1. Price elasticity of demand is a measure of degree of responsiveness of demand for a commodity to change in its price. In other words, the price elasticity of demand quantifies the effect of a change in its own price on the quantity demanded.
2. Formally, price elasticity of demand is defined as the ratio of the change in quantity demanded to a percentage change in price. It is expressed as:
Price elasticity of demand= ed= % change in quantity demand/ %change in its own price = Δq/Δp . p/q
The price elasticity of demand is always negative.
3. Price elasticity of demand may be categorized as:
(i) Greater than unitary elastic demand,
(ii) Less than unitary elastic demand
(iii) Unitary elastic demand
(iv) Perfectly inelastic demand and
(v) Perfectly elastic demand.
4. Greater than unitary demand (or elastic demand) is one in which the percentage change in quantity demanded must exceed the percentage change in price. The value of the co-efficient of price elasticity will be greater than one, i.e., ed> 1. In this case the demand curve is flatter.
5. Less than unitary elastic demand (or inelastic demand) is one which the percentage change in quantity demanded is less than that of percentage change in the price. The value of coefficient of price elasticity of demand will be less than one, i.e., ed< 1. In this case the demand curve is steeper.
6. Unitary elastic demand is one in which the percentage change in quantity demanded is equal to the percentage change in price. In this case, ed= 1 and the demand curve take a particular shape, called rectangular hyperbola. It is a curve which extends towards the x-axis and y-axis in a uniform manner without touching them.
7. A perfectly inelastic demand is one in which the quantity demanded is totally incentive to any change in price. In this case ed= 0 and the demand curve is vertical (parallel to y-axis). If the product is absolutely essential like demand for a rare medicine, then its demand is perfectly inelastic.
8. A perfectly elastic demand is one in which the slight change in price will cause an infinite change in demand. Consumers are prepared to buy all which they can obtain at some price and none at an even slightly higher price. In this case, ed= ∞ and the demand curve is horizontal (i.e., parallel to x-axis).
9. The important properties relating to price elasticity of demand are:
(i) the price elasticity of demand is independent of the choice of units. It is because any percentage in variable is independent of units.
(ii) If two straight line demand curves intersect each other, at their point of intersection, the elasticity associated with the flatter demand curve is higher than a steeper demand curve.
(iii) Two parallel straight line demand curves do not have the same elasticity of demand at a given price. The demand curve, which is closer to the origin is more elastic.
10. The main factors affecting the magnitude of price elasticity are:
(i) Availability of closer substitute of the commodity.
(ii) Proportion of total expenditure spent on the commodity.
(iii) Habits of the consumers.
(v) Nature of the commodity.
11. Greater the availability of the close substitutes of a commodity, higher is the price elasticity of demand for a commodity.
12. Greater is the proportion of total budget spent on a particular commodity, more elastic is the demand for it. The demand for cloth and food articles is elastic whereas that for salt and match box is inelastic.
13. Larger the time horizon, more elastic is the demand for a commodity. The demand for a commodity is inelastic in the short period and elastic in the long period.
14. Demand for essential products is likely to be inelastic. On the other hand, the demand for luxuries is relatively elastic.
15. There are three methods of measuring price elasticity of demand:
(i) total expenditures method
(iii) geometrical method.
16. Under total expenditure method, elasticity of demand can be measured in terms of changes in total expenditure due to change in the price of commodity. There are three cases: (i) ed= 1, when due to rise or fall in price of a good, total expenditure remains unchanged (ii) ed> 1, when due to fall in price, total expenditure goes up and due to rise in price, total expenditure goes down and (iii) ed=<1>
17. Under percentage method, the formula of measuring price elasticity of demand is:
Ed= % change in quantity demand/% change in its own price = Δq/Δp . p/q
The value of price elasticity of coefficient varies between zero and infinity.
18. Under geometrical method, price elasticity of demand at ascertain point along with a straight line demand curve is equal to the lower segment divided by the upper segment of the demand curve at that point. It is expressed as:
Ed= lower segment of the demand curve/ upper segment of the demand curve
19. If the demand curve is vertical (or horizontal). The price elasticity is zero(or infinity). In case, elasticity is equal to one, the demand curve is a rectangular hyperbola.
Introduction to Micro-economics
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