Elasticity of Demand

Elasticity of demand has been defined by a lot of economists with different explanation but the core concept that emerges from all their definitions is that elasticity of demand is a relative change between two quantities demand and the other factors that affects demand. Elasticity of demand can therefore be defined as the extent to which the quantity demanded in the market of a unit of commodity in response to a given change in the price. It is the sensitiveness or responsiveness of demand to changes in the prices. Elasticity of demand is one of the properties of demand to expand or contract in respect to changes in prices. Mathematically the elasticity of demand can be represented by the formulae

Elasticity of Demand=Relative change in demand/relative changes in prices

Since elasticity of demand is a mathematical function some of its component like magnitude can be measured. The measurement of the elasticity of demand can be said to be the degree of elasticity of demand. These results suggest that the elasticity of demand can be a unitary figure, it can be less than one or it can be greater than one. The elasticity of demand is a unitary figure when the amount of the quantity demanded at a price multiplied by the prices remains constant. When the value is greater than one the demand is said to be elastic and it implies that that a small change in price leads to very large change in the quantity demanded .When the unit of elasticity of demand is less than one it is referred to as inelastic demand and can be interpreted to mean that large changes in the prices of a commodity leads to a very small change in the quantity demanded. The classifications based on the three category is very general and can be grouped  further to unitary elastic demand, Relatively elastic demand, perfectly elastic demand, relatively inelastic demand, perfectly inelastic demand.

Under unitary elastic demand there is a proportionate change in price being accompanied by an equal proportionate change in quantity demanded. A relatively elastic demand will indicate that there is a small change proportionate change in prices followed by a larger proportionate change in quantity demanded. Under a perfectly elastic demand the slightest change in prices of a commodity causes a huge or infinite changes in the quantity demanded. An example is when the prices of a commodity is increased zero amount of quantity will be demanded. These cases are very rare in a perfect market. A relatively inelastic demand occurs when there is a very large proportionate change in the prices of a commodity by a smaller proportionate change in quantity demanded. The last category the perfectly inelastic occurs when a substantial change in prices leaves the demand unaffected.

The measurement of elasticity of demand is important in economics because it can be used to make important decisions and conclusions. Some of the decision made from the elasticity of demand is fixing the prices of commodities. The prices of product under the perfectly inelastic category can be increased without affecting the company’s sales. Other uses are tax rate fixation, price discriminations, and environmental improvement

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{ 2 comments… read them below or add one }

jagdeep June 24, 2013 at 3:43 am

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