Elasticity Of Demand

Contents

Degrees of elasticity of demand

Concepts of elasticity of demand

Determinants of elasticity of demand

Elasticity of demand

~~ is the degree of responsiveness of demand to change in its determinants

Determinants are

Price of the product, income of the consumer, price of related goods, taste and preferences of the consumer etc

Degrees of elasticity of demand

Perfectly elastic demand Perfectly inelastic demand Unit elastic demand Relatively inelastic demand Relatively elastic demand

Perfectly elastic demand

~ Quantity demanded changes even though there is no change in price

Elasticity is infinity

Perfectly inelastic demand

Change in price has no effect on quantity demanded

Elasticity is Zero

Unitary Elasticity of demand

Change in price is equal to Change in quantity demanded

Elasticity is 1

Relatively inelastic demand

Change in price is more and corresponding change in quantity demanded is less

Elasticity < 1

Relatively elastic demand

Change in price is less but corresponding change in quantity is more

Elasticity > 1

Concepts of elasticity of demand

Price elasticity of demand Cross elasticity of demand Income elasticity of demand Advertisement elasticity of demand Elasticity of price expectation

Price elasticity of demand

Responsiveness of demand for a commodity to changes is in its price

Cross Elasticity of demand

Degree of responsiveness of demand for a commodity to changes in price of its substitutes and complementary

Income elasticity of demand

Responsiveness of demand to changes in income

Advertisement elasticity of demand

Measures how advertising affects the demand of a certain product.

Elasticity of price expectations

Expected change in future price as a result of change in current prices of a product

Determinants of elasticity of demand

Substitutes: The more substitutes, the higher the elasticity, as people can easily switch from one good to another if a minor price change is made

Necessity: The more necessary a good is, the lower the elasticity, as people will buy it no matter the price

Range of Commodity use: Higher the range of use of a commodity higher the elasticity

Weightage of product in total consumption: the greater the percentage of a total income spent on the commodity, the greater the person’s price elasticity of demand for that commodity

Time: longer any price change persists, the greater the price elasticity of demand

References

Managerial economics – Dwivedi Modern economic theory – K K Dewett