Demand is defined as a schedule that
shows the amounts of a product or service the consumers are willing and able to
purchase at each price during specific time and specific market.
According to Bowden, “Demand is the
propensity of the consumers to buy different quantities of a particular good at
different unit prices”.
Here, desire and ability to buy are
the key components of demand whereas time and market are two requisites. In
this article we are trying to take a look about Elasticity of demand, Types of
Price elasticity of demand and certain importance for the same.
ELASTICITY OF DEMAND:
“Elasticity of demand is a tool that measures the responsiveness of the quantity demanded
of a good to its price”. OR
“Elasticity
of demand is the relative change in quantity demanded to the relative change in
the price”.
Types
of Elasticity of Demand:
1.
Price Elasticity of Demand
2.
Cross-Price Elasticity of Demand
3.
Income Elasticity of Demand
1.
Price Elasticity of Demand:
It
shows the responsiveness of quantity demanded to change in price with others
factors being constant (i.e. Ceteris- paribus). Ceteris Paribus is a Latin term
which means that Except Demand and price all other things like Income, Trends,
Population, Scarcity, Season etc. will remain the same.
2. Income
Elasticity of Demand: It
shows the responsiveness of quantity demanded to change in consumer income (%),
with others factors being constant (i.e. Ceteris- paribus includes price of
commodity, price of substitutes, tastes, preferences etc.)
· Income Elasticity is equal to unity or one when the proportion of income spent on a good remains the same even though income has increased (EI=1).
3.
Cross Elasticity of Demand: It
shows the change in demand for one commodity due to change in price of other
related commodity.
These
may act as substitutes or complements; when fall in the price of one good
increases demand for another good and vice versa. Cross elasticity of demand can be used to
indicate boundaries within industries. The cross elasticity of complementary
goods is positive and that between substitutes, it is negative.
DEGREES
OF PRICE ELASTICITY OF DEMAND:
In
general sense, increase in price brings about a decrease in demand but this is
not same in all goods. X axis represents Quantity of product whereas Y axis
represents Price of the product. Elasticity of demand differs with different
commodities. From the same commodity elasticity of demand differs from person
to person.
Based on the magnitude of elasticity of demand it is
further divided into five categories.
1. Perfectly
Inelastic Demand
2.
Perfectly Elastic Demand
3.
Relative Elastic Demand
4.
Relative Inelastic Demand
5. Unitary
Elastic Demand.
1. Perfectly Inelastic Demand: Here it is stated that, ‘No Matter what the price of the good is the demand will be the same’. The price of commodity may increase or decrease, the quantity demanded remains the same. Hence elasticity of demand is zero.
There is no change with concern to quantity demanded
with respect to increase in price. Hence it is known as perfectly elastic in
nature.
Ex.: Salt, water
and Life saving drugs.
Therefore, Ed=0.
2. Perfectly Elastic Demand: Here, a fractional change in the price may bring about huge change in the Quantity of demand’. Here, the demand is hypersensitive and the elasticity of demand is infinite. Demand curve is horizontal line and parallel to X-axis.
This concept is typically theoretical one and can be
applied in only some of the competitive market. Here, the product is
homogeneous in nature. It clearly depicts that a slight change in price would
stop the demand.
Ed
=Infinity
Ex.:
Bread, Tea, Wada pav.
3. Relative Elastic Demand: ‘Small change in price of the commodity makes drastic change in quantity demanded’.
A small proportionate fall in price is accompanied by a
larger proportionate increase in demand and vice versa. Hence Elasticity of
demand is greater than unity. It is somewhat more practical application for
different products.
Here Ed >1
Ex.: Vaccination, Mode of travel, Medicines etc.
4. Relative Inelastic Demand: ‘Phenomenal change in price will not make change in demand’. A large proportionate fall in price is followed by a smaller proportionate increase in the quantity demanded and vice versa.
Hence elasticity of
demand is less than unity. Here Ed <1.
Ex.: Niche market, Jewelry, Luxurious goods.
5. Unitary Elastic Demand: ‘Here, the Percent change in quantity demand on price will be proportional if price increases’. It means a given proportionate fall in price is followed by the same proportionate increase in demand and vice versa.
Change in demand
and change in price of the product remains same. Hence Elasticity of demand is
one.
Here Ed =1.
All the types of Elasticity are
represented in the following Figure. The graph shows demand curve where, X axis
is quantity demanded and Y axis shows prices. Following is the indication of
the all types of elasticity’s.
·
DD1: Perfectly Elastic Demand
·
DD2: Elastic Demand
·
DD3: Unitary Elastic Demand
·
DD4: Inelastic Demand
· DD5: Perfectly Inelastic Demand
IMPORTANCE
OF ELASTICITY OF DEMAND:
The importance of elasticity of demand
is categorized into two bases i.e. practical and theoretical one.
Practical
Importance of Elasticity of Demand:
1.
Taxation:
2.
Determination of wages
3.
International Trade
4.
Monopoly Price
5.
Increasing Returns
6.
Poverty in Plenty
7.
Elasticity of Promotional Activity
8.
Effect on the Economy
Theoretical Importance of Elasticity of Demand:
1.
Price Determination
2.
Price Discrimination
3.
Measuring degree of Monopoly Power
4.
Boundary between Industries
5.
Market Reforms
6.
Theory of Distribution
7.
Classification of goods as Substitutes
and Complements:
Substitute – ‘A good that can be used in place of
another good’.
Complement – ‘A good that
is used in conjunction with another good’.
Reference Video:
Link:
https://www.youtube.com/channel/UCDul7uf7pcbM_kWCEaA9WvA
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