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## Elasticity

Jan

16

2012

Define elasticity of demand and its types?

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## Answer #1

Ans : Elasticity of demand : A demand function explains the nature of relationship between demand for a commodity and each of its determinants It tells us about the direction of change in any of its determinants ; it how ever does not tell us any thing about the magnitude of change . Degree of change in demand may differ in case of different commodities . Degree of responsiveness of demand to change in any of determinants is called elasticity of demand.

Since there are three quantifiable determinants of demand :1)price of a commodity,

2) prices of the related commodities and 3)level of income we have three different concepts of elasticity of demand : (A) price elasticity of demand (B) cross elasticity of demand and (C) income elasticity of demand . we will also talk about demand elasticity

of substitution.

Price elasticity of demand -: price elasticity of demand is generally defined as the

Responsiveness or sensitiveness of demand for a commodity to the change in its price .

More precisely elasticity of demand is the percentage changes in demand as a result

Of one percent in the price of the commodity . A formal definition of price elasticity

Of demand (e) is given as Percentage change in quantity demanded

ep = ____________________________________

Percentage change in price

A general formula for calculating coefficient of price â€“ elasticity derived from this definition of elasticity is given as follows .

âˆ†Q âˆ†P âˆ†Q P

ep = —– / —- = —- x —-

Q P Q âˆ†P

where Q = original quantity demanded p= original price Q =change in quantity demanded and P = change in price.

Arc elasticity : The measure of elasticity of demand between any two finity points on

A demand curve in known as are elasticity .

Point elasticity : point elasticity on linear demand curve . point elasticity is another way

To resolve the problem in measuring the elasticity . The concept of point elasticity is also

Useful in measuring the elasticity where chane in price and quantity combination is

Infinitesimally small.

Determinants of price elasticity of demand :

1) Availability of substitutes. Coffee and tea may be considered as close substitutes for each other . It price of one of these goods increases , the other commodity become relatively cheaper. Therefore consumers buy more of relatively cheaper goods and less of the costlier one all other things remaining the same . the elasticity of demand for both these goods will be higher .

2) Nature of commodity : The nature of a commodity also affects the price elasticity

Of its demand .commodities can be grouped as luxuries , comfort and necessities .

Demand for luxury goods (e.g. high price refrigerators ,TV sets, cars decoration

Items etc.) is more elastic than the demand for necessities and comforts because

Consumption of luxury goods can be dispensed with or postponed when their rise.

3) Weightage in the total consumption : Another factor that influence the elasticity of demand is the proportion of income which consumers spend on a particular

commodity . I proportion of income spent on a commodity is large its demand

will be more elastic. And vice versa.

4) Range of commodity use: The range of uses of a commodity also influences its

Demand . the wider the range of uses of a product the higher the elasticity of demand .as the price of a multi-use commodity decreases people extend their consumption to its other uses, therefore the demand for such a commodity

Generally increases more than the proportionate increase in its price.

5) Proporation of market supplied : The elasticity of market demand depend also on

The proportion of the market supplied at the ruling price .if less than half of the market is supplied at the ruling price , price elasticity of demand will be higher than one and if more than half of the market e