vA (®) Perfectly Elastic Demand (E, =~): It means that demand changes without any change price. In, this case, demand curve is parallel to X-axis. = Quantity (Units) 800 1000 (ii) More than Elastic (Relatively) [E, > 1]: It means that percentage change in demand is more than percentage change in price. In this case, demand curve is flatter. | Price @ | Quantity (Units) [. 10 1000 E, = » (imaginary) perfectly elastic demand 5 1800 = a 50% decrease < 80% increase J; It means | Unitary Elastic (Unit Elastic) [Ey = that percentage change in demand is equal to percentage change in price. | Price @) | Quantity (Units) IR 10 1000 s 1500 SS = 50% decrease = 50% increase D = y q a Quantity Fig. 4.1 YA E> p Highly elastic demand P im 3 : D & (Flatter demand Biss curve) . q a %s Quantity | Fig. 4.2 Ya Ey Dp Unitary elastic demand P = & Py aes 2 g q % zag” OuantityLess than Elastic (Relativel, (Oy rat percentags chang eta < Ul: It means percentage change in price. In this say Ss 2" a} me eee ee AN WS dase Relatively inelastic demand Price @) | Quantity (Units) 10 _1000 g PL—_\E 5 1200 & | —— — °, 5, 50% decrease > 20% increase (Steeper. demand a ol curve) 7% Quantity Fig. 4.4 (0) Perfectly Inelastic (E, = 0): It me: F i i demanded does not change at all wan nny Bos Oitenealsa0) demancied does not change at all with the change rice. In this case, demand curve is parallel to | __, ___]_ Perfectly inelastic =i, 2 demand | Quantity (Units al 1000 10 1000 A D 43 METHOD FOR MEASURING PRICE 9 Quantity 3 ELASTICITY OF DEMAND. Fie: $5, The method used for = Method. measurement of price elasticity of demand is Percentage or Proportionate According to this method, elasticity of demand can be measured by the following formula: Ey ‘ Or _ Proportionate change in quantity demanded Proportionate change in price dose, percentage change in quantity demanded = 20%; and percentage change in price = 10%. Q- _ Percentage change in quantity demanded Percentage change in price % change in Quantity , . mes ically, this formula can be expressed as under: % change in Price =ample &: Price elasticity of We eee a ee foods x and y is known to be 1 and 2 respectively. Price of ¥ rises ies oF y falls by 5 percent. What ae the percentage changes inthe quant, Solution Here, elasticity for good x =1; Percentage rise in price of x= 5% | Suppose percentage fallin demand for =A ‘S changein demand ~Yehange in price A Zonas (Thus, the demand for goods x wil fall by 5 per cent Now, Flasticty for good y Percentage fall in price of y = 5 ‘Suppose percentage rise in demand for y = A Si change in demand % changein price or A= 10 (Thus, the demand for good y rises by 10 per cent). Example 5 ‘As a result of 2 20 per cent fall in the price of a commodity, its demand rises by 25 per cen. Calculate the price elasticity of demand. Solution % change in demand % changein price ea 105, = 20% ~ 20 Example 6 The price of a commodity rose by 20% as a result of which its demand declined fron 20 units to 15 units. Calculate its price clastcty of demand, Solution Here, change in demand = 20 - 15 = 5 ens 5 in demand = 2 x 100 = 25% % change in demand = = —And, % change in price = o99, % change in demand Ey= > @”% change in price oe a pT 25, Example 7 10 per cent, what i: m ¥S the percentage chang, TE the quantity demanded increases by Solution Here Ey = 2; percentage change in demand = 10%; Suppose the percentage change in Price=A A _ % change in demand ~ _ % change in price pee) 10 A OF A= = =5% change in price, Example 8 s oe buys 40 units of a commodity at a price of €5 per unit and its price elasticity of jemand 4s) 1.5. Calculate the quantity demanded at price 84 per unit of the commodity, Solution Here Ey = ()15 Now in the calculation we ignore the minus sign of Ey Ey Price @) et | Demand (Units) | 40 - 7 = ae: pe $4 = 40 + 12 = 52 units (Because more quantity is demanded at Hence, new quantity demanded lower price). 400 units. The price rises and as a result its market the price elasticity of demand of that good is ()1. Example 9 : The market demand for a good at € 4 eee demand falls to 75 units. Find out the m Solution aie) «nus sign of Ey: foe i teen we ignore the minus 60 °° “s low in dq 2 : 5 Ere) api 4 = 75 Now ge 100-75 = 7° 7 pay 4 aAp = Hence, ene new price =441=%5 Per unit (Because less quantity is demanded at higher price), Example 10 A consumer buys 80 units of a 00d at a price of ¥4 per unit. When the price falls, he buys 129 ‘units. If price elasticity of demand is (-)2, tind out the neve price, Solution Here, Ey = ()2 Now, in the calculation we ignore the minus sign of Ey. 4q VP. Hoe lee ee mere iee 4° apg Price @) ao | Now Aq = 120-80 = 40 Demand (Units) | 80 no | ee at 2 = ‘ap “30 eeO ete 22 > 4p 20° Ap ap = 221, Hence, new price = 4—1 = ®3 per unit (Because more quantity is purchased at lower price) Example 11 ihe quantity demanded by a consumer at price &8 per unit is 600 units, Its price falls by 25% and quantity demanded rises by 120 units. Calculate its price elasticity of demand, Solution ‘Aq = 120 fou * Here % change in quantity demanded = Joo * 100 = 20% % change in price = 25% _ % change ing Ea- % change in p Ee 2 = : = 0.8 (Less elastic demand) Example 12 When the price of a commodity is ® 20 per unit, its quantity demanded is 800 units. When its price tises by €5 per unit its quantity falls by 20%. Calculate its price elasticity of demand. Solution Here % change in quantity demanded = 20% Pachangelin price = z x 100 = 25% % change in q ~ % change inp E, = 2 = 4 = 08 (ess elastic demand) ae 25 5 EyTOTAL EXPENDITURE METHOD OR TOTAL OUTLAY METHOD (PRICE ELASTICITY OF DEMAND) * One of the methods of measuring the price elasticity of demand suggested by Marshall is the ‘Total expenditure method’. * Total expenditure or total outlay is the expenditure incurred by household on the purchase of a commodity. * Itis the product of the price of the commodity and the quantity demanded at that price, i.e., TE=PxQ TE = Total expenditure, P = Price ,Q = Quantity* According to ) the expenditure method, elasticity of demand can be measured by considering the change in total expenditure incurred on a commodity as a result of change in the price of the commodity. * By using this method, we can categorise three types of elasticities: 1. Elastic demand 2. Inelastic demand 3. Unitary elastic demandee * Elastic demand = (E, > 1) a? When a fall in the price of the com se in total expenditure, and a rise in the price leads to decrease in total expenditure, elasticity of demand Sa ee is greater than one. °o 10 20 30 Fig. 6.6 Quantity demanded* Inelastic demand(= (E, < 1) ) When a fall in the price of the commodity reduces total expenditure and a rise in its price increases total expenditure, price elasticity of demand will be less than one. © 20 40 60 80100 Fig. 6.8 Quantity demanded1.2 MEANING OF PRICE ELASTICITY OF DEMAND. Me ate of demand tells us that the quantity demanded increases with the ith the rise in price, Thus, law of dem, lange in quantity demanded ué to change in its price. But it does not tell us how much change in quantity demanded will sprought by the change in its price. To measure this how much” ‘economists have developed a nical concept known as price elasticity of demand. The concept of elasticity of demand measures capenitude of change or the degree of responsiveness. Its thus, clear thatthe law of fe nne is ply a qualitative statement whereas the elasticity of demand is @ quantitative cnc, rat concept $ developed first by Prof. Marshall in his book ‘Principles of Economics’. The term elasticity of lis generally referred to as price elasticity of demand, short, price elasticity of demand is a measure of the degree of responsiveness ts ‘ i in its price, Or, price elasticity of demand can d for a commodity to a change in its price. Or, price y Eh oe the percentage change in quantity demanded divided by the percentage changeSolution 15x 12=3- 44 FACTORS INFLUENCING ELASTICITY OF DEMAND ‘ctvity, change in price CAUSe 2 smal needs, For eg: salt: () Nature of the commodity relatively elastic. For ey (@) Necessities: Since they are need! entent of change. They are ess © Comforts: These are not necessities of life there fed for day to day lial to satisfy the basic i fore the demand is 1 and they can easily £0 whithout they, fan. purchased later or get i substixy (0 Luxuries: They satisfy higher wants of individu ‘They have more elastic demand than comforts as it can De them. For eg cosmetics. i) Availability of substitute goods With change in price itis easy to replace the good. When a commodity has large number « substiites they have more elastic demand and vice-versa. For eg. if price of tea falls people cx Substitute it vuith coffe this fea has elastic demand, (iii) How widely is the product defined Broadly defined produets have relatively inelastic demand because there are not any suich substtus available. For eg: food. When it is narrowly defined like milk has relatively elastic demand. (ix) Postponement of consumption I consumer wait forthe prices to adjust to suitable level then the demand is elastic than thse ‘goods whose demand cannot be postponed. For eg: Waiting for sales to buiy clothes (®) Proportion of expenditure 1 the amount spend on a commodity froms small proportion of Consumer's total expenditure change in price will have only marginal effect and thus dema ‘versa, For eg. expenditure on matchbones constitutes a aaa Bee inelastic and vi? reentage. (vi) Preference and habits Ifa consumer prefers a good or is habitual toa particuta iersieivas the price change: thus demand else tey yo oes ten heldemand is relatively ®* Unitary Elastic demand = (E, = 1). When total expenditure doesn’t change with a change in the price of the commodity, the elasticity of demand is equal to unitary. Y Price Per Pen (sy ,auantity, Total Bec 3 aD 30 300 & ° Ge 300 ° 20. 40 60 Fig. 6.7 Quantity demanded AUCOMMERCE SCHOLAR - SAHIL ROY FOR B.COM/M.COM/NET/IRE/UPSC/ST