Concept and Types of Elasticity of Demand

CONCEPT OF ELASTICITY OF DEMAND

The elasticity of demand is a measure of a degree of responsiveness of quantity of a product to the change in its determinants. If the demand is more elastic, then a small change in price will cause a large change in quantity consumed. If the demand is less elastic, then it will take large changes in price to make a change in quantity consumed. The concept of elasticity of demand shows how much or to what rate the quantity demanded of a commodity will change as a result of a change in the price.

According to K.E. Boulding, "The elasticity of demand may be defined as the percentage change in the quantity demanded which would result from one percent change in its price".

According to Prof. Meyers, "Elasticity of demand is a measure of the relative change in the amount purchased in response to any change in price or a given demand curve".

According to Lipsey, "Elasticity of demand may be defined as the ratio of the percentage change in demand to the percentage change in price".

According to Mrs. John Robbins, "The elasticity of demand at any price or at any output is the proportional change to the amount purchased response to a small change in price, divided by the proportional changes of price".

In brief, the elasticity of demand is defined as the proportionate change in quantity demanded divided by the proportionate change in its determinants like price, income, etc.

Symbolically,

Elasticity of demand (E_d) = {percentage change in quantity demand / percentage change in determinants of demand

TYPES OF ELASTICITY OF DEMAND

Elasticity of demand has been divided into three parts:

1. Price Elasticity of Demand (Ep)
2. IncomeElasticity of Demand (Ey)
3. CrossElasticity of Demand (Exy)

Price Elasticity of Demand (E_P)

When the price of goods changes, its demand also changes. Price elasticity of demand measures by how much quantity demand of goods changes with a given change in the price of it. So, the price elasticity of demand is the measure of the responsiveness of quantity demanded of a product to the change in its price, being other things constant. The term other things refers to the income of the consumer, price of related goods, etc. The price of elasticity of demand is symbolized by the letter 'Ep' and it is written as:

Ep = percentage change in quantity demand/ percentage change in price

= (ΔQ / ΔP)*(P / Q)

Where,

Ep = Price elasticity of demand

ΔQ = Change in quantity demand

ΔP = Change in price

Q = Initial quantity demand

P = Initial price

DEGREE / TYPES OF PRICE ELASTICITY OF DEMAND

Price elasticity of demand can be discussed under the following five types:

i) Perfectly Elastic Demand (Ep =∞)

If very small changes or negligible change in the price of a good lead to an infinite change in quantity demanded that good, then the demand is known as perfectly elastic demand. In this type of demand, the value of price elasticity of demand reaches infinite. The demand curve indicates the change in price is insignificant; however the change in quantity demanded is infinite.

In the given figure, the price is measured in Y-axis and quantity demanded is measured along the X-axis. The point 'P' is the price where the consumer can buy any quantity of demand like Q₁, Q₂, Q₃ and so on. Hence, DD is the perfectly elastic demand curve sloping upward.

ii) Perfectly Inelastic Demand (Ep=0)

If the quantity demanded is totally irresponsive to the change in the price of a good, then the demand is known as perfectly inelastic demand. In such type of demand, whatever be the change in price, the quantity demanded remains same or unchanged. This type of elasticity is found in the case of basic necessary goods such as salt, medicine, etc. Therefore, the numerical value of elasticity becomes 0.

In the given figure, the price is measured in Y-axis and quantity demanded is measured along the X-axis. QD is the perfectly inelastic demand curve which remains constant even the price of a commodity increase from P₁ to P₂ to P₃.

iii) Relatively Elastic Demand (Ep>1)

If the change in demand is greater than the change in the price of good, then the demand is known as relatively elastic demand. At that time percentage change in price leads to more than percentage change in quantity demanded. In this type of demand, the absolute value of price elasticity of demand remains greater than unity.

In the given figure, the price is measured in Y-axis and quantity demanded is measured along the X-axis. The curve is more flat which shows that demand is more elastic. The small fall in price from P₂ to P₁ effects majorly on quantity demand from Q₁ to Q₂ i.e. percentage change in demand is more than the percentage change in price.

iv) Relatively Inelastic Demand (Ep<1)

If the percentage change in demand is less than the percentage change in the price of a good, then the demand is known as relatively inelastic demand. At that time, one percentage change in price leads to less than one percentage change in quantity demand. In this type of demand, the absolute value of price elasticity of demand remains less than unity.

In the given figure, the price is measured in Y-axis and quantity demanded is measured along the X-axis. There is a huge difference in price from P₁ to P₂ but the quantity demand has no vast difference from Q₁ to Q₂. It means there is a small change in quantity demand even the price change with a huge amount. The demand curve DD₁ in the figure seems steeper.

v) Unitary Elastic Demand (Ep=1)

If the percentage change in demand is equal to the percentage change in the price of a good, then the demand is known as unitary elastic demand. In such case percentage change in price equals to the percentage change in quantity demand. At that time, the absolute value of elasticity of demand remains just equal to 1.

In the given figure, the price is measured in Y-axis and quantity demanded is measured along the X-axis. An initial point of price (P1) and quantity demanded (Q₁) is shown as related and when there is a change in price from P₁ to P₂ then it results in an equal change in quantity demand from Q₁ to Q₂. The percentage change in price and the percentage change in quantity demand is equal. DD₁ is the unitary elastic demand curve smoothly sloping downwards to the right.

(Karna, Khanal, and Chaulagain)(Khanal, Khatiwada, and Thapa)(Jha, Bhusal and Bista)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.