Elasticity of Demand

Demand for a good depends upon its price, the income of the consumer, and the price of related goods. The elasticity of demand indicates how much the quantity demanded of a goodwill change with a change in its price or income of the consumer or price of related goods. In the words of Dooley, "The elasticity of demand measures the responsiveness of the quantity demanded of a good to change in its price, the price of other goods and changes in the consumer's income."

Accordingly, the elasticity of demand is of three types:

1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand

Meaning of Elasticity of Demand: Elasticity of demand is a percentage change in quantity demanded of a commodity in response to a given percentage change in any of its quantitative determinants.

Price Elasticity of Demand

The price elasticity of demand is the measure of the responsiveness of quantity demanded of a good to change in its price, other things being equal. It is equivalent to the ratio of the percentage change in the quantity demand to a percentage change in the price. It measures how much the quantity demanded of a good change when its price changes. Price elasticity of demand denotes the ratio at which the demand contracts with a rise in price and extends with a fall in price. There is an inverse relationship between the price and quantity demanded of a good. Accordingly, the Elasticity of demand is expressed by the minus (-) sign.

 

In the words of Lipsey, "Because of the negative slope of the demand curve, the price and the quantity will constantly change in opposite directions. One change will be positive and the other negative, making the measured elasticity of demand negative." However, the custom is to ignore the negative sign and discuss only the absolute level of the price elasticity.

 

Put differently, the price elasticity of demand is expressed as a number eliminating the negative sign. If for example, a 10-percent increase in the quantity of ice cream demanded, then the ratio called the elasticity of demand is

E_d = (-) 15% ÷ (-)10% = 1.5

Price elasticity of demand is a measurement of the extension and contraction of demand in response to some change in the price of the commodity.

The negative sign is overlooked to eliminate an ambiguity that might otherwise arise. It can be confusing to say that an elasticity coefficient of -4 is greater than that of -2. This possible confusion can be avoided if we merely say a coefficient of 4 indicates greater elasticity than 2. Hence, the minus sign in the coefficient of price elasticity of demand is generally ignored.

E_d= (-) Percentage Change in Quantity Demanded ÷ Percentage Change in Price

Suppose, a fall in price by 10 percent is followed by an extension in demand by 20 percent.

Accordingly, the elasticity of demand would work out to be.

E_d= (-) 20% ÷ (-)10%=2

Implying that one-percent change in the price of the commodity causes a 2 percent change in its quantity demanded.

In the words of Dr. Marshall, "Elasticity of demand may be defined as the percentage change in the quantity demanded divided by the percentage change in the price."

According to Boulding, "Price elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in its price."