Elasticity of

INTRODUCTION

• The law of demand explains the direction of change in the quantity demanded, due to the changes in the price in case of normal goods.
• Law of demand explains only the direction but not magnitude of change i.e.,
• Law of demand does not explain how much quantity demanded will change, in response to change in the price, the concept of ELASTICITY OF DEMAND explain this.

ELASTICITY OF DEMAND refers to the percentage change in demand for a commodity with respect to percentage change in any of the factors affecting demand for the commodity.

PRICE ELASTICITY OF DEMAND Degree to which quantity demanded responds to a change in price is known as PRICE ELASTICITY OF DEMAND.

(CHANGE IN PRICE÷ INITIAL PRICE)×100

No unit of price or quantity is used to represent elasticity

PERFECTLY ELASTIC DEMAND

Perfectly elastic demand is said to happen when a little change in price leads to an infinite change in quantity demanded. A small rise in price on the part of the seller reduces the demand to zero. In such a case the shape of the demand curve will be horizontal straight line.

Ed=∞

EXAMPLE:

TIMES OF INDIA NEWSPAPER

If the TOI newspaper increases in price, then people will prefer to buy other substitutes like THE HINDU or HINDUSTAN TIMES.

In this case the demand elasticity of Times of India newspaper is highly elastic.

Perfectly inelastic demand

Ed=0

Perfectly inelastic demand is opposite to perfectly elastic demand. Under the perfectly inelastic demand, irrespective of any rise or fall in price of a commodity, the quantity demanded remains the same. The elasticity of demand in this case will be equal to zero

EXAMPLE:

SALT

If the price of salt increases, demand would largely be unchanged because salt is the necessity good and increase or decrease in price of salt wouldn’t affect the quantity demanded of the salt.

Hence the demand of salt is highly inelastic.

Unitary elastic demand

The demand is said to be unitary elastic when a given proportionate change in the price level brings about an equal proportionate change in quantity demanded. The numerical value of unitary elastic demand is exactly one.

Ed=1

EXAMPLE:

A consumer found today the price of rice increased 10%; from Rs.100 to Rs.110. Then, A reduces 10% of consumption of her rice; from 1 kg to 0.9 kg.

Hence, this shows that 10% increase in price of rice lead to 10% decrease in demand of rice.

Relatively elastic demand

Ed>1

Relatively elastic demand refers to a situation in which a small change in price leads to a big change in quantity demanded. In such a case elasticity of demand is said to be more than one 

EXAMPLE:

Air-travel for vacationers is very sensitive to price. An increase in the air fare will lead the vacationer to choose another mode of transportation like car or lead him to postpone the vacation plan for the time being. Thus for a rise in airlines fare for the vacationers we would see a relatively more drastic reduction in demand towards air travel and hence its the situation of high price elasticity of demand.

Relatively inelastic demand

Ed<1

Under the relatively inelastic demand, a given percentage change in price produces a relatively less percentage change in quantity demanded. In such a case elasticity of demand is said to be less than one.

EXAMPLE:

COVID VACCINES

When the covid vaccines came in India, it had a very huge demand irrespective of price.

If the change in price of vaccines is high then also the demand would show the minimal change in the quantity demanded.

Hence demand here is less elastic.

1. AB — Perfectly Inelastic Demand

2. CD — Perfectly Elastic Demand

3. EG — Less than Unitary Elastic Demand

4. EF — Greater Than Unitary Elastic Demand

5. MN — Unitary Elastic Demand.

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