Elasticity of Demand
The Law of Demand states that the quantity demanded of a commodity is inversely proportional to the price of that commodity.
It tells only about the direction of change in demand for a commodity in response to change in its price. Thus, the law presents only a qualitative statement. It does not tell us the magnitude of change in quantity demanded in response to a change in price. It does not tell about the extent to which the demand for different commodities responds to price changes differs.
To solve this problem Alfred Marshall presented the phenomenon of Elasticity of Demand.
Elasticity of demand makes a quantitative statement.
Elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in any of its determinants.
It means how much the quantity demanded changes when there is change in price of the commodity, price of other commodity and income of the consumer occur.
Types of Elasticity of Demand:
There are as many types of elasticity of demand as there are types of economic variables determining the demand (determinants of demand). But there are three main types of elasticity of demand :
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand.
Price Elasticity of Demand:
Price elasticity of demand is a measure of how much the quantity demanded of a commodity changes when its price changes.
Price elasticity of demand is defined as the degree of responsiveness of quantity demanded of a commodity in response to a change in its own price.
Price ED may also refers to the ratio of the percentage change in the quantity demanded (∆Q) of a commodity to a given percentage change in its price (∆P).
If price E D is represented as ep
ep = percentage change in quantity demanded ÷ percentage change in price
If percentage change in the quantity demanded =∆Q
and percentage change in price = ∆P
Then, ep = ∆Q / ∆P
Classification or Degrees of Price Elasticity :
Price ED presents a quantitative statement. It shows how much quantity is demanded of a commodity with the change in its own price. To explain this phenomenon of degree of elasticity, economists express price elasticity of demand in terms of its numerical value. This numerical value changes from zero to infinity. On the basis of its numerical value the price elasticity of demand have five different types:
1. Perfectly Inelastic Demand (ep = 0)
2. Inelastic Demand (ep < 1)
3. Unitary Elastic Demand (ep = 1)
4. Elastic Demand (ep > 1)
5. Perfectly Elastic Demand (ep = infinity)
1. Perfectly Inelastic Demand (ep = 0):
When the quantity demanded of a commodity does not respond to a change in its price, then the elasticity of demand is zero.
The quantity demanded does not change, but it remains same with any rise or fall in the price of the commodity. It is the case of perfectly inelastic demand. The demand curve of zero elasticity is known as perfectly or completely inelastic demand curve (D1 curve) which is parallel to Y – axis .
Demand curve for perfectly Inelastic demand :
Example: perfectly inelastic demand is very rare even in case of basic necessities which also change with the change in their price. The demand for life – saving medicines can be put into this class.
2. Inelastic Demand (ep <1 ) :
Demand is said to be inelastic when the percentage change in quantity demanded of a commodity is less than the percentage change in its price.
We know that, the elasticity of demand is the ratio of percentage change in quantity demanded to the percentage change in its price. If the change in quantity demanded is less than the change in its price than the elasticity of demand becomes less than unity (ep < 1).
When, ∆ Q < ∆P
Then , ep < 1
Generally the demand for necessities is relatively inelastic. For instance, if a fall in the price of a commodity by 10 per cent leads to an increase in quantity demanded by 8 percent, the demand is inelastic.
Demand curve showing Inelastic demand:
In the given figure, curve D2 is inelastic because the percentage change in quantity demanded ∆Q is smaller than the percentage change in price.
3. Unitary Elastic Demand
When a given percentage change in the price of a commodity causes an equivalent percentage change in the quantity demanded, then the elasticity of demand is said to be unitary (ep = 1).
Here, the percentage change in quantity demanded is exactly at the same rate as the change in price.
∆Q =∆P
ep = 1
For example, if a fall in the price of a commodity by 10 percent causes an increase in the amount purchased of it by 10 percent, the elasticity of demand equals to one.
Demand curve showing Unitary Elastic demand :
In the given figure the demand curve D3 has unitary elasticity at all the points on curve, such a curve is known as rectangular hyperbola curve.
A rectangular hyperbola curve is a curve in which the total area of rectangles at different points on the curve is same. Such a curve extends towards the X axis and Y axis in a uniform way, but never touches them.
Cases of unitary elastic demand are very rare indeed.
4. Elastic Demand (ep > 1 ) :
When the percentage change in the quantity demanded of a commodity exceeds the percentage change in its price, the elasticity of demand is greater than unitary and the demand is said to be elastic demand.
It can also be said that in elastic demand the percentage change in the quantity demanded is larger than the percentage change in its price.
If percentage change in quantity demanded is ∆Q and percentage change in price is ∆P then
∆Q > ∆P
Then, ep > 1
For example, if the rise in the price of a commodity by 10 per cent causes a decrease in amount demanded by 15 per cent, the demand is said to be elastic.
Generally the demand for luxury goods is elastic in nature.
Demand curve showing Elastic demand:
In the given figure, the demand curve D4 is elastic as ∆Q is relatively larger than ∆P.
5. Perfectly Elastic Demand (ep = infinity):
When the consumers are prepared to purchase all that they can get at a particular price but nothing at all at a slightly higher price, then the demand is said to be perfectly or completely elastic and the price elasticity of demand is regarded as infinity.
In perfectly elastic demand, the consumers are prepared to purchase everything at a particular price but nothing at slightly higher price.
In this case, a very small fall in the price of a commodity causes the demand to increase to infinity.
This is the extreme or upper limit of price elasticity. Cases of perfectly elastic demand are extremely rare.
Demand curve showing perfectly Elastic demand :
In the given figure, demand curve D5 shows perfectly elastic demand curve which is parallel to X -axis. Here at price P quantity demanded is infinity but at slightly higher price the quantity demanded is zero.
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