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The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its prices, price of other goods and change in consumers income. Thus, Elasticity measures the extent to which demand will change.
Price elasticity of demand is the ratio of the percentage change in the quantity demanded of a commodity to a percentage change in its price.
The concept of elasticity of demand is divided into five degrees which are: Perfectly Elastic Perfectly Inelastic Less than Unitary Elastic Greater then Unitary Elastic or ELASTIC
ED =
Price
120
150
Quantity
Price
4 3
ED = 0
120
Quantity
ED =1
2 0 120 150
Quantity demand
Price
ED > 1
D
120
160
Quantity
% change in demand is less than the % change in the price of the commodity.
A More Inelastic Demand Curve
4
Price 3
ED < 1
D 120 140 Quantity
Total expenditure method Proportionate method Point elasticity method Arc elasticity method Revenue method
In order to measure the elasticity of demand it is essential to know how much and in what direction the total expenditure changes as a result of change in the price of a good.
If total expenditure remains same, no matter price rises or falls, then the elasticity of demand is UNITARY. If, due to fall in price, TE goes up and due to rise in price TE goes down, then elasticity of demand is GREATER THAN UNITARY.
If, due to fall in price TE goes down and due to rise in price TE goes up, then elasticity of demand is LESS THAN UNITARY.
Price 6 5 6 5 6 5 Qty. 10 15 10 12 10 11 TE 60 75 60 60 60 55 PEd >1 =1 <1
R price N
Ed>1 B
Ed=1
M P O E D
C Ed<1
Total expenditure
Ed= (-)
It refers to price elasticity of demand at any point on the demand curve. Price elasticity of demand is different a different points on a demand curve. Accordingly, price elasticity at every point on a given demand curve is measured separately.
Ed = Ed > 1
Elasticity declines along demand curve as we move toward the quantity axis
Price
Ed = 1
Ed < 1 Ed = 0
1 2 3 4 5 6 7 8 9 10 Quantity
4 3 2 1
In case of point elasticity method, elasticity can be measured only if there is an infinitely small change in price and the quantity demanded.
This method is applied when there is huge change in the price and the quantity demanded.
D P P1 P2 A
ARC
B
C D
Price
Q Qty.
Q1
Q2
Availability of substitutes: goods having substitutes available like tea and coffee have elastic demand. whereas commodities that do not have any substitutes, e.g. liquor have inelastic demand.
Goods with different uses: goods that can be put to different uses have elastic demand. Like electricity. Postponement of the use: goods whose demand can be postponed have elastic demand. Income of the consumer: people having very high or very low income have inelastic demand. But for a middle income people, demand is elastic. Influence of habit and custom: Demand is inelastic if a consumer is habitual of a good. Proportion of income spent on a commodity: