Concept & Types of Elasticity Demand
Concept of ED
Elasticity of demand refers to the degree of responsiveness in demand for a commodity to the change in any of its determinants. In other words %Δ in Qdx divided by the %Δ in its determinants. First introduced by classical economist A. A. Cournot & J. S. Mill and later on Neo-classical economist, Alfred Marshall developed it in the scientific way in his book "Principle of Economics" published in 1890 A.D.
Symbolically, Ed = %
Δ in Qd / %
Δ in its determinants
Price Elasticity of Demand (PED)
Ep means how strongly do consumer react (by using less) if you raise your product price. So, Ep is the reaction of quantity on price.
Symbolically,
 |
Price Elasticity of Demand
|
Degrees/Types of PED
1] Perfectly Elastic Demand
 |
Perfectly Elastic Price Elasticity of Demand
|
2] Perfectly Inelastic Demand
 |
Perfectly Inelastic Price Elasticity of Demand
|
3] Unitary Elastic Demand
 |
Unitary Elastic Price Elasticity of Demand
|
4 ] Relatively Elastic Demand
 |
Relatively Elastic Price Elasticity of Demand
|
5] Relatively Inelastic Demand
 |
Relatively Inelastic Price Elasticity of Demand
|
Table Example of Price Elasticity of Demand
 |
Table: Types of Price Elasticity of Demand
|
Determinants of PED
1] Availability of Substitutes
If available →User switches product → More elastic
If not →User can't switches product → Inelastic
2] Time Period
Longer time horizon → Choice → More elastic & Vice-versa [Postponement condition]
3] Nature of Goods
Necessary → Inelastic, Luxury → Elastic & Habit forming goods (cigarette) → Inelastic
4] Proportion of Income Spent
Greater proportion → Elastic & Small proportion → Less elastic
5] Number of Uses of a Commodity
Multiple use (electricity) → Elastic & Single use (Ink) → Less elastic
6] Price Expectation of Buyers
Price fall expectation → Less responsive demand & vice – versa
Uses or Importance of PED
Ep has great practical importance in the formulation of economic policies & understanding economic problems. Manager should able to answer:
- How much do we have to cut our price to achieve 3% sales growth?
- If we cut price by 5%, how many more units will be sold?
1] Helpful to monopolist in fixing price
More elastic → Profit increase by lowering price
Less elastic → Profit can increase by increasing price
2] Helpful to the government in formulating taxation policies
The finance minister has to consider the nature of Ed for a commodity before levying an excise tax on it.
Inelastic demand → Tax↑ → Public revenue↑
Necessary goods → Tax↓ & Luxurious goods → Tax↑
3] Wage determination
Inelastic demand for labor → Trade union can force the employer to increase the wage organizing strike
Elastic demand for labor → Union tactics can't work to raise wage
3] International Trade
Export commodity has inelastic demand and Import commodity has elastic demand → beneficial to the nation
4] Helpful in determining the rate of exchange
Before deciding to devalue or revalue domestic currency in relation to foreign countries, the government has to study carefully the elasticities of demand for its imports and exports.
5] Helpful in declaring certain industries as 'Public Utilities'
The concept of Ed also enables the government to decide as to what particular industries should be declared as public utilities and being consequently owned & operated by state.
6] Price determination of public utilities like postal office, drinking water, electricity etc.
Inelastic demand → Price↑ & Elastic demand → Price↓
7] Price determination of joint products like sheep & wool, paddy & straw -wfg / k/fn_
Cost of production cannot be calculated separately. So Ed is useful to determine price.
Inelastic demand → Price↑ & Elastic demand → Price↓
Income Elasticity of Demand (YED)
YED measure the responsiveness of demand to changes in income (real), OTRS.
 |
Income Elasticity of Demand
|
Types/degrees of YED
1] Positive YED [ Ey > 0]
Qdx varies positively with income and connected with normal goods
Y↑ → Qdx ↑ & Y↓ → Qdx↓
Symbolically,
 |
Positive Income Elasticity of Demand
|
a) Greater than Unity
 |
Greater than Unity Income Elasticity of Demand
|
b) Equal to Unity
 |
Equal to Unity Income Elasticity of Demand
|
c) Less than Unity
 |
Less than Unity Income Elasticity of Demand
|
2] Negative YED [Ey < 0]
Qdx varies inversely with income & connected with inferior goods.
Y↑ → Qdx ↓ & Y↓ → Qdx↑
 |
Negative Income Elasticity of Demand
|
3] Zero YED [ Ey = 0]
No any response in demand due to change in income & connected with very low priced goods.
 |
Zero Income Elasticity of Demand
|
Table Example of Income Elasticity of Demand
 |
Table: Types of Income Elasticity of Demand
|
Cross Elasticity of Demand (XED)
OTBE, XED measures the responsiveness of the demand for x-good to the change in the price of y-good.
 |
Cross Elasticity of Demand
|
Types/degrees of XED
 |
Positive Cross Elasticity of Demand
|
 |
Negative Cross Elasticity of Demand
|
 |
Zero Cross Elasticity of Demand
|
Table Example of Cross Elasticity of Demand
 |
Table: Types of Cross Elasticity of Demand
|
Concept & Types of Elasticity of Supply
Concept of ES
Elasticity of supply refers to the degree of responsiveness in supply for a commodity to the change in any of its determinants. In other words %Δ in Qsx divided by the %Δ in its determinants.
Symbolically, Es = %Δ in Qsx/%Δ in its determinants
Price Elasticity of Supply (PES)
ES means how strongly producer react if there is rise in the price of the product. So, ES is the reaction of quantity supply on price.
Symbolically,
 |
Price Elasticity of Supply
|
 |
Perfectly Elastic Price Elasticity of Supply
|
 |
Perfectly Inelastic Price Elasticity of Supply
|
 |
Unitary Elastic Price Elasticity of Supply
|
 |
Relatively Elastic Price Elasticity of Supply
|
 |
| Relatively Inelastic Price Elasticity of Supply |
Comments
Post a Comment
If you have any doubt, Please let me know !