MEANING OF ELASTICITY OF DEMAND:Term is used to denote a measure of the rate at which demand changes in response to the change in prices.It is the percentage change in quantity demanded divided by the percentage in one of the variables on which demand depends.It is Price elasticity of demand , which is usually referred to as elasticity of Demand.
TYPES OF ELASTICITY OF DEMAND:Price elasticityIncome elasticityCross elasticityPromotional elasticity
PRICE ELASTICITY OF DEMAND:Price elasticity of Demand expresses the response of quantity demanded of goods to a change in its price.Definition:“Elasticity of demand may be defined as the ratio of the percentage change in demand to the percentage change in price” -prof.Lipsey..
THUS, PRICE ELASTICITY OF DEMAND ISTHE RATIO OF PERCENTAGE CHANGE IN AMOUNT DEMANDED TO APERCENTAGE CHANGE IN PRICE.Price elasticity(Ep)=%change in quantity demanded % change in Price Ep= ^Q xP = ^Q x P Q ^P ^P QWhere, Ep=price elasticity P=PriceQ=Quantity ^Q=Change in quantity demanded^P=Change in Price.
TYPES/DEGREES OF DEMAND:Perfectly Elastic Demand(E=∞): In this case the demand for a commodity changes even though there is no change in Price.It implies that with a very small Percentage change in price , the quantity demanded would change indefinitely & so the seller would not change the Price.
Perfectly Inelastic Demand(E=0):If the demand for a commodity does not change in spite of an increase or decrease in its Price.
Unitary Elastic Demand(E=1)Price elasticity of demand is unity when the change in demand is exactly proportionate to the change in price.Eg: The Price is Rs.10 &the quantity demanded is 100 units &the total outlay is Rs.1000. and if price increases to Rs.20 & the quantity demanded declines to 50 units , the total outlay is Rs. 1000In this case demand curve is rectangular hyperbola.
Elastic Demand(E>1):If the Percentage change quantity demanded is greater than the percentage change in price.Price elasticity of demand is greater than one.Eg: The Price Increases from Rs.10 to Rs.20,quantity demanded declines from 100 units to 40 units.as a result , the total outlay declines from Rs. 1000 to Rs.800.
on the other hand, if Price declines from Rs.10 to Rs.5 and quantity demanded increases from 100to300 units as a result the total outlay has increased from Rs.1000 to Rs.1500.In this case the price and total outlay are inversely related.
Inelastic demand(E<1):If the Percentage change in quantity demanded is less than the percentage change in Price .Price elasticity of demand is less than one.Eg: when price increases from Rs.10 to Rs.20& the quantity declines from 100 units to 50 units , the total outlay increases from Rs.1000 to Rs.1500.
On the other hand if the price declines from Rs.10 to Rs.5 & quantity demanded increases from 100 units to 150 units . the total outlay declines from Rs.1000 to Rs.750This shows that the price and total outlay are directly related.Because , the quantity demanded changes relatively slower than the change in price.