Note on Concept of Elasticity of Demand

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CONCEPT OF ELASTICITY OF DEMAND

source:www.slideshare.net
source:www.slideshare.net

The elasticity of demand is a measure of a degree of responsiveness of quantity of a product to the change in its determinants. If the demand is more elastic, then a small change in price will cause a large change in the quantity consumed. If the demand is less elastic, then it will take large changes in price to make a change in the quantity consumed. The concept of elasticity of demand shows how much or to what rate the quantity demanded of a commodity will change as a result of a change in the price.

According to K.E. Boulding, "The elasticity of demand may be defined as the percentage change in the quantity demanded which would result from one percent change in its price".

According to Prof. Meyers, "Elasticity of demand is a measure of the relative change in the amount purchased in response to any change in price or a given demand curve".

According to Lipsey, "Elasticity of demand may be defined as the ratio of the percentage change in demand to the percentage change in price".

According to Mrs. John Robbins, "The elasticity of demand at any price or at any output is the proportional change to the amount purchased response to a small change in price, divided by the proportional changes of price".

In brief, the elasticity of demand is defined as the proportionate change in quantity demanded divided by the proportionate change in its determinants like price, income, etc.

Symbolically,

Elasticity of demand (Ed) = {percentage change in quantity demand/percentage change in determinants of demand

 

TYPES OF ELASTICITY OF DEMAND

source:businessjargons.com
source:businessjargons.com

Generally, there are three types of Elasticity of demand. They are :

  1. Price Elasticity of Demand (Ep)
  2. Income Elasticity of Demand (Ey)
  3. Cross Elasticity of Demand (Exy)

 

Price Elasticity of Demand (EP)

The proportionate change in quantity demanded for a goods due to the proportionate change in price of goods, other things remaining the same is called price elasticity of demand. Price elasticity is usually symbolized by 'Ep' and written as:

    Ep = \(\frac{\%\:of\:change\:in\:commodity\:demand}{\%\:of\:change\:in\:price}\)

 

    Ep =\(\frac{\frac{\Delta Q}{Q}\:X\:100 \%}{\frac{\Delta P}{P}\:X\:100\%}\)

    i.e. Ep =\(\frac{ΔQ}{ΔP}\) X \(\frac{P}{Q}\)

Where,

Ep = Price elasticity of demand

Δ  = Small change

Q  = Quantity demand

P  = Price 

 

 

DEGREE / TYPES OF PRICE ELASTICITY OF DEMAND

Price elasticity of demand can be discussed under the following five types:

i) Perfectly Elastic Demand (Ep = ∞)

If the quantity demanded for a goods increases infinitely with a small fall in price or becomes zero with small rise in price, then it is called perfectly elastic demand. 

 

s

 

In the given figure, the price is measured in OY-axis and quantity demanded is measured along the OX-axis. PD is the demand curve which is parallel to OX-axis. Perfectly elastic demand shows that quantity demanded for a goods increases infinitely with a small fall in price or becomes zero with a small rise in price. 

 

ii) Perfectly Inelastic Demand (Ep = 0)

If the quantity demanded for a goods doesn't change with any change in price of the goods, then it is called perfectly inelastic demand. 

s

In the given figure, the price is measured in OY-axis and quantity demanded is measured along the OX-axis. QD is the demand curve which is parallel to OY-axis. Here, whatever be the price either OP1 or OP2 or OP quantity demanded is same as OQ. 

 

iii) Relatively Elastic Demand (Ep > 1)

If the proportionate change in quantity demanded for a goods is more than the proportionate change in price of the goods, then it is called relatively elastic demand.

s

In the given figure, the price is measured along OY-axis and quantity demanded is measured along OX-axis. D1D is the demand curve which is relatively elastic. Here, increase in quantity demanded from OQ1 to OQ2 is more than the decrease in price from OP2 to OP1. Thus, it indicates perfectly elastic demended.

 

 

iv) Relatively Inelastic Demand (Ep < 1)

If the proportionate change in quantity demanded for a goods is less than the proportionate change in price of the goods, then it is called relatively inelastic demand.

s

In the given figure, the price is measured along OY-axis and quantity demanded is measured along the OX-axis. D1D is the demand curve which is relatively inelastic. Here, the increase in quantity demanded for a goods from OQto OQis less than the decreass in price of thr goods from OP2 to OP1. So, it indicates relatively inelastic demand. 

 

v) Unitary Elastic Demand (Ep = 1)

If the proportionate change in quantity demanded for a goods is equal to the proportionate change in price of the goods, then it is called unitary elastic demand.

s

In the given figure, the price is measured along OY-axis and quantity demanded is measured along the OX-axis. D1D is the demand curve which is unitary elastic, Here, the increase in quantity demanded for a goods from OQ1 to OQ2 equal to the decrease in price of goods from OPto OP1. So, it indicates unitary elastic demand.

 

 

 

 

 

 

 

 

(Karna, Khanal, and Chaulagain)(Khanal, Khatiwada, and Thapa)(Jha, Bhusal and Bista)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

 

 

 

Types and subtypes of elasticity of demand

Price Elasticity of Demand (Ep)

  1. Perfectly Elastic Demand (Ep =∞)
  2. Perfectly Inelastic Demand (Ep=0)
  3. Relatively Elastic Demand (Ep>1)
  4. Relatively Inelastic Demand (Ep<1)
  5. Unitary Elastic Demand (Ep=1)

Income Elasticity of Demand (Ey)

  1. Zero Income Elasticity of Demand (Ey=0)
  2. Positive Income Elasticity (Ey>0)
  3. Negative Income Elasticity (Ey<0)

Cross Elasticity of Demand (Exy)

  1. Positive Income Elasticity (Exy>0)
  2. Negative Income Elasticity (Exy<0)

 

 

 

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