PRICE ELASTICITY OF DEMAND CLASS 11 | CHAPTER 6 | ECONOMICS
Price Elasticity of Demand is defined as the measurement of percentage change in quantity demanded in response to a given percentage change in own price of the commodity. It is denoted by Ed (Elasticity of demand) or Ep (Price Elasticity of Demand).
Forms/Degrees of Elasticity of Demand
There are 5 Degrees of Elasticity of Demand.
Perfectly Elastic Demand
Perfectly Inelastic Demand
Highly Elastic Demand
Highly Inelastic Demand
Unit Elastic Demand
Measurement of Price Elasticity of Demand
1) Total outlay method or total expenditure – This relationship between price elasticity of demand and expenditure was given by Prof. Marshall. He estimates the degree of price elasticity of demand depending on the change in the total expenditure following a change in own price of commodity.
Under this method, there are 3 situations of elasticity of Demand.
Elastic demand – In this, the price of the commodity and total expenditure are inversely related. With fall in price, total expenditure increases and vice versa.
Inelastic demand – In this, price of the commodity and total expenditure are positively related. With rise in price, total expenditure rises and with fall in price, total expenditure also falls.
Unitary elastic demand – When total expenditure remains constant with increase or decrease in price of the commodity.
2) Percentage or Proportionate Method – Ed is measured by the ratio of the percentage change in quantity demanded in response to the percentage change in own price
% ∆ in QD=∆Q/Q×100
% ∆ in own price=∆P/P×100
3) Geometric or Point Method – It measures price elasticity of demand at different points on the demand curve. This method is used only with the reference to the linear demand curve which is a straight line demand curve.
Ped=(Lower segment)/(Upper segment)
Price elasticity of demand at different points on straight line Demand Cure
(i) ed =∞ (Perfect elastic demand)
NM/0=∞ (any real number divided by 0 towards infinity)
(ii) ed >1 (highly elastic demand)
AN/AM>1 (AN> AM)
(iii) ed = 1 (Unit elastic demand
(iv) ed < 1 (highly inelastic demand)
BN/BM<1 [BN < BM]
(V) ed=0 (Perfect inelastic demand)
Different Demand Curve
1)Ed = (Perfectly Elastic Demand Curve) – A situation when demand is infinite at the prevailing price. It is a situation where the slightest rise in price causes the quantity demanded falls to zero.
Ed=1/(SLOPE OF D.C) × P/Q = ∞
2) Ed = 0 (Perfectly Inelastic Demand Curve) – It is a situation when change in price causes no change in quantity. Even a little change in price does not impact the quantity demanded. Slope of vertical line is .
Ed=1/(SLOPE OF D.C) × P/Q = 0
3) Ed = 1 (Unit Elastic Demand) – It is a situation when percentage change in quantity demanded for a commodity is equals to percentage change in its price.
Factors Affecting Price Elasticity of Demand
Price Level – Elasticity of demand depends on the level of price of the concerned commodity. Elasticity of demand will be high at higher level of the price of the commodity and low at lower level of price.
Nature of Commodity – A commodity may be a necessity, comfort or luxury for a consumer. When a commodity is a necessity (for example food grains, salt, vegetables etc.), its demand is inelastic. When a commodity is a comfort (cooler, TV, mobile), its demand is unit elastic. When a commodity is luxury (car, air conditioner etc.), its demand is elastic.
Portion of Income Spent on Commodity – Consumers spent small portion of income on some goods like needled, newspaper etc. such goods have inelastic demand. The goods on which the consumer spend large portion of his income like clothes, furniture etc. have elastic demand.
Availability of Substitutes – Goods which have large number of close substitutes like pen, cold drinks etc have more elastic demand. Goods with no or very less substitutes like petrol, liquor etc have inelastic demand.
Postponement of Use – Demand will be elastic for those commodities whose consumption can be postponed for future like car, house etc. the commodities w hose consumption cannot be postponed like food, medicine etc have inelastic demand.
Income of Consumer – The high income group will not care about price so demand will be inelastic where as the demand will be elastic for low income groups.
Diversity of Uses – Commodities that can be put to a variety of uses have elastic demand. For example milk, electricity etc. Whereas if a commodity has only a few uses, its demand is less elastic. (like paper).
Habits of Consumer – If a consumer is habitual of a commodity, he will continue to consume it even at a higher price, thus the demand for the commodity will be elastic and vice versa.
Time Period – Demand is elastic in short period but elastic in long period. It is because, in the short run can not change his consumption habits where as in long run he can change more conveniently.
Elasticity of Demand for Two Intersecting Demand Curve
If two negatively sloped demand curve intersect each other than the point of intersection, flatter demand curve (DD) is more elastic than steeper one (D1D1)
If the price is OP and the quantity. demanded is OQ at point E. When the price falls from OP to OP’, the quantity demanded increases from OQ to OQ1 for D1D1 demand curve and from OQ to OQ2 for DD demand curve.
It is clear from the diagram that the change in demand OQ2 (DD demand curve) is more than change in demand OQ (D1D1 demand curve), with the same change in price (PP1). Therefore DD is more elastic than D1D1.