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Elasticity of Demand BBS1

The elasticity of demand refers to the responsiveness of demand to changes in factors that determine demand, such as a product's price. There are different types of elasticity of demand, including price elasticity, which measures the responsiveness of quantity demanded to a change in price. Price elasticity can range from perfectly elastic demand, where a small change in price leads to an infinite change in quantity demanded, to perfectly inelastic demand, where changes in price result in no change in quantity demanded.

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43 views2 pages

Elasticity of Demand BBS1

The elasticity of demand refers to the responsiveness of demand to changes in factors that determine demand, such as a product's price. There are different types of elasticity of demand, including price elasticity, which measures the responsiveness of quantity demanded to a change in price. Price elasticity can range from perfectly elastic demand, where a small change in price leads to an infinite change in quantity demanded, to perfectly inelastic demand, where changes in price result in no change in quantity demanded.

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Elasticity of Demand

The elasticity of demand is the measure of responsiveness of demand for a commodity to the change in
any of its determinants viz. price of the same commodity, price of the related commodity, consumer’s
income, tastes and preferences of the consumer, consumer’s expectations regarding prices, etc. Law of
demand only shows the inverse relationship between price and quantity demanded of a commodity.
This law does not state the degree of change in demand due to change in price. But, the elasticity of
demand shows the rate of change in demanded in response to the change in its price. So, in simple
term, the responsiveness of change in the quantity demanded due to change in its price is termed as
elasticity of demand.
According to Prof. Alfred Marshall, “The elasticity of demand in a market is great or small according as
the amount demanded increases much or little for a given fall in price and diminishes much or little for a
given rise in price.”
Thus, the elasticity of demand refers to the responsiveness of change in demand to the change in factors
determining demand.
Types of Elasticity of Demand
There are as many elasticity of demand as its determinants. The most important types of
elasticity of demand are as follows.
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Advertisement elasticity of demand
Price Elasticity of Demand (Ep)
Price elasticity of demand is defined as the responsiveness of change in quantity demanded of a
commodity to the change in its price. In other words, the price elasticity of demand is defined
as the ratio of percentage change in quantity demanded to the percentage change in price. It
can be expressed as follow:

Percentage change∈quantity demanded


Ep =
Percentage change ∈ price

Change∈quantity demanded
x 100
Initial quantity demanded
=
Change∈ price
x 100
Initial price
∆Q
x 100
Q ∆Q P
= ∆P = ∆P x Q
x 100
P

∆Q P
∴ Ep = x
∆P Q
Where
Ep = Coefficient of price elasticity of demand
Q = initial quantity of demand P = initial price
∆ Q = change in quantity demanded ∆ P = change in price
Types (Degrees) of Price Elasticity of Demand
There are five types of price elasticity of demand. They are as follows:
1. Perfectly Elastic Demand (Ep = ∝)
Demand is said to be perfectly elastic if negligible change in price leads to infinite
change in the quantity demanded. Visibly, no change in price causes an infinite change
in demand.
Percentage change∈quantity demanded ∝
Ep = = =∝
Percentage change ∈ price 0

It can be shown by following figure


2. Perfectly Inelastic Demand (Ep = 0)
When the demand for a commodity does not change with the change in its price, the
demand is said to be perfectly inelastic demand. For example, medicine and salt have
perfectly inelastic demand.

Percentage change∈quantity demanded 0


Ep = = =0
Pe rcentage change ∈ price Any amount

It is shown by following figure

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