Mention the demand function. What is elasticity of demand? Describe thedeterminants of elasticity of demand.
The demand for a product or service is affected by its price, the income of the individual, theprice of other substitutes, population, and habit. Hence we can say that demand is a functionof the price of the product, and others as mentioned above.Demand function is a comprehensive formulation which specifies the factors that influence thedemand for a product. Mathematically, a demand function can be represented in the followingmanner.Dx = f (Px, Ps, Pc, Ep, Y, Ey, T, W, A, U….etc) WhereDx = Demand for commodity XPx = Price of a commodity XPc = Price of the complementsY = Income of the consumer T = Tastes and preferencesA = Advertisement and its impactPs = Price of substitutesEp = Expected future priceEy= Expected income in the futureW= Wealth of the consumer U = All other determinants
Elasticity of demand
In economics the term elasticity refers to a ratio of the relative changes in two quantities. Itmeasures the responsiveness of one variable to the changes in another variable.
Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change in the price of a commodity.
It refers to the capacity of demandeither to stretch or shrink to a given change in price.
Elasticity is an index of reaction.
Elasticity of demand indicates a ratio of relative changes in two quantities.ie, price anddemand.According to professor Boulding:
“Elasticity of demand measures the responsivenessof demand to changes in price”.
In the words of Marshall,”
The elasticity (or responsiveness) of demand in a marketis great or small according to as the amount demanded much or little for a givenfall in price, and diminishes much or little for a given rise in price
Different Degree of Price Elasticity of Demand