Elasticity Of Demand | Meaning, Types, Price, Price Elasticity Of Demand

Meaning Of Elasticity Of Demand Elasticity of demand may be defined as the degree of responsiveness of demand as changes in price, income, prices of other commodities etc.   Types of Elasticity of Demand Price elasticity of demand Income elasticity of demand Cross elasticity of demand   Price Elasticity Of Demand Price elasticity of demand […]

Meaning Of Elasticity Of Demand

Elasticity of demand may be defined as the degree of responsiveness of demand as changes in price, income, prices of other commodities etc.

 

Types of Elasticity of Demand

Price elasticity of demand

Income elasticity of demand

Cross elasticity of demand

 

Price Elasticity Of Demand

Price elasticity of demand is the degree of responsiveness of demand for a particular commodity to changes in its price.  It is the rate at which the quantity demanded changes as its price changes.

To measure the price elasticity of demand we use the formula:

% change in Quantity Demanded

% change in price

This formula can be broken down or simplified as:

Old Quantity – New Quantity  X  100

Old quantity

E=       Old Price – New Price   X 100

Old Price

Illustration

When the price of a given product is reduced from N90 to N80, the quantity demanded increases from 50 to 60 units.   Deduce the coefficient of elasticity of demand.

 

Solution

Old price = N90, New price = N80

 

Change in price = 80 – 90 = -10

=    10   x  100

 

90         1               =   11.1%

 

Old quantity = 50, New quantity = 60

 

Change in quantity = 60 – 50 = 10

 

=  10  x  100

 

50         1     =  20%

 

PE      =      20

 

11.1    =   1.8%

 

Types Of Price Elasticity Of Demand

The types of elasticity of demand and their graphical representation can be shown as follows:

  1. Perfectly Elastic (or Infinitely Elastic) Demand.

Consumers react sharply to changes in price. They are willing to buy all the goods available at a particular price and none at all at a slightly higher price. The co-efficient of elasticity tends to infinity.

 

  1. Perfectly Inelastic (or Zero Elasticity) Demand

When the quantity demanded remains the same regardless of the change in price. The demand is said to be perfectly inelastic. The co-efficient of elasticity is zero

 

Unitary (or Unity) Elasticity of Demand

This is the situation where a change in price or income brings about the same percentage change in the quantity demanded. The coefficient of elasticity of demand is equal to 1

 

Price

Fairly Elastic Demand

In this case, a small percentage change in price gives rise to more than proportionate change in the quantity demanded.  For example, where a 20% fall in price leads to a 50% rise in demand, the coefficient of elasticity is greater than 1 but less than infinity.

 

Inelastic Demand (Fairly Inelastic Demand)

When a change in price of a commodity leads to a less than proportionate change in the quantity demanded then demand is inelastic e g a 15% increase in price bringing about 10% decrease in quantity demanded.

The coefficient of elasticity is less than 1 but greater than zero

 

Factor affecting (Or Determining) Elasticity of Demand

Availability of Close Substitutes: A commodity that has close substitutes is likely to have an elastic demand

Degree of Necessity of the Goods: If a commodity is a necessity or a near-necessity, increase or

decrease of its price are not likely to affect its demand

 

Proportion of Consumer’s Income that Is Spent on that Commodity: Generally the higher a persons income, the more inelastic his demand for commodities

Habit: If a consumer has become addicted to a commodity, his demand for the good will tend to be monastic. An increase in the price of the commodity may therefore not affect (reduce) his quantity demanded.

The Level of Consumer’s Income: The larger the income of the consumer the more inelastic is his demand for commodities. On the other hand, the demand of consumers with low income tends to be elastic.

Cheap Commodities: The cost of some commodities are relatively insignificant and as such consumers demand for them will be inelastic.

Related Posts:

Change In Quantity Demanded

Theory Of Consumer Behaviour

Cross Elasticity Of Demand

Income Elasticity Of Demand

Elasticity Of Supply

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