Price elasticity of demand

Price elasticity of demand is the responsive of the quantity demanded of a good to a change in its price. It is defined as the percentage change in quantity demanded divided by the percentage change in price. Symbolically the price elasticity of demand is expressed as under Ep = percentage change in quantity demanded Percentage change in price The price elasticity of demand tells us the relative amount by which the quantity demanded will change in response to a change in the price of a particular good. For example if the there is 10% rise in the price of tea and it leads to reduction in its demand by 20% the price elasticity of demand will be Ep =-20

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Degrees of price elasticity of demand

We have stated that demand for a product is sensitive or responsive to price changes. The variation in demand is however not uniform with a change in price. In case of some products a small change in price leads to relatively larger change in quantity demanded fro example a decline of 1% in price leads to 8% increase in the quantity demanded of a commodity in such a case the demand is said to elastic. There other products where the quantity demanded is relatively unresponsive to price changes. A decline of 8% in price for example gives rise to 1% increase in quantity demanded demand here is said to be inelastic. 1) Perfectly elastic demand: A demand is perfectly elastic when with a small increase in price of a good its quantity demanded drops down immediately to zero. Perfect elasticity implies that want at a ruling price. If any producer tries to charge even one penny more no one would buy his product people would prefer to buy from another producer who sell the good at the prevailing market price.

2) Perfectly inelastic demand: when the quantity demanded of a good does not change at all to whatever change in price the demand is said to be perfectly inelastic or the elasticity of demand is zero

3)Unitary elasticity of demand: when the quantity demanded of a good changes by exactly the same percentage as price the demand is said to has a unitary elasticity for example a 30% change in price leads to 30% change in quantity and the result would be 1

4)Elastic demand: if a one percent change in price causes greater than a one percent change in quantity demanded of a good the demand is said to be elastic alternatively we can say that elasticity of demand is greater than 1. For example 10 % change in price would lead to 20% change in the quantity demand

Inelastic demand: when a one percent change in price causes a less than one percent change in the quantity demanded of a commodity the demand is said to be relatively inelastic. The elasticity of a good is here less than 1 or less than unity. For example 30% change in price leads to 10% change in quantity demanded of a good.

Types of elasticity of demand

The quantity of a commodity demanded per unit of time depends upon various factors such as the price of a commodity, the money income of consumers, the prices of related goods, the taste of the peoples, etc ., etc Whenever there is change in the quantity of the commodity purchased over a specified period of time. The elasticity of demand measures the responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant. When the relative responsiveness of sensitiveness of the quantity demanded is measured to changes in its price, the elasticity is said be price elasticity of demand. When the change in demand is the result of the given change in income its name income elasticity of demand. Some times a change in the price of one good causes a change in the demand for other. The elasticity here is called cross elasticity of demand. The three main types of elasticity are now discussed in brief.

1)price

elasticity of demand

The concept of price elasticity of demand is most commonly used in economic literature. Price elasticity of demand is the responsiveness of quantity demanded to a change in price. The formula for price elasticity of demand is the ratio of percentage change in quantity demanded for a good to the percentage change in price stated mathematically Price elasticity of demand= %change in quantity of demanded % change in price q Q 100 =q p p q p p100 the concept of price elasticity of demand can be used to divide the goods into three groups 1)elastic 2)inelastic 3)unitary elastic

Income elasticity of demand

Income elasticity of demand can be defined as the ratio of percentage in the amount of a good purchased per unit of time to a percentage change in the income of a consumer. The formula for the income elasticity of demand is the percentage change in demand divided by the percentage change in income putting this in symbols gives: Ey=%q %p

Cross elasticity of demand

Cross elasticity of demand measures the degree of responsiveness of the quantity demanded of one good B to changes in the price of another good A The formula for measuring the cross elasticity of demand is Exy=% change in quantity demanded of B = %QB % change in price A %PA

Factors determining price elasticity of demand

1)Nature of commodities: in developing countries of the world the per capital income of the people is generally low. They spend a greater amount of their income on the purchase of necessaries of life such as wheat milk course cloth etc. they have

to purchase these commodities whatever be their price. The demand for goods of necessities is therefore less elastic or inelastic. The demand for luxury goods on the other hand is greatly elastic. For example if the price of burger falls its demand the cities will go up. 2) Availability of substitutes: if a good has greater number of close substitutes available in the market the demand for the good will be greatly elastic for example if the price of coca cola rises in the market people will switch over to the consumption of pepsi cola which is its close substitute so the demand for coca cola is elastic. 3)proportion of the income spent on the good: if the proportion of income spent on the purchase of a good is very small, the demand for such a good willl be inelastic. For example if the price of a box of matches or salt rises by 50%, it will not affect the consumers demand for these goods. The demand for salt maker box therefore will inelastic. On the other hand if the price of a car rises from 6 lakh to 9 lakh and it takes a greater portion of the income of the consumers, its demand would fall. The demand for car is therefore elastic. 3) Addiction: if a product is habit forming say for example cigarette the rise in its price would not reduce much change in demand. The demand for habit forming good is therefore less elastic.