in quantity. Let us understand with an
example.
Thus in the above figure one
may conclude that Ed>1 because PP1 (Change in price) > MM1 (change in
quantity) but this conclusion is wrong. You should measure elasticity in terms
of percentage at point S.
Let us take an illustration.
Assumed values : Q
=10, Q1=15, Change in Q = 5; P=5, P1= 40, Change in P= 10
Ed =() change in Q * P/ change
in P*Q
= () 5*50/10*10
= 2.5
Hence Ed = 2.5 even when PP1 is
greater than MM1
Flatter and Steeper Curve of Demand
Do you know that what is meant
by flatter and steeper curve of demand in terms of elasticity? It is very simple. Flatter curve is more
elastic than steeper curve. Steeper curve is less elastic than flatter
curve. In other words, when a demand
curve is flatter, change in quantity demand is greater than steeper curve. You can understand well with help of
following diagram:
In the above diagram:
 D1 and D2 are two demand curves starting from the point R
 D2 is flatter and D1 is steeper.
 ·Now, when price reduces to OR1 from OR then quantity demand for D1 increases from zero to OM1
 D2 curve shows rise in quantity demanded from zero to OM1
Hence OM1 is greater than OM.
We can say that flatter curve is more elastic than steeper curve.
Cross Price Elasticity
The degree of change in demand of a commodity due to change
in price of related goods is known as cross price elasticity.
Example : If demand
of tea changes by 2% due to change in price of its substitute good coffee by 1%
then this type of measurement of elasticity is known as cross price elasticity
of demand.
Ed = % change in quantity of good A/ %
change in price of good B
Substitution Elasticity
The substitution elasticity
indicates that to what extent one commodity can be substituted for another
without making any change in total satisfaction. It is the measure of ease or
difficulty with which one commodity is substituted with other.
There
are two situations:
Substitution elasticity may be infinite. It is
happened when goods are perfect substitutes.
Substitution elasticity may be zero. It happens
when goods are not perfect substitutes. There can be no substitution. Goods
must be used in fixed quantity or proportion.
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