The proportionate change in the quantity demanded of a commodity due to a proportionate change in the price of the commodity is called Price Elasticity of Demand.
Consumers usually buy more when the price of the commodity falls and tends to buy less when the price of the commodity rises. Sometimes, with a greater change in the price of the product, the demand for that product does not change much and there can be a case where a slight change in the price of the commodity affects demand in a greater way. In Price Elasticity of Demand, the quantitative aspect of demand is studied. We will see the size of the movement of quantity demanded of a commodity related to its price.
The Price Elasticity of Demand for any goods measures the willingness of the consumers to buy less of the goods when the price rises and more of the goods when the price falls. Price Elasticity of Demand is one of the three types of elasticity of demand. The other two types of elasticity of demand are Income Elasticity of Demand and Cross Elasticity of Demand.
Elasticity of Demand
The degree of change (or the degree of extension or contraction in the demand curve) in response to a change in any economic factor related to the demand of a product is called Elasticity of Demand. The elasticity of demand is a measurement of the degree of change in demand in response to a given change in any factor which affects demand.
However, an important point here is that we always consider the percentage change in the values rather than considering the absolute value while calculating the elasticity of a commodity. Thus, we compare the percentage change in quantity demanded of a particular product to the percentage change in any other factor which affects demand (Price, Income, etc.).
Measurement of Price Elasticity of Demand (Two important methods of measuring Price Elasticity of Demand)
1. Proportionate or Percentage Method: This is the most popular method of measuring the price elasticity of demand. Under this method, Elasticity of Demand is measured by the ratio of the proportionate (percentage) change in quantity demanded to the proportionate change in the price of the commodity.
2. Geometric Method: Geometric method measures the price elasticity of demand at different points on the demand curve. It is also called the 'Point Method of measuring Elasticity of Demand'.
Degrees or Types of Price Elasticity of Demand
There are five distinct degrees or types by which various degree of elasticity is measured and graphically presented.
1. Perfectly Elastic Demand: A perfectly elastic demand refers to a situation where the demand is infinite at the prevailing price. It is a situation where the slightest rise in price causes the quantity demanded of the commodity to fall to zero.
2. Perfectly Inelastic Demand: A perfectly inelastic demand curve refers to a situation when a change in price causes no change in the quantity demanded. Even a great change in price does not impact the quantity demanded.
3. Unitary Elastic Demand: It refers to a situation when a change in quantity demanded in response to a change in own price of the commodity is such that total expenditure on the commodity remains constant.
4. Greater than Unitary Elastic Demand: Elasticity of Demand is greater than unitary elastic when a change in quantity demanded in response to a change in the price of the commodity is such that total expenditure on the commodity increases when the price decreases and total expenditure decreases when the price increases.
5. Less than Unitary Elastic Demand: Elasticity of Demand is less than unitary elastic when a change in quantity demanded in response to a change in the price of the commodity is such that the total expenditure on the commodity increases when the price rises and decreases when the price falls.
Elasticity of Demand | Degree |
|---|---|
Perfectly Elastic Demand | Ed=∞ |
Perfectly Inelastic Demand | Ed=0 |
Unitary Elastic Demand | Ed=1 |
Greater than Unitary Elastic Demand | Ed>1 |
Less than Unitary Elastic Demand | Ed<1 |
Factors affecting Price Elasticity of Demand
1. Nature of Commodity: he elasticity of demand depends on the type of commodity. Necessities like salt, oil, and textbooks usually have inelastic demand, while luxuries like air conditioners and fashionable clothes have elastic demand..
2. Availability of Close Substitutes: Goods with close substitutes have elastic demand because consumers can easily switch to another product. Goods with no close substitutes have inelastic demand because consumers have no other option even if the price ris
3. Diversity of Uses: Commodities that can be put to a variety of uses have elastic demand. On the other hand, if a commodity such as paper has only a few uses, its demand is likely to be less elastic.
4. Income Level of the Buyer: Elasticity of demand also depends on the income of consumers. If consumers have high income, demand is usually less elastic because price changes do not affect them much. If consumers have low income, demand is more elastic because price changes affect their purchasing power.
5. Time Horizon: Demand is usually inelastic in the short run because consumers cannot quickly change their habits. In the long run, demand becomes more elastic as consumers can find substitutes or change their consumption.
Importance of Elasticity of Demand
1. Factor Pricing: Helps determine the rewards paid to factors of production based on their demand
2. Paradox of Poverty amidst Plenty: When crop supply increases but demand is inelastic, prices fall and farmers’ income decreases.
3. Decisions of Monopolist: A monopolist sets low prices for elastic demand and high prices for inelastic demand..
4. Formulation of Government Policies: Helps the government decide tax rates—higher tax on inelastic goods and lower tax on elastic goods.
5. International Trade: Helps countries decide export prices based on the elasticity of demand in other countries.