1.
Price elasticity
of demand is a measure of degree of responsiveness of demand for a commodity to
change in its price. In other words, the price elasticity of demand quantifies
the effect of a change in its own price on the quantity demanded.
2.
Formally, price
elasticity of demand is defined as the ratio of the change in quantity demanded
to a percentage change in price. It is expressed as:
Price elasticity of demand= ed=
% change in quantity demand/ %change in its own price = Δq/Δp . p/q
The price elasticity of demand is always
negative.
3.
Price elasticity
of demand may be categorized as:
(i)
Greater than
unitary elastic demand,
(ii)
Less than unitary
elastic demand
(iii)
Unitary elastic
demand
(iv)
Perfectly
inelastic demand and
(v)
Perfectly elastic
demand.
4.
Greater than
unitary demand (or elastic demand) is one in which the percentage change in
quantity demanded must exceed the percentage change in price. The value of the
co-efficient of price elasticity will be greater than one, i.e., ed>
1. In this case the demand curve is flatter.
5.
Less than unitary
elastic demand (or inelastic demand) is one which the percentage change in
quantity demanded is less than that of percentage change in the price. The
value of coefficient of price elasticity of demand will be less than one, i.e.,
ed< 1. In this case the demand curve is steeper.
6.
Unitary elastic
demand is one in which the percentage change
in quantity demanded is equal to the percentage change in price. In this
case, ed= 1 and the demand curve take a particular shape, called
rectangular hyperbola. It is a curve which extends towards the x-axis and
y-axis in a uniform manner without touching them.
7.
A perfectly
inelastic demand is one in which the quantity demanded is totally incentive to
any change in price. In this case ed= 0 and the demand curve is
vertical (parallel to y-axis). If the product is absolutely essential like
demand for a rare medicine, then its demand is perfectly inelastic.
8.
A perfectly elastic demand is one in which the slight change in price will cause an
infinite change in demand. Consumers are prepared to buy all which they can
obtain at some price and none at an even slightly higher price. In this case, ed=
∞ and the demand curve is horizontal (i.e., parallel to x-axis).
9.
The important
properties relating to price elasticity of demand are:
(i)
the price elasticity of demand is independent
of the choice of units. It is because any percentage in variable is
independent of units.
(ii)
If two straight
line demand curves intersect each other, at their point of intersection, the
elasticity associated with the flatter demand curve is higher than a steeper
demand curve.
(iii)
Two parallel
straight line demand curves do not have the same elasticity of demand at a
given price. The demand curve, which is closer to the origin is more elastic.
10.
The main factors
affecting the magnitude of price elasticity are:
(i)
Availability of
closer substitute of the commodity.
(ii)
Proportion of
total expenditure spent on the commodity.
(iii)
Habits of the
consumers.
(iv)
Time period
(v)
Nature of the
commodity.
11.
Greater the
availability of the close substitutes of a commodity, higher is the price
elasticity of demand for a commodity.
12.
Greater is the
proportion of total budget spent on a particular commodity, more elastic is the
demand for it. The demand for cloth and food articles is elastic whereas that
for salt and match box is inelastic.
13.
Larger the time
horizon, more elastic is the demand for a commodity. The demand for a commodity
is inelastic in the short period and elastic in the long period.
14.
Demand for essential
products is likely to be inelastic. On the other hand, the demand for luxuries
is relatively elastic.
15.
There are three
methods of measuring price elasticity of demand:
(i)
total
expenditures method
(ii)
percentage method
(iii)
geometrical
method.
16.
Under total expenditure
method, elasticity of demand can be measured in terms of changes in total
expenditure due to change in the price of commodity. There are three cases: (i)
ed= 1, when due to rise or fall in price of a good, total expenditure
remains unchanged (ii) ed> 1, when due to fall in price, total
expenditure goes up and due to rise in price, total expenditure goes down and
(iii) ed=<1 and="" down="" due="" expenditure="" fall="" goes="" in="" o:p="" price="" rise="" to="" total="" up.="" when="">1>
17.
Under percentage
method, the formula of measuring price elasticity of demand is:
Ed= % change in quantity
demand/% change in its own price = Δq/Δp . p/q
The value of price elasticity of
coefficient varies between zero and infinity.
18.
Under geometrical
method, price elasticity of demand at ascertain point along with a straight line
demand curve is equal to the lower segment divided by the upper segment of the
demand curve at that point. It is expressed as:
Ed= lower segment of the demand
curve/ upper segment of the demand curve
19.
If the demand
curve is vertical (or horizontal). The price elasticity is zero(or infinity).
In case, elasticity is equal to one, the demand curve is a rectangular
hyperbola.
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