Economics (NCERT) Notes

2.12 Elasticity of Demand

Nature of demand
•The demand for a good moves in the opposite direction of its price.
•However, the impact of the price change is always not the same.
     •Sometimes, the demand for a good changes considerably even for small price changes.
     •Sometimes, the demand is not affected much by price changes
•Demands for some goods are very responsive to price changes while demands for certain others are not so responsive to price changes.
 
Price elasticity of demand
•Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price.
•Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price.
•Price elasticity of demand for a good eD =
= (percentage change in demand for the good)/(percentage change in the price of the good)
= (∆Q/Qx100)/ (∆P/Px100)
= (∆Q/Q)/ (∆P/P)
Where ∆P is the change in price of the god and ∆Q is the change in quantity of the good.
 
Example
•Suppose an individual buy 15 bananas when its price is Rs. 5 per banana.
•When the price increases to Rs. 7 per banana, she reduces his demand to 12 bananas.
•Here
•Q= 15, ∆Q =-3
•P=5, ∆P=2
•Hence
•Percentage change in quantity demanded = -20
•Percentage change in Market price = 40
•Hence Price elasticity = (∆Q /Qx100)/ (∆P /Px100) = |eD| = 0.5
•Thus the demand for bananas is not very responsive to a change in price of bananas.
 
Inelastic Demand
•When the percentage change in quantity demanded is less than the percentage change in market price, |eD|is estimated to be less than one and the demand for the good is said to be inelastic at that price.
•Demand for essential goods is often found to be inelastic.
 
Elastic Demand
•When the percentage change in quantity demanded is more than the percentage change in market price, the demand is said to be highly responsive to changes in market price and the estimated |eD|is more than one.
•The demand for the good is said to be elastic at that price.
•Demand for luxury goods is seen to be highly responsive to changes in their market prices and |eD|>1.
 
Unitary-elastic
•When the percentage change in quantity demanded equals the percentage change in its market price, |eD|is estimated to be equal to one and the demand for the good is said to be Unitary-elastic at that price.
•The demand for certain goods may be elastic, unitary elastic and inelastic at different prices.



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