4price Elasticity of Demand

PRICE ELASTICITY OF DEMAND Q) Define price elasticity of demand? A) Price elasticity of demand indicates the magnitude of change or the degree of  responsiveness of demand for a commodity to a change in its price. Mathematically, it is the ratio of proportionate (percentage) change in demand to proportionate (percentage) change in price. Symbolically, it is defined as; Price Elasticity of demand (Ed) = Percentage change in quantity demanded Percentage change in the price OR, Change in quantity demanded Initial quantity demanded Change Chang e in quantity quan tity price Initial price

Ed =

q/Q p/P

=

q * p

q * 100 Q……………. p * 100 P

P Q

Example: Price of a commodity has gone down from Rs.100 to Rs.50. As a result the quantity demanded has gone up from 200 to 400. Solution: Ed = q * P p Q = 200 50

*

100.. 200

=

2

Q) Explain various kinds (degree) of price elasticity of  demand. A) Price elasticity of demand is the measurement of responsiveness of demand to change in price. Demand for different goods responds differently to change in price. For instance, demand for salt does not respond or change at all even if its price falls by 50% whereas demand for apples responds very much when its price falls by 20% only. On the basis of  change in demand as a result of changes in price, elasticity of demand can be classified into the following categories: (i) (i) Elas Elasti ticc Dem Deman and d or or Mor Moree tha than n uni unitt elas elasti ticc dem deman and d (E (Ed >1): if percentage change in quantity demanded is more than the percentage change in price the commodity is said to have more than unit elastic (Ed >1) or Elastic

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demand. For example, if price falls by 10%, the quantity demanded will go up more than 10%. The demand for luxury goods (AC, TV, refrigerator, Cars) is elastic. Price

Demand

10

20

5

40

In the diagram, Demand curve is an elastic demand curve. When price declines from OP to OP1, demand increases from OQ to OQ1, the change in price is only PP1, but the change in demand is OQ1 which is much more than the change in price. The slope of this curve is more inclined towards OX – axis or it is a flatter curve. (ii) (ii) Inel Inelas asti ticc Dema Demand nd OR OR Les Lesss than than uni unitt elas elasti ticc dema demand nd (E (Ed