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Introduction

Introduction

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Published by ashishnova
ELASTICITY OF DEMAND
ELASTICITY OF DEMAND

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Published by: ashishnova on Nov 19, 2009
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09/27/2010

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INTRODUCTION
Demand is desire backed by willingness to pay and ability topay i.e. a wish to have a commodity does not become demand. Aperson wishing to have a commodity should be willing to pay for itand should have ability to pay for it. Thus a desire becomes demandif it is backed by willingness to pay and ability to pay. Demand ismeaningless unless it is stated with reference to a price.Decisions regarding what to produce, how to produce and for whom to produce are taken on the basis of price signals coming fromthe market. The law of demand explains inverse relationshipbetween price and quantity demanded. When price falls quantitydemanded of that commodity will increase. The deficiency of law of demand is removed by the concept of elasticity of demand.
 
MEANING AND DEFINITIONOFELASTICITY OF DEMAND
The term elasticity was developed by Alfred Marshall, and isused to measure the relationship between price and quantitydemanded. The law states that the price of a commodity falls, thequantity demanded of that commodity will increase, i.e. it explainsonly the direction of change in demand and not the extent of change.This deficiency is removed by the concept of elasticity of demand.Elasticity means responsiveness. Elasticity of demand refersto the responsiveness of quantity demanded of a commodity tochange in its price.According to E.K. Estham, “elasticity of demand is a measure of theresponsiveness of quantity demanded to a change in price”.
 
IMPORTANCEOFTHE CONCEPT ‘ELASTICITY’
The concept f elasticity of demand plays a crucial role in business-decisions regarding fixing of price with a view to make larger profit. For instance, cost of production is increasing the firm would want to pass the risingcost on to the consumer by raising the price. Firms may decide to change theprice even without any change in the cost of production. But whether raisingprice following the rise in cost or otherwise proves beneficial depends on:a)The price elasticity of demand for the product, i.e. how high or low is theproportionate change in its demand in response to a certain percentage change in itsprice.b)Price elasticity of demand for its substitutes, because when the price of aproduct increases the demand for its substitutes increases automatically even if their prices remain unchanged.Raising the price will be beneficial only if:a)Demand for a product is less elasticb)Demand for its substitutes is much less elastic.Elasticity of demand establishes the quantitative relationship betweenquantity demanded and price or other demand determinants
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