Price Elasticity of Demand
Price elasticity of demand is a measure of the degree
of change in demand of a commodity to the change in price of that commodity. In other words, price
elasticity of demand is the rate of change in quantity demanded in response to
the change in the price. It is often referred to as ‘price elasticity’ and is
denoted by Ep or PED.
The price elasticity of demand is defined as the percentage
change in quantity demanded due to certain percentage change in price.
Where, EP= Price
elasticity of demand
q= Original quantity demanded
∆q = Change in quantity demanded
p= Original price
∆p = Change in price
Calculation
of Price Elasticity of Demand
Suppose that price of a commodity falls down from Rs.10 to Rs.9
per unit and due to this, quantity demanded of the commodity increased from 100
units to 120 units. What is the price elasticity of demand?
Give that,
p= initial price= Rs.10
q= initial quantity demanded= 100 units
∆p=change in price=Rs. (10-9) = Rs.1
∆q=change in quantity demanded= (120-100) units = 20 units
Now,
The quantity demanded increases by 2% due to fall in price by Re.1.
1. Perfectly Elastic Demand (EP = ∞)
The demand is said to be perfectly elastic if the quantity
demanded increases infinitely (or by unlimited quantity) with a small fall in
price or quantity demanded falls to zero with a small rise in price. Thus, it
is also known as infinite elasticity. It does not have practical importance as
it is rarely found in real life.
In the given figure, price and quantity demanded are measured
along the Y-axis and X-axis respectively. The demand curve DD is a horizontal straight line parallel to
the X-axis. It shows that negligible change in price causes infinite fall or
rise in quantity demanded.
2. Perfectly Inelastic Demand (EP = 0)
The demand is said to be perfectly inelastic if the demand
remains constant whatever may be the price (i.e. price may rise or fall). Thus
it is also called zero elasticity. It also does not have practical importance
as it is rarely found in real life.
In the given figure, price and quantity demanded are measured
along the Y-axis and X-axis respectively. The demand curve DD is a vertical straight line parallel to the
Y-axis. It shows that the demand remains constant whatever may be the change in
price. For example: even after the increase in price from OP to OP2 and fall in price from OP to OP1, the quantity demanded remains at OM.
3. Relatively Elastic Demand (EP> 1)
The demand is said to be relatively elastic if the percentage
change in demand is greater than the percentage change in price i.e. if there
is a greater change in demand there is a small change in price. It is also
called highly elastic demand or simply elastic demand. For example:
If the price falls by 5% and the demand rises by more than 5% (say 10%), then it is a case of elastic demand. The demand for luxurious goods such as car, television, furniture, etc. is considered to be elastic.
In the given figure, price and quantity demanded are measured along the Y-axis and X-axis respectively. The demand curve DD is more flat, which shows that the demand is elastic. The small fall in price from OP to OP1 has led to greater increase in demand from OM to OM1. Likewise, demand decrease more with small increase in price.
4.
Relatively Inelastic Demand (Ep< 1 )
The demand is said to be relatively inelastic if the percentage
change in quantity demanded is less than the percentage change in price i.e. if
there is a small change in demand with a greater change in price. It is also
called less elastic or simply inelastic demand.
For example: when the price falls by 10% and the demand rises by less
than 10% (say 5%), then it is the case of inelastic demand. The demand for
goods of daily consumption such as rice, salt, kerosene, etc. is said to be
inelastic.
In the given figure, price and quantity demanded are measured along the Y-axis and X-axis respectively. The demand curve DD is steeper, which shows that the demand is less elastic.The greater fall in price from OP to OP1 has led to small increase in demand from OM to OM1. Likewise, greater increase in price leads to small fall in demand.
5. Unitary
Elastic Demand ( Ep = 1)
The demand is said to be unitary elastic if the percentage change
in quantity demanded is equal to the percentage change in price. It is also
called unitary elasticity. In such type of demand, 1% change in price leads to
exactly 1% change in quantity demanded. This type of demand is an imaginary one
as it is rarely applicable in our practical life.
In the given figure, price and quantity demanded are measured
along Y-axis and X-axis respectively. The demand curve DD is a rectangular hyperbola, which shows that the demand is
unitary elastic. The fall in price from OP to OP1 has caused equal
proportionate increase in demand from OM to OM1. Likewise, when price
increases, the demand decreases in the same proportion.
Adopted from: https://www.businesstopia.net/economics/micro/price-elasticity-demand
0 Reviews:
Post a Comment