(A) Price Elasticity of Demand : Price Elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to the change in its price, other factors remaining constant. According to Marshall Price Elasticity of Demand (Ed) is the ratio of proportionate change in quantity demanded of a commodity to a \ given proportionate change in its price.
∆ (delta) = Stands for change
∆Q = Change in Quantity demanded (New Qty. – Old Qty. demanded)
AP = Change in Price (New price – Old price)
P & Q = Original Price and Original Quantity Demanded
Using this formula price Elasticity of demand can be calculated for any set of data of demand and price. The value obtained may range from zero to infinity. Since quantity demanded has a negative relationship with price, the elasticity of demand so obtained will have negative sign, we ignore the negative sign altogether.
(B) Types of price elasticity of demand :
(a) Perfectly Elastic Demand (Ed = ∞) : When a change in price leads to infinite change in quantity demanded of a commodity it is called as perfectly elastic demand. It is an extreme case, which is very rare. It is a theoretical concept not found in real life.
\(Ed = \cfrac{Percentage\, Change\, in\, Quantity\, Demanded}{Percentage\, change\, in\, Price}\)
\(Ed = \cfrac{ Any\, Number}{0} =∞\)
Ed = ∞ (Infinity)
In the diagram demand curve ‘DD’ is horizontal straight line parallel to X-axis,
(b) Perfectly Inelastic Demand (Ed = 0) : When a change in price has no effect on the quantity demanded of that commodity then it is called Perfectly Inelastic Demand. The demand does not respond to the change in price at all. For instance, if price changes by 10% and the demand does not change at all then e = 0.
\(Ed = \cfrac{ Percentage\, △\, in\, Quantity\, Demanded}{Percentage\, △\, in\, Price}\)
\(Ed = \cfrac{0}{10}\)
Ed = 0
In this case the numerical coefficient value is zero. It is also extreme case which rarely exists. Salt and life saving medicine are a ) few example of Perfectly Inelastic Demand as they are absolute necessity. The demand ) curve ‘DD’ is a vertical straight line parallel to Y-axis.
(c) Relatively Elastic Demand (Ed > 1): When the proportionate or percentage change in the quantity demanded of a commodity is greater than proportionate or percentage change in its price then, demand is said to the relatively elastic.
Here the amount demanded of a commodity rises much after a slight fall in its price. For instance a 5% fall in price will bring a 10% rise in demand for that commodity.
\(Ed = \cfrac{Percentage\, Change\, in\, Quantity\, Demanded}{Percentage\, change\, in\, Price}\)
\(Ed = \cfrac {10}{0}\) = 2 i.e. Ed > 1
The numerical coefficient value is greater than one and lies between 1 and ∞.
Example : Luxury goods BMW Car, air – conditioners, LED TV etc. will have relatively elastic demand. In the diagram the demand curve DD has a flatter slope. It slopes gradually.
(d) Relatively Inelastic Demand (Ed < 1): When the proportionate or percentage change in quantity demanded of a commodity is less than proportionate or percentage change in its price then demand is said to be relatively inelastic. Here the degree of responsiveness of demand is very little to a given change in its price. For instance, if price falls by 10% then quantity demanded may rise by say 5%.
\(Ed = \cfrac{Percentage\, Change\, in\, Quantity\, Demanded}{Percentage\, change\, in\, Price}\)
\(Ed = \frac {5%}{10%}\) = \(\cfrac{1}{2}\) = 0.5 i.e. (Ed < 1)
The numerical coefficient value is less than one and lies between 0 and 1.
Example : The demand for necessary goods like wheat, rice, sugar etc. is said to be relatively inelastic as the demand is less responsive to a given change in price. In the diagram the demand curve DD has a rapid and steep slope.
(e) Unitary Elastic Demand (Ed = 1) : When proportionate or percentage change in quantity demanded is exactly equal to proportionate or percentage change in price, then demand is said to be unitary elastic. For instance a 10% fall in price of a commodity leads to 10% rise in demand of that commodity.
\(Ed = \cfrac{Percentage\, Change\, in\, Quantity\, Demanded}{Percentage\, change\, in\, Price}\)
\(Ed = \cfrac {10}{0}\) = 1
∴ Ed = 1
In this case the demand curve slopes downwards uniformly. This demand curve is called a rectangular hyperbola as shown in the figure. The unity elasticity of demand is a dividing line to distinguish between relatively elastic demand and relatively inelastic demand.
