ELASTICITY OF DEMAND

ELASTICITY OF DEMAND

Till now we were concerned with the direction of the changes in prices and quantities demanded. From the point of view of a business firm, it is more important to know the extent of the relationship or the degree of responsiveness of demand to changes in its determinants. Now we will try to measure these changes, or to say, we will try to answer the question “by how much does demand change due to a change in price”?

Consider the following situations:

(1) As a result of a fall in the price of radio from ` 500 to ` 400, the quantity demanded increases from 100 radios to 150 radios.

(2) As a result of fall in the price of wheat from ` 20 per kilogram to ` 18 per kilogram, the quantity demanded increases from 500 kilograms to 520 kilograms.

(3) As a result of fall in the price of salt from ` 9 per kilogram to ` 7.50, the quantity demanded increases from 1000 kilogram to 1005 kilograms.

What do you notice? You notice that as a result of a fall in the price of radios, the quantity demanded of radios increases. Same is the case with wheat and salt. Thus, we can say that demand for radios, wheat and salt all respond to price changes. Then, what is the diuerence? The diuerence lies in the degree of response of demand which can be found out by comparing the percentage changes in prices and quantities demanded. Here lies the concept of elasticity.
Definition: Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends. More precisely, elasticity of demand is the percentage change in quantity demanded divided by the percentage change in one of the variables on which demand depends.

These variables are price of the commodity, prices of the related commodities, income of the consumers and other factors on which demand depends. Thus, we have price elasticity, cross elasticity, income elasticity, advertisement elasticity and elasticity of substitution,. It is to be noted that when we talk of elasticity of demand, unless and until otherwise mentioned, we talk of price elasticity of demand. In other words, it is price elasticity of demand which is usually referred to as elasticity of demand.

Goods and Service Tax Book (Updated upto 20th January 2018)

GST Student friendly Book most relevant/Useful for CA Intermediate/IPCC, CS executive , CWA Intermediate and CA final. 

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Author Name- CA Harshita Raichandani and CA Dhananjay Ojha

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GST (Goods and Services Tax) Book -A student friendly Book. - Bharat Gurukul

GST Student friendly Book most relevant/Useful for CA Intermediate/IPCC, CS executive , CWA Intermediate and CA final. ALSO useful for B.Com / M.Com / MBA/ BBA/UPSC/ SSC and Various Govt Exams.!! This book is approved by Ministry of HRD Govt.of India as Students friendly book. Author Name- CA Harshita Raichandani and CA Dhananjay Ojha Book […]