Economics (NCERT) Notes

2.14 Relationship between Elasticity and Demand

Constant Elasticity Demand Curve
•The elasticity of demand on different points on a linear demand curve is different, varying from 0 to ∞ .
•Sometimes, the demand curves can be such that the elasticity of demand remains constant throughout.
•Sometimes, the demand curves can be such that the elasticity of demand remains vary with price.
 
Perfectly Inelastic Curve
 

•In a vertical demand curve, the demand is given at the level q .
•A price never leads to a change in the demand for such a demand curve
•Hence |eD| is always 0.
•Therefore, a vertical demand curve is perfectly inelastic.
 
Perfectly elastic curve
 

•In a horizontal demand curve, market price remains constant at P , whatever be the level of demand for the commodity.
•At any other price, quantity demanded drops to zero
•Hence, |eD| is ∞
•Thus a horizontal demand curve is perfectly elastic.
 
Unitary elastic demand curve
 

•Figure depicts a demand curve which has the shape of a rectangular hyperbola.
•This demand curve has a property that a percentage change in price along the demand curve always leads to equal percentage change in quantity.
•Therefore, |eD| = 1 at every point on this demand curve.
•This demand curve is called the unitary elastic demand curve.
 
Rectangular Hyperbola
 

•An equation of the form xy = c, where x and y are two variables and c is a constant, giving us a curve called rectangular hyperbola.
•For any two points p and q on the curve, the areas of the two rectangles Oy1px1 and Oy2qx2 are same and equal to c.
•With such a demand curve, no matter at what point the consumer consumes, her expenditures [E=pxq] are always the same. 
 
Factors Determining Price Elasticity of Demand for a Good
•The price elasticity of demand for a good depends on the nature of the good and the availability of close substitutes of the good.
•Necessities like food items are essential for life and the demands for such goods do not change much in response to changes in their prices.
•On the other hand, demand for luxuries can be very responsive to price changes.
•In general, demand for a necessity is likely to be price inelastic while demand for a luxury good is likely to be price elastic.
 
Elasticity within Inelastic Items
•Though demand for food is inelastic, the demands for specific food items are likely to be more elastic.
•If the price of this variety of pulses goes up, people can shift to some other variety of pulses which is a close substitute.
•The demand for a good is likely to be elastic if close substitutes are easily available.
•If close substitutes are not available easily, the demand for a good is likely to be inelastic.



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