PRICE ELASTICITY OF DEMAND

by • 19/06/2011 • B.COM PART 1 EconomicsComments (1)1406

“It is the degree of responsiveness in the quantity demand of product to a change in its price.”

Price elasticity of demand can be measured with the help of any of the wollowing three methods:

  • Total Outlay method
  • Percentage method
  • Geometric method
  • TOTAL OUTLAY METHOD:

“ In this method, we compare the total outlay of the consumer before and after variation in price.”

Here Elasticity of demand is expressed in three ways:

a)      Unity

b)      Greater than unity

c)      Less than unity

a) Elasticity Equal To Unity:

If the quantity demanded of a product changes due to a change in price and the total outlay of the consumer remains constant then the elasticity of demand will be equal to unity.

b) Elasticity More Than Unity:

If the quantity demanded of a product rises due to a change in price and the total outlay of the consumer increases  then the elasticity of demand will be more than unity.

c) Elasticity Less Than Unity:

If a fall in the price results in the quantity demanded for the product to increase and the total outlay of the consumer to fall, elasticity of demand would be less than unity.

  • PERCENTAGE METHOD:

The previous method gives only a rough measure of elasticity of demand. But with the percentage method we are able to be more precise as to how much elastic the demand is:

This method is applies in two cases:

a)      Point elasticity of demand

b)      Arc elasticity of demand

a) Point Elasticity Of  Demand:

When elasticity of demand is measured for a very small change in price.

Percentage change in Qty Demand

Ed = ______________________________

Percentage change in Price

i.e.

∆Q             P

Ed =     _____   x     ____

∆ P              Q

b) Arc Elasticity Of Demand:

When elasticity of demand is to be measured for a significant change in price.

Percentage change in Qty Demand

Ed = ______________________________

Percentage change in Price

i.e.

Q1 – Qo             P1 +  Po

Ed =     _________   x     ________

Q1 + Qo              P1 – P

  • GEOMETRIC METHOD:

This method enables us to measure elasticity of demand at any point on the demand curve. In the above diagram we have purposely derived a demand curve at which the tangent (MN) indicates that elasticity o demand =1 at point A. If the point were to be lower then elasticity of demand will be < 1 and if the point were to be any where between MA, then elasticity will be > 1.

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One Response to PRICE ELASTICITY OF DEMAND

  1. abhinendra says:

    very important question

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