Demand Price Elasticity, Business Economics Assignment Help

Business Economics - Demand Price Elasticity, Business Economics

Demand Price Elasticity

Price elasticity of demand indicated the degree of responsiveness of quantity demanded of a good to the change in its price other factors such as income prices of related commodities that demine demand are held constant. Precisely price elasticity of demand is defend as the ratio of the percentage change inhumanity demanded of a commodity to a percentage change in price thus

Ep = percentage change in quantity demanded/ percentage change in price

It follows from the above definition of price elasticity of demand that when the percentage change in quaintly demanded a commodity is greater than the percentage change in price that brought it about price elasticity of demand (e) will be greater than one and in this case demand s said to be elastic. On the other hand when given percentages change in price of commodity leads to a smaller percentage change in quantity demanded elasticity will be less than one and demand in this cse is said to be inelastic. Further when the percentage change in quantity demanded of a commodity is equal to the percentage change in price that caused it price elasticity is equal to one. Thus in case of elastic demand a given change in price causes quite a large change in quantity demanded. And in case of inelastic demand a given change in price brings about a very small change in quantity demanded of a commodity.

It is a matter of common knowledge and observant on that there is a considerable difference between different goods in regard to the magnitude of response of demand to the changes in price. The demand for some goods is more responsive to the changes in price than those for others. In terminology of economics we would say that demand for some goods is more elastic than those for the other ro the price elasticity of demand of some goods is greater than those of the other. Marshall who introduced the concept of elasticity into economic theory remarks that the elasticity or responsiveness of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price.

It should however be noted that terms elastic and inelastic demand are used in the relative sense. In other words elasticity is a matter of degree only. Demand for some goods is only more or less elastic than others. Thus when we say that demand for a good is elastic we earn only that the demand for it is relatively more elastic. Likewise when we say that demand for a good is inelastic we do not mean that its demand id absolutely inelastic but only that it is relatively les elastic. In economic theory elastic and inelastic demand has come to acquire precise meaning. Demand for goods is said to be elastic if price elasticity of demand for it is greater than one. Similarly the demand for a good is called inelastic if price elasticity of demand for it is less than one. Price elasticity of demand equal tone or in other words unit elasticity of demand therefore represents the dividing line between elastic and inelastic demand. It will now be clear that by inelastic demand we do not mean perfectly inelastic but only that price elastic of demand is less than unity and by elastic demand we do not mean absolutely elastic but that price elasticity of demand is greater than one.


Elastic demand: ep >1

Inelastic demand:  ep < 1

Unitary elastic demand: ep = 1

Price elasticity of demand for different goods varies a good deal

As said above goods show great aria to in respect of elasticity of demand their responsiveness to changes in price. Some goods like common salt, wheat and rice are very unresponsive to changes in their prices. The demand for slat remains practically the same for a small raise of fall n its price. Therefore dead for common slat is said to be inelastic demand for goods like television refrigerator etc. is elastic since changes in their prices bring about large changes in their quantity demanded. We small explain later at length those factors which are responsible for the difference in elasticity of demon of various goods. It will suffice here to ask that the main reason for difference in elasticity of demand is he possible of substitution the presence or absence of competing substitutes. The greater the ease with which substitutes can be found for a commodity or with which it can be substituted for other commodities the greater will be the price elasticity of demand of that commodity.

Goods are demanded because they satisfy some particular wants and in general wants can be satisfied in a variety of alternative ways. For instance the want for entertainment can be gratified by having television set, r by possessing a gramophone, r by going to cinemas or by visiting theatres. If the price of a television set falls the quantity demanded of televise sets will rise greatly since fall in the price of television will induce some people to buy television in place of having gramophones or visiting cinemas and theatres. Thus the demand for televisions is elastic. Likewise I the price of Lux fall its demand will greatly rise because it while substituted for other varieties of soap A such as jai. Hamm gore pears etc. on the contrary the demand for a necessary good like salt is inelastic. The demand for slat is inelastic since it satisfies a basic human want and no substitutes for it are available people would consume almost thecae quantity of self whether it become slightly cheaper or dearer than before.

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