Scribd
Upload
30 views

4 - Elasticity of Demand

This document discusses the concept of elasticity of demand. It defines elasticity of demand as the percentage change in quantity demanded of a good from a percentage change in any factor that affects demand, such as price, income, or the price of a substitute good. It focuses on price elasticity of demand, explaining that it measures the responsiveness of quantity demanded to a change in price. The document outlines different degrees of price elasticity, from perfectly elastic to perfectly inelastic demand, and lists factors that influence a good's price elasticity such as availability of substitutes, income level, and whether the good is a necessity. It concludes by discussing methods used to measure price elasticity of demand.

Uploaded by

nai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
30 views

4 - Elasticity of Demand

This document discusses the concept of elasticity of demand. It defines elasticity of demand as the percentage change in quantity demanded of a good from a percentage change in any factor that affects demand, such as price, income, or the price of a substitute good. It focuses on price elasticity of demand, explaining that it measures the responsiveness of quantity demanded to a change in price. The document outlines different degrees of price elasticity, from perfectly elastic to perfectly inelastic demand, and lists factors that influence a good's price elasticity such as availability of substitutes, income level, and whether the good is a necessity. It concludes by discussing methods used to measure price elasticity of demand.

Uploaded by

nai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 29

CHAPTER 4

ELASTICITY OF DEMNAD

h
Concept of Elasticity of Demand
 Law of demand gives us the direction of change in quantity demanded as a result of a change in
price, but it does not specifies the amount or the extent by which the quantity demanded changes
with a change in price. Therefore to measure the magnitude of change in quantity demanded the
concept of Elasticity of Demand was developed by Prof. Alfred Marshall in his book Principles of
Economics.

 Elasticity of Demand:
 Refers to the percentage change in demand for a commodity with respect to percentage change in
any of the factors affecting demand for that commodity.

 Types of Elasticity of Demand:


 1. Price Elasticity of Demand: Refers to degree of responsiveness of demand to the change in its
price.
 2. Income Elasticity of Demand: Refers to degree of responsiveness of demand to the change in
income of its buyer.

3. Cross Elasticity of Demand: Refers to degree of responsiveness of demand to the change in price
 Price Elasticity of Demand:
 It is the measurement of percentage change in quantity demanded due to
percentage change in own price of the commodity.
 It is the degree of change in demand in response to a change in the own price of the
commodity.
 It establishes a quantitative relationship between quantity demanded of a
commodity and its price, while other factors remain constant.
 Higher the numerical value of elasticity, larger is the effect of a price change on the
quantity demanded.
 It is also known as Demand Elasticity.

 Degrees of Elasticities of Demand: Price elasticity of Demand can be expressed in


terms of numerical value, which ranges from zero to infinity:
I.
. Perfectly Elastic Demand:
 When there is an infinite demand at a particular price and demand becomes zero with a slight rise
in the price, then demand for such a commodity is said to be perfectly elastic.
 Here Ed = Infinite, Demand curve will be a horizontal straight line parallel to X axis .
 Usually these kind of goods have plenty of substitutes available.
 Very close examples of a perfectly elastic demand would be precious metals such
as gold, silver, and platinum. If one jeweler is selling it at a lower price than the
other (considering same quality),we will definitely go to the one which offers a lower price.
I.I. Perfectly Inelastic Demand:
 When there is no change in demand with change in price, then demand for such a
commodity is said to be perfectly inelastic.
 Here Ed = 0, Demand curve will be a vertical straight line parallel to Y axis.
 It is an imaginary situation.
 An example of perfectly inelastic demand would be a lifesaving drug that people will
pay any price to obtain. Even if the price of the drug were to increase dramatically, th
quantity demanded would remain the same.
III. Highly Elastic Demand:
 When percentage change in the quantity demanded is more than the percentage
change in price, then demand for such a commodity is said to be highly elastic.
 Here Ed >1, Demand curve is flatter and its slope is inclined more towards X axis.
 Example: AC, Electronic gadgets, Automobiles, etc
.IV. Less Elastic Demand:
 When Percentage change in quantity demanded is less than percentage change in
price then demand for such a commodity is said to be less elastic.
 Here, Ed < 1 and demand curve is steeper and slope is inclined more towards Y-axis.
 Examples : Salt, vegetables etc.
.

V. Unitary Elastic Demand:


 When percentage change in the quantity demanded is equal to percentage change
in price, then demand for such a commodity is said to be unitary elastic.
 Here, Ed = 1 and demand curve is a rectangular hyperbola.
 Example : Refrigerator
.
Factors affecting Price Elasticity of Demand

 Availability of Close Level of income


Substitutes  Higher the level of income,
 lower the elasticity of
Good having number of
demand and vice versa.
close substitutes will have
an elastic demand.

 Good with no close


substitute will have an
inelastic demand.
Factors affecting Price Elasticity of Demand continued….

Nature of the commodity Share in Total Expenditure


⮚ Necessities - Less ⮚ Larger the proportion of total
elastic expenditure spent on a good
higher will be the elasticity and
vice versa.

⮚ Comforts – Elastic

⮚ Luxuries - More elastic


Factors affecting Price Elasticity of Demand continued….

Level of Price Habits


⮚ Goods with higher level of ⮚ If you are habituated to a
price will have more elastic particular good, elasticity
demand then the lower level will be less and vice versa.
of price.
Factors affecting Price Elasticity of Demand continued….

Number of Uses Time period


⮚ More the number of uses a ⮚ During short period most
commodity can be put to- of the commodities are
More elastic is the demand having less elasticity of
and vice versa. demand.
⮚ In the long run when
substitutes are available
demand for the goods will
become more elastic.
Factors affecting Price Elasticity of Demand continued….

Postponement of Consumption
⮚ Demand for less urgent commodities will have highly elastic
demand and commodities which are of urgent demand will
have inelastic demand.
.

 Measurement of Price Elasticity of Demand:


 Percentage Method: Introduced by Prof. Marshall. It is also known as Flux
method or Proportionate method.

You might also like