Rajasthan Board RBSE Class 12 Economics Notes Chapter 4 Price Elasticity of Demand
The price elasticity of demand is defined as the degree of responsiveness or sensitiveness of demand for a commodity to the change in its price.
Elasticity of demand is a per cent change in the quantity demanded of a commodity as a result of a certain percentage change in its price.
Alfred Marshall stated in his famous book ‘Principles of Economics’ while introducing the concept of the elasticity of demand, “The elasticity of demand in a market is great or small according to whether the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price.”
“The elasticity of demand is a measure of relative change in the quantity purchased in response to a relative change in the price on a given demand curve” was defined by ‘Albert L. Mevers’, in his book ‘Elements of Modern Economics.’
Price elasticity of demand is expressed by the formula given below:
Here, ep stands for price elasticity
∆Q stands for change in quantity
Q stands for original quantity
∆P stands for change in price
P stands for original price
There are five kinds of elasticity of demand depending upon their degree.
- Completely perfectly elastic demand
- more elastic demand
- unitary elastic demand
- inelastic demand, and
- perfectly inelastic demand or zero elasticity demand.
Demand for a commodity is considered perfectly elastic when the demand for it may increase or decrease to any extent irrespective of any change or infinitesimal change in its price.
If the percentage change in quantity demanded equals to the percentage change in price, it is said to be unitary elastic demand.
When chang in quantity demanded in response to change in price of the commodity is such that total expenditure on the commodity increases when price decreases, and total expenditure decreases when price increases, it is known as greater than unitary elastic demand.
Demand for a commodity is said to be inelastic or less than unitary elastic when the percent change in quantity demanded is less than the percentage change in price.
A perfectly inelastic demand is one in which a change in price causes no change in the quantity demanded. It is a situation where even substantial changes in price leave the demand unaffected.
There are three methods of measuring price elasticity of demand:
- Total expenditure method
- Proportion method
- Geometric method.
Total outlay method was first used by Alfred Marshall. It means comparing the new total price and new total expenditure with the original price and the original total expenditure of a commodity for judging the character of elasticity of demand.
Proportionate or percentage method was suggested by Alfred Marshall. It is the method in which elasticity of demand is measured by the ratio of the proportionate (percentage) change in quantity demanded to the proportionate (percentage) change in price.
Point method is another name for geometric method. It is the method in which elasticity of demand is measured at different points on the demand curve.
Point elasticity is measured at a point on the demand curve.
When price-elasticity of demand is measured between any two finite points on a demand curve, is called Arc Elasticity. It is measured for a considerably high change in price.
When demand curve shows rectangular hyperbola, it means the elasticity of demand is equal to unity.
When the demand curve is flatter, it represents a greater elasticity of demand.
On the point of intersection of the demand curves, the more flatter curve shows more elasticity of demand.
Cross elasticity of demand refers to the percentage change in the demand for one commodity in response to a percentage change in price of another commodity.
The income elasticity may be defined as the ratio of the percentage change in purchases of a good to the change in income which induces the former. It is the degree of response of quantity demanded to a change in income, and it is measured by dividing the proportionate change in quantity demanded by the proportionate change in income.
There are many factors which determine price elasticity of demand. These are:
- Availability of substitution
- Nature of commodity
- Proportion of income spent
- Habit of consumer
- Time factor
- Range of alternative uses of commodity
- The proportion of market supplied
- Price level
- Income of consumer
- Combined demand.
Important Glossary
- Elasticity : It is the measure of responsiveness of demand for a commodity to the change in any of its determinants, viz., price of the commodity, price of the substitutes and complements, consumers’ income and consumer expectation regarding prices.
- Demand : Desire of something or want.
- Price : Value of a commodity or the amount of money expected.
- Income : Received money, especially on regular basis through work or investment.
- Perfectly Elastic Demand : It is the demand in which a little change in price will cause an infinite change in demand, or ed = ∞.
- Perfectly Inelastic Demand : It is the demand in which a change in price causes no change in the quantity demanded, or ed = 0.
- Unitary Elastic Demand : It is the demand in which a percentage change in price generates an equal percentage change in demand, or ed = ∞.
- More than Unitary Elastic Demand : It is the demand in which a given percentage change in price causes relatively more percentage change in demand, or ed > 1.
- Less than or Inelastic Demand : It is the demand in which a given percentage change in price causes relatively less percentage change in demand, or ed < 1.
- Total Expenditure Method : It is the method through which the consumer compares the new total price and new total expenditure with the original price and the original total expenditure of a commodity for judging the character of elasticity of demand.
- Proportion Method : It is the method in which elasticity of demand is measured by the ratio of the proportionate (percentage) change in quantity demanded to the proportionate (percentage) change in price.
- Geometric Method : It is the method in which elasticity of demand is measured at different points on the demand curve.
- Point Method : Geometric method is also called Point Method.
- Arc Elasticity : When price-elasticity of demand is measured between any two finite points on a demand curve, it is called Arc Elasticity.
- Cross Elasticity : Cross elasticity of demand refers to the percentage change in the demand for one commodity in response to a percentage change in price of another commodity.