Demand Analysis and Elasticity of Demand - NET exam - paper 2

                      Demand Analysis and Elasticity of Demand

Elasticity of demand is a measure used in economics to show the responsiveness of the quantity demanded of an item to a change in its price.

Source: Boundless. “Elasticity of Demand.” Boundless Marketing. Boundless, 01 Jul. 2015. Retrieved 10 Jul. 2015 from https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/pricing-8/demand-analysis-59/elasticity-of-demand-295-10575/

Elasticity of demand is a measure used in economics to show the responsiveness of the quantity demanded of an item to a change in its price.

Source: Boundless. “Elasticity of Demand.” Boundless Marketing. Boundless, 01 Jul. 2015. Retrieved 10 Jul. 2015 from https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/pricing-8/demand-analysis-59/elasticity-of-demand-295-10575/

 Elasticity of demand is a measure used in economics to show the responsiveness of the quantity demanded of an item to a change in its price.the responsiveness change in demand due to change in price ..

According to Marshall, “the elasticity (or responsiveness) of demand in a market is great or small accordingly as the demand changes (rises or falls) much or little for a given change (rise or fall) in pr
The formula for the coefficient of price elasticity of demand for a good is:

The above formula usually yields a negative value, due to the inverse nature of the relationship between price and quantity demanded, as described by the "law of demand"

Elasticity of Demand

The law of demand explains the functional relationship between price and demand. In fact, the demand for a commodity depends not only on the price of a commodity but also on other factors such as income, population, tastes and preferences of the consumer. The law of demand assumes these factors to be constant and states the inverse price-demand relationship.
 In other words, the law of demand merely shows the direction in which the demand changes as a result of a change in price, but does not throw any light on the amount by which the demand will change in response to a given change in price. Thus, the law of demand explains the qualitative but not the quantitative aspect of price- demand relationship.
 Some commodities are more responsive or sensitive to change in price while some others are less. The concept of the elasticity of demand has great significance as it explains the degree of responsiveness of demand to a change in price. It thus elaborates the price-demand relationship. The elasticity of demand thus means the sensitiveness or responsiveness of demand to a change in price.

Types of Price Elasticity

The concept of price elasticity reveals that the degree of responsiveness of demand to the change in price differs from commodity to commodity. Demand for some commodities is more elastic while that for certain others is less elastic. Using the formula of elasticity, it possible to mention following different types of price elasticity:

•     Perfectly inelastic demand (ep = 0)

 This describes a situation in which demand shows no response to a change in price. Thus ep = O. Hence, perfectly inelastic demand

•     Inelastic (less elastic) demand (e < 1)

 In this case the proportionate change in demand is smaller than in price.This is referred to as an inelastic demand

•     Unitary elasticity demand (e = 1)

When the percentage change in price produces equivalent percentage change in demand, we have a case of unit elasticity.. In this case percentage change in demand is equal to percentage change in price, hence e = 1

•     Elastic (more elastic) demand (e > 1)

In case of certain commodities the demand is relatively more responsive to the change in price.the percentage change in demand is greater than that in price. Hence, the elastic demand (e>1)

•     Perfectly elastic demand (e = ∞)

This is experienced when the demand is extremely sensitive to the changes in price.