Introduction to Economics - Elasticity of Demand
The Law of Demand Indicates the direction of change in the quantity demanded of a result of change in price. It doesnot fell in the extend by which the demand with change in response to change in price of the product economist here ease and measure the responsiteness of quantity demanded to a change in price by the concept of elasticity of demand.
Elasticity of demand shows the expension and contraction in demand with respect to change in price.
* 1 Price Elasticity of Demand
* 2 Degree Of Price Elasticity Of Demand
* 3 Measurement of Prize Elasticity of Demand
* 4 Types of Elasticity
* 5 Factors Determining Elasticity of Demand
* 6 Conclusion
Price Elasticity of Demand
Price Elasticity of demand response the expension or contraction in demand is response to change in price.
Ep = Proportunate change in quantity demand / Proportunate change in price
Ep = D f/q / Dp/p
Degree Of Price Elasticity Of Demand
Degree of elasticity of demand falls into five catagories.
1. Perfectly elastic demand
2. Perfectly Inelastic demand
3. Unitory elasticity
4. Relatively elastic demand
5. Relatively Inelastic demand
1. Perfectly Elestic Demand.
A demand is properly elastic demand when amount demanded of a good at the ruling price is infinite. Imperfectly elastic demand when ruling price fall the consumer by much good while when price level increase the consumer leave the use of product or says demand is equal to zero.
2. Perfectly Inelastic Demand.
Perfectly Inelastic demand shows that there is no change in demand is response to change in prize. It refers the elasticity of demand is equal to zero.
3. Unitary Elasticity of Demand
Such demand in which percentage change in price is equal to percentage change in quantity we said the demand is unitary elastic.
4. Relatively Elastic Demand
Relatively elastic demand shows the percentage change in quantity demanded is higher is response to percentage change in price like suppose the 10% change in price leads the 20% change in quantity then.
5. Relatively Inelastic Demand
Relatively Inelastic shows that % change in quantity is less in response to % change in prize.
When, Ed < 1, we said Relatively inelastic demand.
Measurement of Prize Elasticity of Demand
There are three methods of measuring elasticity of demand.
1. Revenue Method
2. Propotional Method
3. Graphic Method
1. Revenue Method
According to this method elasticity of demand can be measured from the change in the total revenue of the firm as the increase or decrease the prices of the goods.
Elasticity is expressed in three ways.
A. Unit elastic demand
B. Elastic demand
C. In elastic demand
A. Unit Elastic Demand
When the increase or decrease in the price of goods leads to firm total revenue remain the same we said this is Unit Elastic Demand.
A Negatively r/s small changes in price of the good and the total revenue of the firm. When a firms lowers the prize its total revenue rises and when it increase the price of a good its total revenue falls.
C. Inelastic Demand
In case of Inelastic demand a relation exist between change in price of a good and the total revenue of the firm.
When a firm raise the price of a good its total revenue goes up and when its lower the prize the total revenue of the firm goes down.
Price of Per Dozens (Rs) P | Quantity Demanded Q | Total Revenue TR = PxQ | Elasticity
1.50 ................................. 3 ........................... 4.50 ...................... > 1
1.25 ................................. 4 ........................... 5.00
1.00 ................................. 5 ........................... 5.00 ...................... = 1
0.75 ................................. 6 ........................... 4.50
0.60 ................................. 7 ........................... 4.20 ...................... < 1
0.50 ................................. 8 ........................... 4.00
2. The Propotional Method Or Percentage Method
This method relates to point elasticity we coupare the % change in price with the % change in demand. The elasticity of demand is the ratio of % change in quantity demanded of a product to the % change in price.
Elasticity of Demand = Propotionate change in demand / Propotionate change in price
Elasticity of Demand always Negative but we taken positive value between we noted fallen price in followed by rise in demand means demand is always Negatively Sloped.
3. Geometric Measurement of Elasticity OR The Point Method.
The price elasticity of demand also be measured at any point on the demand curve. It is noted that demand is unitory at mid point of demand curve the total revenue is maximum at this point. Any point above unitory point shows elasticity is greater than 1 ( means price relation in this point leads to an increase in the total revenue.
Any point below midpoint below midpoint shows elastic is less than 1 means price relation in these point lead to reduction in the total revenue.
Qs. Define Elasticity of Demand and distinguish between point Elasticity and are elasticity?
The point elasticity regers to elasticity of demand at a point of demand curve. the change in price and reseltant changed in demand are very very Small.
We use are of demand curve to measure elasticity when price changed are big we use the average of the two prices.
Are elasticity is a measure of the measure responsivemess to price changes exhibited by a demand curve over same finite strech the curve.
PM is an are which measures elasticity over a certain range of prices and quantities. We noted from the fig. that elasticity is difference of different point.
Now suppose at point P on the demand.
These results shows that the point method of measuring elasticity at two Points on a demand curve gives different elasticity Coefficient.
In order to avoid this problem, we use an average of the two values is calculated on the basis of following formula
Q1 - Q2/Q1 + Q2 divided P1-P2/P1+P2
This result is more satisfactory then the two different elasticity coefficient arrived at by the point elasticity Method.
The closer the two points P and M are the more accurate will be the measure of elasticity on the basis of are elasticity.
Are elasticity is the elasticity of mid-point of P and M
Types of Elasticity
The demand depends upon various factors such as the price of a commodity, the money income of consumer the prices of related good the taste of the people etc.
The elasticity of Demand measures responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant.
There are three major types of elasticity.
1. Price elasticity
2. Income elasticity
3. Cross elasticity
1. Price Elasticity of Demand.
If measures the responsiveness of demand to small changes in price.
Ep = Proportionate change in quantity demand / Proportionate change in Price
2. Income Elasticity.
It measures the changes in Demand due to change in income.
Income Elasticity = Proportionate change in Quantity Demand / Proportionate Changes in Income
Measurement of Income Elasticity
Its measure in same way as price elasticity measure.
For Example: If the income of a consumer increases by 5% the prices of all other goods remain constant, the purchase of the consumer for good X increases by 10%.
If Income increase 5% and demand increases 5% is result than.
3. Cross Elasticity of Demand
It measures a change in price of one good causes a change in demand for another.
Change in price of substitutes goods result change in Demand for the goods.
Cross Elasticity of Substitutes
When such goods who are substitute to each other. Like Tea and Coffee, Butter & Jam etc. An increase in the price of one good result the increase in quantity demands for other.
Factors Determining Elasticity of Demand
There are several factors which determine the elasticity of demand.
1. For Necassary the Demand is Inelastic Or Less Elastic
For necassities of life demand do not effect much as response to change in price like (Salt, Wheat etc)
2. Demand for Luxuries is Elastic
When the price falls consumer buy more when price rise no one can purchase. These are the luxuries of life. Like we have to purchase a Flat in clifton buy a Car like BMW etc.
3. Demand for Substitutes is also elastic
When the price of one commodity increase demand for its substitutes increase.
4. Demand for Goods having Several Uses is Elastic
Coal is such a good Which is cheap and use for several purpose so demand for it is elastic.
5. Elasticity also depends on the Price Levels
If the price is either too high or low the demand will be less elastic.
6. Has If and Fashion
The demand for those goods which are habitually consumed or which are in fashion is elastic.
7. Future Expectation about Price Changer
If people think that price level include in future demand for it increases.
As we analyse these condition and sort that elasticity do not depend on a particular thing if changer time to time and place to place.