By studying Law of demand, we know that demand of a
commodity is greatly influenced by the its price.
We learnt that increase in the price of the commodity causes contraction in demand, while decrease in price causes extension in demand.
We learnt that increase in the price of the commodity causes contraction in demand, while decrease in price causes extension in demand.
Thus, law of demand makes a qualitative statement only. It does not tell us about the
magnitute/degree of change in quantity demanded in response to change in the
price.
It only tells about the direction of change.
It only tells about the direction of change.
Degree of change in quantity demanded in response to
change in the price is the subject matter of Elasticity of Demand.
It makes a Quantitative statement.It tells us about the extent to which the demand responds to change in price.
It makes a Quantitative statement.It tells us about the extent to which the demand responds to change in price.
While measuring the degree of change in demand we
always consider percentage values, not the absolute values.
Price elasticity of demand is defined as a measurement of
percentage in quantity demanded in response to a given change in own price of
the commodity.
ep
= Percentage change in quantity demanded
Percentage change in price
(Where ep refers to price
elasticity of demand)
Kinds of Price Elasticity of Demand :
There are five
different kinds of price elasticity of Demand:
1) Perfectly Elastic Demand :
A Perfectly Elastic
Demand refers to a situation when demand is infinite at the prevailing price.
It is a situation where the slightest rise in the price causes the quantity demanded of the commodity to fall to zero.
It is a situation where the slightest rise in the price causes the quantity demanded of the commodity to fall to zero.
As shown in the
figure below. DD is the perfectly elastic demand curve, parallel to X axis.
 |
| elastic demand |
It shows that at
Price Rs.4, quantity demanded may be 10,20, 30 or more units i.e. demand for
the commodity is infinite. But if the price increased from Rs.4, the demand
falls to zero.And at price lower than Rs.4 an infinitely large quantity is
demanded.Cases of perfectly elastic demand curve is very rare.
ep = ∞
2) Perfectly Inelastic Demand :
A Perfectly
Inelastic Demand refers to a situation when change in price causes no change in
the quantity demanded.The elasticity of demand is zero.
As shown in the
figure below. DD is the perfectly inelastic demand curve, parallel to Y axis.
 |
| inelastic demand |
When price is Rs.2,
demand is for 4 units. When the price rises to Rs. 4 or Rs.6 quantity demanded
remains constant at 4 units.Hence, elasticity of demand is zero. Cases of
perfectly elastic demand curve are also rare.
3) Unitary
Elastic demand :
When a given
percentage change in the price of the commodity causes an equivalent percentage
change in the quantity demanded, then the elasticity of demand is said to be
unitary.
For example, if
there is a 10% change in the price of the commodity (rise/fall), the quantity
demanded will also change by 10% (rise/fall).
It is the situation when change in quantity
demanded in response to change in own price of the commodity is such that total
expenditure on the commodity remains constant.
As shown in the graph below, DD is the
unitary elastic demand curve.
 |
| unitary demand |
When price falls to OP1, quantity
demanded rises to OC,total expenditure is area
OCRP1.
Area
OBTP = Area OCRP1, implying that total expenditure remains constant even after change in
price of the commodity.
Gap BC is equal to PP1.
ep = 1
4)
Elastic Demand / Greater than unitary elastic demand :
When the percentage change in quantity demanded of a
commodity exceeds the percentage
change in its price, the elasticity of demand is greater than unitary.
For example, if
there is a 10% change in the price of the commodity (rise/fall), the quantity
demanded will change by 25% (rise/fall).
As shown in the graph below, DD is the
elastic demand curve. The demand curve
is flatter.
 |
| elastic demand |
When price is OP, quantity demanded is
OB,total expenditure is area OBTP.
When price falls to OP1, quantity
demanded rises to OC, total expenditure is area
OCRP1.
Area
OCRP1 > Area OBTP, implying that total expenditure increases in response to decrease in
price of the commodity.
Also the percentage increase in quantity
demanded is more than the percentage fall in the price. Gap BC is more than PP1.
ep > 1
Flatter the demand curve, greater is the elasticity.
5)
Inelastic Demand / Less than unitary elastic demand :
When the percentage change in quantity demanded of a
commodity is less the percentage
change in its price, the elasticity of demand is less than unitary.
For example, if
there is a 10% change in the price of the commodity (rise/fall), the quantity
demanded will change by 6% (rise/fall).
As shown in the graph below, DD is the
inelastic demand curve.
 |
| inelastic demand |
When price is OP, quantity demanded is OB,
total expenditure is area OBTP.
When price falls to OP1, quantity
demanded rises to OC, total expenditure is area
OCRP1.
Area
OCRP1 < Area OBTP, implying that total expenditure reduced in response to fall in price
of the commodity.
Also the percentage increase in quantity
demanded is less than the percentage fall in the price. Gap BC is less than PP1.
ep < 1
Steeper the curve, less is the elasticity.
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