In previous sessions, we have discussed in detail about the demand curve. Demand curve is derived from the demand function. Demand function shows the relationship between price of a good and its quantity demanded keeping factors other than price affecting demand constant. Demand curves can be either linear or non-linear. We discussed the subject of demand keeping a linear demand curve in focus. Now individual demand curve represents the choice of an individual. And when all the individual demand curves are aggregated for a good, we get to know the Market Demand of that good which is simply the total demand of that good in the market.
In this session, we will discuss in detail about the Elasticity of Demand.
Elasticity of Demand
Demand in simple terms is the willingness and ability of a consumer to buy a particular quantity of good at a given market price and level of income. Now demand for a good or commodity is affected by several factors including price of that good, the taste and preference of the consumers, the level of income of the consumers as well as prices of related products that can be either complements or substitutes.
An important thing to note here is that, the quantity demanded of a good will get affected or changed given change in any of the above listed factors which can affect demand. But it becomes vital to understand which factor can cause what amount of change in demand. Let us understand it in a lucid manner.
Demand or quantity demanded for a product will change given a change in any factor. But the question is what is the exact or percentage wise change in the factors and due to its effect what is the exact or percentage wise change in the quantity demanded of the good or commodity. So we are aiming to measure the change in the factors in numerical manner i.e., in percentage terms and also measure the effect on quantity demanded of the change in numerical terms i.e., in percentage terms.
Elasticity of Demand is thus the measure of responsiveness of the demand for a particular good, service or commodity to the change in the factors affecting the demand of the good, service or commodity.
Now this can be ascertained for different factors individually. That is, we study the elasticity of demand by categorizing the different factors. So to say, if we want to know the elasticity of demand with respect to change in price as a factor, what we are measuring is Price Elasticity of Demand. If the factor we are measuring for is income, we are measuring the Income Elasticity of Demand.
In this session we will focus on Price Elasticity of Demand.
Price Elasticity of Demand
In general, we know that as the price of a good or commodity increases, the demand for that commodity decreases and vice versa.
We will understand the same with the help of an example as follows;
We are given with the demand of Apples at particular prices as follows;
Here we will find the Price Elasticity of demand for Apples. One thing which is important to note here is that, the price elasticity of demand in general would be negative number as the demand for a good is inversely related to the price of that good as studied as per Law of Demand. But here we will take the absolute value of the same when calculating the elasticity of demand.
In the above example, we can see that as the price of the Apples increased from Rs.10 to Rs.14, the quantity demanded for Apples decreased from 30 to 24.
First of all, as per formula we need to derive the Percentage Change in quantity demanded of the Apple, which comes up to
Here we can see that the demand for apples is not very responsive to the change in its price.
When the percentage change in quantity demanded is less than then the percentage change in price, the price elasticity of demand would be less than 1 as is the case here and thus the demand is said to be inelastic at that price level. Here the price elasticity of Apples is less than 1 i.e., 0.5 hence it is inelastic. Generally, the price elasticity of demand for essential goods tend to be inelastic i.e., less than 1.
In a scenario when the percentage change in quantity demanded is more than then the percentage change in price, the price elasticity of demand would be more than 1. This means the demand is highly responsive to the price of that product and hence the demand for that product is said to be elastic. Generally, the price elasticity of demand for luxury goods tend to be elastic i.e., more than 1.
And when the percentage change in quantity demanded is equal to the percentage change in price, the price elasticity of demand would be equal to 1. Here in this case, the demand is said to be unitary elastic at that price level i.e., change in price brings an equal change in quantity demanded.
So for different goods, demand can be either elastic, unitary elastic or inelastic depending upon the nature of the product as well as the price level of the product.
Conclusion
In this session, we discussed in detail the concept of Elasticity of Demand. We specifically focused on the Price Elasticity of Demand. Within the Price Elasticity of Demand, we studied three scenarios where the demand can be elastic, unitary elastic or inelastic.
In this session, we will discuss in detail about the Elasticity of Demand.
Elasticity of Demand
Demand in simple terms is the willingness and ability of a consumer to buy a particular quantity of good at a given market price and level of income. Now demand for a good or commodity is affected by several factors including price of that good, the taste and preference of the consumers, the level of income of the consumers as well as prices of related products that can be either complements or substitutes.
An important thing to note here is that, the quantity demanded of a good will get affected or changed given change in any of the above listed factors which can affect demand. But it becomes vital to understand which factor can cause what amount of change in demand. Let us understand it in a lucid manner.
Demand or quantity demanded for a product will change given a change in any factor. But the question is what is the exact or percentage wise change in the factors and due to its effect what is the exact or percentage wise change in the quantity demanded of the good or commodity. So we are aiming to measure the change in the factors in numerical manner i.e., in percentage terms and also measure the effect on quantity demanded of the change in numerical terms i.e., in percentage terms.
Elasticity of Demand is thus the measure of responsiveness of the demand for a particular good, service or commodity to the change in the factors affecting the demand of the good, service or commodity.
Now this can be ascertained for different factors individually. That is, we study the elasticity of demand by categorizing the different factors. So to say, if we want to know the elasticity of demand with respect to change in price as a factor, what we are measuring is Price Elasticity of Demand. If the factor we are measuring for is income, we are measuring the Income Elasticity of Demand.
In this session we will focus on Price Elasticity of Demand.
Price Elasticity of Demand
In general, we know that as the price of a good or commodity increases, the demand for that commodity decreases and vice versa.
The price elasticity of demand is a measure of elasticity to calculate the responsiveness of demand for a product to change in the price of that product. In formula terms, the Price Elasticity of Demand for a good is defined as percentage change in demand (quantity demanded) of that good divided by the percentage change in price of that good.
We will understand the same with the help of an example as follows;
We are given with the demand of Apples at particular prices as follows;
Here we will find the Price Elasticity of demand for Apples. One thing which is important to note here is that, the price elasticity of demand in general would be negative number as the demand for a good is inversely related to the price of that good as studied as per Law of Demand. But here we will take the absolute value of the same when calculating the elasticity of demand.
In the above example, we can see that as the price of the Apples increased from Rs.10 to Rs.14, the quantity demanded for Apples decreased from 30 to 24.
First of all, as per formula we need to derive the Percentage Change in quantity demanded of the Apple, which comes up to
Here we can see that the demand for apples is not very responsive to the change in its price.
When the percentage change in quantity demanded is less than then the percentage change in price, the price elasticity of demand would be less than 1 as is the case here and thus the demand is said to be inelastic at that price level. Here the price elasticity of Apples is less than 1 i.e., 0.5 hence it is inelastic. Generally, the price elasticity of demand for essential goods tend to be inelastic i.e., less than 1.
In a scenario when the percentage change in quantity demanded is more than then the percentage change in price, the price elasticity of demand would be more than 1. This means the demand is highly responsive to the price of that product and hence the demand for that product is said to be elastic. Generally, the price elasticity of demand for luxury goods tend to be elastic i.e., more than 1.
And when the percentage change in quantity demanded is equal to the percentage change in price, the price elasticity of demand would be equal to 1. Here in this case, the demand is said to be unitary elastic at that price level i.e., change in price brings an equal change in quantity demanded.
So for different goods, demand can be either elastic, unitary elastic or inelastic depending upon the nature of the product as well as the price level of the product.
Conclusion
In this session, we discussed in detail the concept of Elasticity of Demand. We specifically focused on the Price Elasticity of Demand. Within the Price Elasticity of Demand, we studied three scenarios where the demand can be elastic, unitary elastic or inelastic.
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