**Elasticity of demand**

**Elasticity of demand**

*Demand**The amount of commodities desire or purchase at a given price in a specific period of time is called demand.*

The price elasticity of demand which we simply called as elasticity of demand “it is the relationship between percentage change in Quantity demanded and the percentage change in the price of a commodity. OR

**Elasticity of Demand:**The price elasticity of demand which we simply called as elasticity of demand “it is the relationship between percentage change in Quantity demanded and the percentage change in the price of a commodity. OR

*The degree of response in quantity demanded due to change in price is called elasticity of demand. How much change in quantity demanded occurs due to change in price. OR*

If we divide marginal demand function i.e. dQ/dP by the average demand function i.e. Q/P we get elasticity of demand.

**Ep = % change in Quantity Demanded (Qd) / % change in Price (P)****General Formula:**If we divide marginal demand function i.e. dQ/dP by the average demand function i.e. Q/P we get elasticity of demand.

**(dQ/dP)/(Q/P)…**OR**(dQ/dP)*(P/Q)….**OR**dQ/Q * P/dP…***This shows that elasticity of demand is the ratio between percentage changes in demand to the percentage change in price.*

There are three methods of elasticity of demand.

1. Total outlay method/Expenditure method.

2. Percentage OR Proportional Method.

**Measurement of Elasticity of Demand:**There are three methods of elasticity of demand.

1. Total outlay method/Expenditure method.

2. Percentage OR Proportional Method.

*3.*

*Point and Arc elasticity method.*

According to this method of measuring the elasticity of demand there are three further ways as below:

a. Equal to Unity

b. Greater than Unity

c. Less than unity

When the price decreases the quantity demanded increases but the total expenditure remain constant; then the elasticity of demand is called equal to unity as given in the following schedule.

**1.****TOTAL OUTLAY OR EXPENDITURE METHOD:**According to this method of measuring the elasticity of demand there are three further ways as below:

a. Equal to Unity

b. Greater than Unity

c. Less than unity

**Equal to unity:**When the price decreases the quantity demanded increases but the total expenditure remain constant; then the elasticity of demand is called equal to unity as given in the following schedule.

When the price of a commodity increases and the quantity demanded decreases, but the total expenditure also decreases then the elasticity of demand is called greater than unity.

**DD is a demand curve which has elasticity of demand equal to unity. Its shape is like a rectangular hyperbola. The distance of DD from both axes is equal.**

Rs.6 Unit.4 Rs.24

Rs.4 Unit.6 Rs.24

Rs.3 Unit.8 Rs.24

Diagram:

__Schedule:__

Px (Price) Qx (Quantity) Total ExpendituresRs.6 Unit.4 Rs.24

Rs.4 Unit.6 Rs.24

Rs.3 Unit.8 Rs.24

Diagram:

**Greater than Unity:**When the price of a commodity increases and the quantity demanded decreases, but the total expenditure also decreases then the elasticity of demand is called greater than unity.

*As given in the following schedule:*

Rs.4 Unit.7 Rs.28

Rs.6 Unit.6 Rs.36

**Rs.3 Unit.8 Rs.24**

__Schedule:__

Px (Price) Qx (Quantity) Total ExpendituresRs.4 Unit.7 Rs.28

Rs.6 Unit.6 Rs.36

*With the help of the above schedule the shape of this type of demand curve is made in the following diagram.*

__Diagram:__

*DD is a demand curve, which has elasticity of demand more than unity. It is a flatter, which has horizontal tendency.*

When the price increases the quantity demanded decreases but the total expenditure increase and vice versa is less than unity.

It is explained in the following schedule:

__Less than Unity:__When the price increases the quantity demanded decreases but the total expenditure increase and vice versa is less than unity.

It is explained in the following schedule:

With the help of the above schedule the shape of this type of demand curve is made in the following diagram.

Rs.3 Unit.8 Rs.24

Rs.4 Unit.4 Rs.16

Rs.5 Unit.2 Rs.10__Schedule:__

Px (Price) Qx (Quantity) Total ExpendituresRs.3 Unit.8 Rs.24

Rs.4 Unit.4 Rs.16

Rs.5 Unit.2 Rs.10

With the help of the above schedule the shape of this type of demand curve is made in the following diagram.

**Diagram:***DD is a demand Curve that has elasticity of demand less than unity. It is a steeper demand curve, which has vertical tendency.*

In this method we compare the percentage change in demand to the percentage change in price

Thus the formula os:

Ep = % change inQuantity Demanded (Qd) / % change in Price (P)

stope = Vertical Changes / Horizontal Changes OR Slope = change in price / change in quantity

It has following ways to check the condition of elasticity.

When the % change in quantity demanded (Qd) is equal to the % change in price; then the elasticity of demand is equal to the unity. OR

If we increase 10% input and as the result output also increased by 10% then it is known as equal to unity or constant return to scale. OR

When a specific change in price brings same change in quantity demanded (Qd) is known as unit elastic demand.

**P****ERCENTAGE METHOD:**In this method we compare the percentage change in demand to the percentage change in price

Thus the formula os:

Ep = % change inQuantity Demanded (Qd) / % change in Price (P)

stope = Vertical Changes / Horizontal Changes OR Slope = change in price / change in quantity

It has following ways to check the condition of elasticity.

**a.****Equal to Unity OR Unit Elastic Demand:**When the % change in quantity demanded (Qd) is equal to the % change in price; then the elasticity of demand is equal to the unity. OR

If we increase 10% input and as the result output also increased by 10% then it is known as equal to unity or constant return to scale. OR

When a specific change in price brings same change in quantity demanded (Qd) is known as unit elastic demand.

*For Example:*

Ep = % change inQuantity Demande (Qd) / % change in Price (P)

Ep = 10/10 = 1 Ep =1

Ep = % change inQuantity Demande (Qd) / % change in Price (P)

Ep = 10/10 = 1 Ep =1

When the % change in the quantity demanded (Qd) is more than the % change in price and then the elasticity of demand is more than unity. OR

If we increase 10% input as the result output increased more than 10% then is known as more than Unity or increasing return to scale. OR

If a little %age change in the price brings larger change in quantity demanded (Qd) is known as elastic demand.

Ep = % change in Quantity Demanded / % change in Price (P)

Ep = 15/10 = 1.5 1.5>1

When the % change in quantity demanded is less than the % change in price then the elasticity of demand is less than unity. OR

If we increase 10% input as a result output increased less than 10% is known as less than unity or decreasing return to scale. OR

If a specific %age change in price brings smaller change in quantity demanded (Qd) is known as inelastic demand.

Ep = % change in Quantity Demanded / % change in Price (P)

Ep = 8/10 = .8 .8>1

**b.****More than Unity OR Elastic Demand:**When the % change in the quantity demanded (Qd) is more than the % change in price and then the elasticity of demand is more than unity. OR

If we increase 10% input as the result output increased more than 10% then is known as more than Unity or increasing return to scale. OR

If a little %age change in the price brings larger change in quantity demanded (Qd) is known as elastic demand.

Ep = % change in Quantity Demanded / % change in Price (P)

Ep = 15/10 = 1.5 1.5>1

**c.****Less than Unity OR Inelastic Demand:**When the % change in quantity demanded is less than the % change in price then the elasticity of demand is less than unity. OR

If we increase 10% input as a result output increased less than 10% is known as less than unity or decreasing return to scale. OR

If a specific %age change in price brings smaller change in quantity demanded (Qd) is known as inelastic demand.

Ep = % change in Quantity Demanded / % change in Price (P)

Ep = 8/10 = .8 .8>1

**d.****Perfectly Inelastic:***If an increase in price brings no change in the quantity demanded (Qd) is perfectly inelastic demand. You see there is no change as price changed.*

Ep = 0.....

Drugs lie in this case

If an increase in price brings infinite change in quantity demanded (Qd) is known as perfectly inelastic demand. In this price will not change and Qd change at same price that’s why slope is

Infinite or quantity infinite

Ideal situation

Ep = 0.....

Drugs lie in this case

**e.****Perfectly Elastic:**If an increase in price brings infinite change in quantity demanded (Qd) is known as perfectly inelastic demand. In this price will not change and Qd change at same price that’s why slope is

Infinite or quantity infinite

Ideal situation

*Ep = (infinity)*

**POINT ELASTICTY METHOD:***The measurement of elasticity of demand at one point on the demand curve is called point elasticity. The formula is;*

Ed = (Q/P)

Let suppose,

Ed = (Q/P)

Let suppose,

0.25 4

0.24 4.1

**Px Qx**0.25 4

0.24 4.1

**Q = 4.10 – 4 = 0.1;**

**P = 0.24 - 0.25 = -0.01**

Ed =(Q/P) Ed =-0.625<1

*ARC ELASTICITY:**The proportionate change in the quantity demanded resulting from appreciable proportionate change in price is called Arc elasticity. OR*

Let’s suppose,

Let’s suppose,

**Px Qx**

10 20

5 40

Ed = (Q2-Q1/Q2+Q1) / (P2-P1/P2+P1)

Ed = (40-20/40+20) / (5-10/5+10)..... = -1 = 110 20

5 40

Ed = (Q2-Q1/Q2+Q1) / (P2-P1/P2+P1)

Ed = (40-20/40+20) / (5-10/5+10)..... = -1 = 1

Price elasticity of demand is applicable on the following cases

1. Excise Taxes

2. Drugs

3. Wages

If government charge tax rupee 1 on a product, and 10000 units are sold, tax will be (1*10000) = 10000. Now if the government impose rupee 1.50 on the product then because of elastic demand sales reduce to 4000 units so tax revenue decline to (1.50*4000) = 6000. But if the product is inelastic then tax revenue will not decline such as on liquor, wheat etc.

In present it is discussed that drugs should be treated like alcohol and allows for adults and made it legal because the demand for it is highly inelastic.

It is proved that teenage labors are relatively inelastic in the employment and are relatively elastic in the unemployment.

__Diagram:__

__APPLICATION OF ELASTICITY OF DEMAND:__Price elasticity of demand is applicable on the following cases

1. Excise Taxes

2. Drugs

3. Wages

**1.**__Excise Taxes:__If government charge tax rupee 1 on a product, and 10000 units are sold, tax will be (1*10000) = 10000. Now if the government impose rupee 1.50 on the product then because of elastic demand sales reduce to 4000 units so tax revenue decline to (1.50*4000) = 6000. But if the product is inelastic then tax revenue will not decline such as on liquor, wheat etc.

**2.****:**__Drugs__In present it is discussed that drugs should be treated like alcohol and allows for adults and made it legal because the demand for it is highly inelastic.

**3.**__Wages:__It is proved that teenage labors are relatively inelastic in the employment and are relatively elastic in the unemployment.

*DETERMINANTS OF PRICE ELASTICITY DEMAND:**Following are the determinants of price elasticity of demand.*

1. Substitute Possibilities

2. Luxuries vs. Necessities

3. Time

4. Portion of income

1. Substitute Possibilities

2. Luxuries vs. Necessities

3. Time

4. Portion of income