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Home Elasticity of Demand Degrees of Elasticity of Demand

Degrees of Elasticity of Demand:

 

We have stated demand for a product is sensitive or responsive to price change. The variation in demand is, however, not uniform with a change in price. In case of some products, a small change in price leads to a relatively larger change in quantity demanded.

 

Elastic and Inelastic Demand:

 

For example, a decline of 1% in price leads to 8% increase in the quantity demanded of a commodity. In such a case, the demand is said to elastic. There are other products where the quantity demanded is relatively unresponsive to price changes. A decline of 8% in price, for example, gives rise to 1% increase in quantity demanded. Demand here is said to be inelastic.

 

The terms elastic and inelastic demand do not indicate the degree of responsiveness and unresponsiveness of the quantity demanded to a change in price.

 

The economists therefore, group various degrees of elasticity of demand into five categories.

 

(1) Perfectly Elastic Demand:

 

A demand is perfectly elastic when a small increase in the price of a good its quantity to zero. Perfect elasticity implies that individual producers can sell all they want at a ruling price but cannot charge a higher price. If any producer tries to charge even one penny more, no one would buy his product.

 

People would prefer to buy from another producer who sells the good at the prevailing market price of $4 per unit. A perfect elastic demand curve is illustrated in fig. 6.1.

 

Diagram:

 

 

It shows that the demand curve DD/ is a horizontal line which indicates that the quantity demanded is extremely (infinitely) response to price. Even a slight rise in price (say $4.02), drops the quantity demanded of a good to zero. The curve DD/ is infinitely elastic. This elasticity of demand as such is equal to infinity.

 

(2) Perfectly Inelastic Demand:

 

When the quantity demanded of a good dose not change at all to whatever change in price, the demand is said to be perfectly inelastic or the elasticity of demand is zero.

 

For example, a 30% rise or fall in price leads to no change in the quantity demanded of a good.

 

Ed = 0

       30%

 

Ed = 0

 

 

In figure 6.2 a rise in price from OA to OC or fall in price from OC to OA causes no change (zero responsiveness) in the amount demanded.

 

Ed = 0

       Δp

 

Ed = 0

 

(3) Unitary Elasticity of Demand:

 

When the quantity demanded of a good changes by exactly the same percentage as price, the demand is said to has a unitary elasticity.

 

For example, a 30% change in price leads to 30% change quantity demand = 30% / 30% = 1.

 

One or a one percent change in price causes a response of exactly a one percent change in the quantity demand.

 

 

In this figure (6.3) DD/ demand curve with unitary elasticity shows that as the price falls from OA to OC, the quantity demanded increases from OB to OD. On DD/ demand curve, the percentage change in price brings about an exactly equal percentage in quantity at all points a, b. The demand curve of elasticity is, therefore, a rectangular hyperbola.

 

Ed = %∆q

      %∆p

 

 Ed = 1

 

(4) Elastic Demand:

 

If a one percent change in price causes greater than a one percent change in quantity demanded of a good, the demand is said to be elastic.

 

Alternatively, we can say that the elasticity of demand is greater than. For example, if price of a good change by 10% and it brings a 20% change in demand, the price elasticity is greater than one.

 

Ed = 20%

      10%

 

 Ed = 2

 

 

In figure (6.4) DD/ curve is relatively elastic along its entire length. As the price falls from OA to OC, the demand of the good extends from OB to ON i.e., the increase in quantity demanded is more than proportionate to the fall in price.

 

Ed  = %∆q

        %∆p

 

Ed > 1

 

(5) Inelastic Demand:

 

When a change in price causes a less than a proportionate change in quantity demand, demand is said to be inelastic.

 

The elasticity of a good is here less than I or less than unity. For example, a 30% change in price leads to 10% change in quantity demanded of a good, then:

 

Ed = 10%

       30%

 

Ed = 1

        3

 

Ed < 1

 

 

In figure (6.5) DD/ demand curve is relatively inelastic. As the price fall from OA to OC, the quantity demanded of the good increases from OB to ON units. The increase in the quantity demanded is here less than proportionate to the fall in price.

 

Note: It may here note that the slope of a demand curve is not a reliable indicator of elasticity. A flat slope of a demand curve must not mean elastic demand. Similarly, a steep slope on demand curve must not necessarily mean inelastic demand.

 

The reason is that the slope is expressed in terms of units of the problem. If we change the units of problem, we can get a different slope of the demand curve. The elasticity, on the other hand, is the percentage change in quantity demanded to the corresponding percentage change in price.

Relevant Articles:

Meaning of Price Elasticity of Demand
Degrees of Elasticity of Demand
Measurement of Price Elasticity of Demand
Types of Elasticity of Demand
Factors Determining Price Elasticity of Demand
Importance of Elasticity of Demand
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
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Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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