Elasticity of Demand

Introduction:

The concept of elasticity of demand was first introduced by the classical economists A.A. Cournot and J.S. Mill. Later on, neo-classical economist Alfred Marshall developed it in a scientific way in his book Principles of Economics published in 1890.

Elasticity is a measure of the responsiveness change in the demand of the quantity and its supplied to change in any of its determinants. Like its price, the income of the consumers, prices of complementary or substitute goods, etc. In other words, the ratio of percentage change in the demand of the commodity to change in its determinants. In short, we also say “Elasticity”, an economic tool which measures the behavior of buyers and supplier as per change in its determinants. It allows us to analyze the demand and supply function with full of accuracy.

Following definition can clear your concept about the elasticity of demand:

According to Alfred Marshall

“The elasticity of demand in a market is great or small according to as the amount demanded increases much or little for a given fall in the price and diminishes much or little for a given rise in the price.”

Importance of elasticity of demand

Price elasticity of demand states that price and quantity demanded of the commodity have an inverse relation. When the price for particular commodity increases, its demand decreases and vice-versa. This law says us, how much quantity demanded at a particular price, but this law doesn’t say us the degree of change in demand due to a change in price. In other words, this law doesn’t explain how much demand for commodity increases or decreases due to a decrease or increase in prices. Alfred Marshall developed the concept of elasticity of demand to answer this question.

Types of Elasticity of Demand

Mainly elasticity of demand is categories into three types ie. Elastic, Inelastic and Unitary Demand

Elastic Demand

From the above figure, we can see that when the price of the commodity decrease by 10%, its demand increased by 20%. This type of demand for the commodity called elastic demand.

Inelastic Demand

From the above figure, we can see that when the price of the commodity decrease by 20%, its demand only increased by 10%. This type of demand for the commodity known as inelastic demand.

To know more about elastic and inelastic demand

Unitary elastic Demand

If the percentage change in quantity demanded by the commodity is equal to the percentage change in its price. Demand for the commodity known as unitary elastic demand.

For Example:

If the change in quantity demanded by 20% and change in its price by 20%.

Price elasticity of demand= Percentage change in quantity demanded/Percentage change in price=20%/20%=1

Graphical Representation:

Types of Elasticity of demand on the basis of determinants

There are major three types of elasticity of demand on the basis of determinants:

1. Price elasticity
2. Income elasticity
3. Cross elasticity

Price Elasticity of demand

Price elasticity of demand is a measure of how much the quantity demanded of good changes, responds to a change in the price of that good. The price elasticity of demand for any goods measures the change in consumer behavior due to a change in price. Thus, the elasticity reflects the many economic, social, and psychological forces that shape consumer tastes. Demand for a good changed by more percentage than the percentage change in price. These types of demand known as elastic demand. And Demand for a good changed by less percentage than the percentage change in price. These types of demand known as inelastic demand.

Formula for Price Elasticity of Demand:

Economists compute the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in price. Mathematically,

Example of computing price elasticity of demand

Types of Price elasticity of demand

• Perfectly Elastic Demand
• Perfectly inelastic Demand
• Unitary elastic Demand
• Relatively elastic Demand
• Relatively inelastic Demand

Perfectly elastic Demand (E_p=∞)

If a  miserable (very very nearly to zero) change in the price of goods leads to an infinitely large change in quantity demanded, it is perfectly elastic demand. In a graphical way, it’s visible as no change in price leads to an infinite change in quantity demanded. It is only a theoretical concept, hardly found in practice or real life.

For Example:

If the quantity demanded increase to ∞ due to no change in price.

Price elasticity of demand= Percentage change in quantity demanded/Percentage change in price=∞/0=∞

Graphical Representation:

Perfectly inelastic demand (E_p=0)

If the quantity demanded of the commodity does not change with the change in its price. Demand that commodity known as perfectly inelastic. Such types of elasticity are in the case of goods like medicine, salt, etc.

For Example:

If the change in quantity demanded for salt is o due to change in price.

Price elasticity of demand= Percentage change in quantity demanded/Percentage change in price=0/Any amount=0

Graphical Representation:

Unitary elastic Demand (E_p=1)

If the percentage change in quantity demanded by the commodity is equal to the percentage change in its price. Demand for the commodity known as unitary elastic demand.

For Example:

If the change in quantity demanded by 20% and change in its price by 20%.

Price elasticity of demand= Percentage change in quantity demanded/Percentage change in price=20%/20%=1

Graphical Representation:

Relatively elastic Demand

If the percentage change in the quantity demand for the commodity is more than the percentage change in its price. it known as relatively elastic demand. Such kinds of demand are in the case of luxury goods like cars, jewelers, refrigerators, etc.

For Example:

If the price falls by 10% causes rises in quantity demanded by 20%. Then,

Price elasticity of demand= Percentage change in quantity demanded/Percentage change in price=20%/10%=2

Graphical Representation:

Relatively inelastic Demand

The percentage change in the quantity demand for the commodity is less than the percentage change in its price. Its called relatively inelastic demand. We can see such types of elasticity in basic goods like rice, vegetables, clothes, etc.

For Example:

If the price falls by 20% causes rises in quantity demanded by 10%. Then,

Price elasticity of demand= Percentage change in quantity demanded/Percentage change in price=10%/20%=0.5

Graphical Representation:

Check Your Level of Knowledge

Decreasing in the demand of commodity due to increases in price Law of Supply Law of Elasticity of demand Law of price elasticity of demand Law of Demand

In which elasticity of demand 'Salt' is falls.......... Perfectly elastic demand Perfectly inelastic demand Unitary elastic demand Relatively elastic demand Relatively inelastic demand

Why economist introduced the concept of price elasticity of demand ? To measure how much quantity demanded at a particular price To know the degree of change in demand due to a change in price.

In which of the following goods the relatively elastic demand fall into? Normal goods Luxury goods Inferior goods

Some Important Questions:

Related Articles:

• Demand – Concept |Demand Function | Law of Demand
• Income elasticity of Demand
• Cross elasticity of demand