Meaning of Price Elasticity
Price elasticity of demand denotes the ratio at which the demand contracts with the rise in price and extends with a fall in price. So there is an inverse relationship between price and demand of a good. Price elasticity of demand is represented with the minus (–) Sign. It can be understand with the help of following formula.
Example :- Rise in price by 10 percent is followed by a decrease in demand by 20 percent. Measures of price elasticity of demand
Definition of Price Elasticity of Demand
By Dr. Marshall, “Elasticity of demand is defined as the percentage change in the quantity demanded divided by the percentage change in the price”. Measures of price elasticity of demand
Degrees of Price Elasticity of Demand
Price elasticity of demand is for all goods, at different prices are not always the same for always. It may be more or less. So in economics, the study of the concept of elasticity of demand is divided into five degrees. Which are the following.
(1). Perfectly Elastic
(2). Perfectly Inelastic
(3). Unit Elastic
(4). More than unit Elastic
(5). Less than unit Elastic
(1). Perfectly Elastic Demand:- A perfectly elastic demand is that due to which a little change in price will cause an infinite change in demand. As a little price rise causes demand to fall in demand to zero and a little fall in price causes an infinite demand for goods. So under Perfect Competition, the demand curve of firms is perfectly elastic. Measures of price elasticity of demand
DD Represents a perfectly elastic demand curve. As it is parallel to the OX- axis. As if prices rise a little from 4 to 5 then demand goes on zero. And at the same price 4 a consumer can buy 10 units or 30 units as many units as he desires.
(2). Perfectly Inelastic Demand:- A perfectly inelastic demand is one which a change in price causes no change in demand is called inelastic demand. Such a type of demand is concerned with the essential things of life such as salt, sugar, clothes and flour. Measures of price elasticity of demand
When price is 0 to 2, 0 to 4 and 0 to 6 but demand remains constant at all prices is called perfectly inelastic demand. Measures of price elasticity of demand
(3). Unitary Elastic Demand:- Unitary Elastic demand is that which shows an equal percentage change in demand with the same percent change in price of a good is called unitary Elastic Demand. Example- A 10% change in price rise of a good then the same 10% of the demand will decline of the same good whose demand rises. And Reverse this. Measures of price elasticity of demand
In the graph we can see that price goes up OT to OP then at the same time demand declines ON to OM at the same percentage 10%.
(4). Greater than Unitary Elastic:- It is a demand in which a greater change in demand caused a less price decline. Example if price falls 5% then demand increases by 20% and reverse this. In other words if the price rises a little but compared to it demand will decline more percentage as compared to rise price. Measures of price elasticity of demand
As we see in the graph that price goes down from OP to OT by 5%. But Demand goes up by 20% is called the Greater than Unitary elastic demand.
(5). Less than Unitary Elastic demand:- it is that demand of goods which percentage demand responses less than the price more is called Less than Unitary Elastic demand. Example:- When price falls by 5 percent accompanied by 3 percent extends a demand of a good. Measures of price elasticity of demand
When price falls more than a percentage than demand goes on it is called less than unitary demand. Measures of price elasticity of demand
Measurement of Price Elasticity of Demand
There are five methods of measurement of price elasticity of demand. Which are as.
- Total Expenditure Method
- Proportionate Method
- Point Elasticity Method
- Arc Elasticity Method
- Revenue Method
(1). Total Expenditure Method:- This method was developed by Dr. Marshall. This method tells us how much and in what direction the total expenditure has changed as a result of a change in the price of a good. This method shows us three stages of expenditure due to the change in price as follows.
- Unity Elasticity Demand:- When the total expenditure remains constant due to the fall or rise in the price of a good.
- Greater than Unity Elastic Demand:- When total expenditure rises due to the price fall. And total expenditure goes down due to the price rise of a good.
- Less than a Unity Elastic Demand:- When total expenditure goes down due to the fall in price of a good. And reverse Total expenditure goes up due to the rise in price of a good.
Now, we can understand this total expenditure with the change in price with the following example.
|
Elasticity of Demand |
Price |
Total Expenditure |
|---|---|---|
|
Unity |
Rise Fall |
Unchanged Unchanged |
|
Greater than Unity |
Rise Fall |
Down Up |
|
Less than Unity |
Rise Fall |
Up Down |
(2). Proportionate Method:- This is the second method of price elasticity method. Which shows proportionate change in demand is divided by the proportionate change in price. This can be understood with the following formula.
Ed= (-) Proportionate change in demand for good -x
Proportionate change in price of a good -x
(3). Point Elasticity Method:- This method can be measured with the help of demand curve. Which shows change in demand with the changes in price change. As at every point of price it shows different demand. So such changes of price denote different demands of the same good for which price has been changed. All these points are different prices as well as different demand due to the change in price level of the same good.
Example throughout the graph we can understand as at point A, price elasticity of demand where op is a price and oq is a quantity demanded. Another point C, where Op1 is the price for the same good and OQ1 is a quantity demanded for the same good. Measures of price elasticity of demand
(4). Arc Elasticity:- arc elasticity method can be used when a little change occurs in price as well as little change in demand. It can be understood with the following graph arc.
- There are three as A, B and C demand points on the demand curve.
- When we see points A and B where the price OP and Demand at OQ on the point A of Demand Curve.
- But when price falls a little from OP to OP1 in results of which demand also rises a little by OQ to OQ1.
- And the same occurred on the point C, where we can see when Price rises from the OP2 to OP1 then demand falls a little from OQ2 to OQ1.
- So we find in the graph the Arc between the two points as A and C.
So, Price elasticity of demand of an arc is called arc Elasticity of Demand.
(5). Revenue Method
This is the fifth method of price elasticity of method. Revenue is earned by the firm by selling its products. Assume that a firm sells 10 products and the firm gets 50 rupee as a revenue. This is called total revenue of the firm as 50 rupees. When we divide total revenue by the number of total sold units we get the average revenue. When we divide 50 rupees by 10 units of products, we get the average here =5. Measures of price elasticity of demand
If firms sell 11 products and total revenue goes up with the firm as 55. Now we can find the marginal revenue is 55-50 = 5.
Marginal Revenue = 5
So the price of elasticity under the Revenue Method is measured with the help of Marginal revenue. Measures of price elasticity of demand
Revenue has been shown on OY -axis and quantity demanded on OX-axis. AB is average revenue and Demand Curve and AN is marginal Revenue Curve. At point P on (Average Revenue) demand Curve. You can check the syllabus of Business Economics on the official website Gndu.
Conclusion:-
Price elasticity of demand (PED) is a crucial concept in economics that measures how the quantity demanded of a good or service responds to changes in its price. Goods with elastic demand experience significant changes in quantity demanded when prices fluctuate, while inelastic goods show little responsiveness to price changes. Measures of price elasticity of demand
Understanding price elasticity helps businesses and policymakers make informed decisions regarding pricing strategies, taxation, and revenue generation. Firms can use this concept to maximize profits by adjusting prices based on consumer sensitivity, while governments can predict the impact of taxes on goods and services.
In conclusion, price elasticity of demand is an essential tool for analyzing market behavior. It provides insights into consumer purchasing patterns, assists in strategic decision-making, and helps in predicting the economic impact of price changes on different products and industries. Measures of price elasticity of demand
Important other questions of Business Economics
Assumption and Exception of Diminishing Utility
Equilibrium of consumer under Indifference Curve