ELASTICITY OF DEMAND, ITS TYPES AND DEGREES OF PRICE ELASTICITY OF DEMAND.

 INTRODUCTION

Law of Demand merely tells us that there is an inverse relationship between price of a commodity and its quantity demanded. It is a qualitative statement which describes only the direction of change in demand with change in its price.

MEANING

A technical term elasticity of demand is used to measure the degree of this responsiveness in the demand for a good to a change in its price, income or price of related commodity.

        This concept was developed b economists like J.S.Mill, Cournot etc. but the credit of its scientific presentation goes to Marshall.




PRICE ELASTICITY OF DEMAND

Price elasticity of demand establishes a quantitative relationship between the quantity demanded of a commodity and its price while other factors remain constant. It is expressed as a proportion at which quantity demanded changrs with change in its price.

Definition

" The price elasticity of demand measures the responsiveness of the quantity demanded changes with the change in its price."

Formula:

Ed = Proportionate change in quantity demanded / Proportionate change in price


It should be noted that the co efficient of elasticity of demand is always negative because there is an inverse relationship between the price and the quantity demanded.

DEGREES OF PRICE ELASTICITY OF DEMAND

On the basis of responsiveness of the quantity demanded to change in the price, there are five degrees of elasticity of demand .

1. Perfectly elastic demand - When at any given price, the quantity demanded rises to any level, the demand is said to be perfectly elastic. The shape of the demand curve is horizontal straight line as shown in the figure


Demand curve is parallel to X-axis. The figure shows that at given price OP, the demand is infinite. A slight rise in price will reduce the demand to zero. This is a rare case which is hard to find in the real world.

2. Perfectly inelastic demand-If with the change in price, there is no change in demand at all, the demand is said to be perfectly inelastic. The elasticity of demand in this case is zero at all the points of such a curve. The demand curve is vertical straight line parallel to Y-axis.



3.Unitary elastic demand- If proportionate or percentage change in demand of a commodity and proportionate change in its price are equal, it is said to be unitary elastic demand.

EXAMPLE-If 10% fall in price is followed by 10% extension in demand.

    Ed= -(-) 10% /10%


a demand curve is called rectangular hyperbola.

4.Relatively elastic demand - A relatively elastic demand is one in which a given proportionate change in price attended b a more than proportionate change in quantity demanded and hence the coefficient of elasticity of demand is greater than one.

       Ed >1

The demand curve in this case will be flatter or gradually sloping.



5.Less elastic demand - A relatively less elastic demand is one in which a given percentage change in price is attended by less than proportionate change in demand and hence the coefficient of elasticity of demand is less than one.

     Ed<1

The demand curve in this case is relatively steeper.




INCOME ELASTICITY OF DEMAND

Income elasticity of demand explains the responsiveness of change in demand to a change in income.

Ey= %change in demand / %change in income

INCOME                            DEMAND

10000                                        50

20000                                        80

30000                                        120




CROSS ELASTICITY OF DEMAND

Cross elasticity of demand explains "  the responsiveness of change in price of  a good to a change in price of another (related good)." Thus, there exists quantitative relationship between price and demand of complementary goods and substitute . It is also of positive nature because there exists a direct relationship between price of a good and demand of related good.

Ec = %change in demand for good X / %change in price of Y good.




Suppose, price of butter falls by 20% and demand of cars rises by 10%. Then, Ec= -10/20=-0.5  (less elastic)










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