Elasticities of Demand
Essay title: Elasticities of Demand
ELASTICITIES OF DEMAND
MEANING OF ELASTICITY:-
Elasticity is concerned with the extent to which one variable, for example, demand, responds to a change in another variable, for example, price. The three types of elasticity of demand measure how the quantity demanded responds to changes in the key influences on demand; price, price of related products and income. With elasticity of demand, economists are concerned not only with the direction of the change in demand but also the size of the change.
PRICE ELASTICITY OF DEMAND:-
Price elasticity of demand refers to the responsiveness of quantity demanded to a change in price. Where quantity. demanded is very responsive to price changes — a small change in price leading to a relatively large change in quantity demanded
demand is said to be elastic. Whereas when quantity demanded is relatively unresponsive to price changes, demand is inelastic. To be more precise, elasticity of demand is the relationship between the proportionate change in price and the proportionate change in quantity demanded.
MEASURING PRICE ELASTICITY OF DEMAND:-
The concept of elasticity is concerned with proportionate changes in price and quantity and not absolute changes. Price elasticity of demand can be given a numerical value by using the following formula:
Price elasticity of demand is usually negative since for most products price and demand are inversely related.
DEGREES OF PRICE ELASTICITY OF DEMAND:-
Demand for most products is either elastic or inelastic. Products with elastic demand have a coefficient greater than one and less than infinity. In this case a given percentage change in price will cause a greater percentage change in demand. Demand tends to be elastic for goods and services which have close substitutes, take up a large portion of consumers’ income, are perceived as luxuries and whose purchase can be postponed.
When a given change in price causes a smaller percentage change in demand, the product has inelastic demand. Basic necessities, goods and services which take up a small portion of consumers’ incomes, addictive goods and services, goods and services with no substitutes and those which have a number of different uses have inelastic demand.
The other three degrees of price elasticity of demand are less common and may, with certain products, occur over a limited price range.
Unit price elasticity of demand occurs when a percentage change in price results in an equal percentage change in demand. In this case the coefficient will be I.
Perfectly inelastic demand is when a change in price causes no change in the quantity demanded. For instance, a person with a serious illness might be prepared to buy the same quantify of a medicine when its price rises and may not find it beneficial to increase the quantity they take when its price falls. However there are few products with perfectly inelastic demand just as there are few products with perfectly elastic demand.
When demand is perfectly elastic a change in price will cause an infinite change in the quantity of demand. The coefficient is infinity. For example, suppose there are a number of people selling CDs of a pop group at one of their concerts; if one lowered his/her price below those of his/her competitors s/he may capture all the customers at the concert.
DETERMINANTS OF PRICE ELASTICITY OF DEMAND:-
As indicated above there are some key determinants of price elasticity of demand.