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Unit 2 Elasticity of Demand (Page no. 1-19) Demand Forecasting (Page no. 20-28) www.apnenotes.co
Downloaded from www.apnenotes.co 1 Elasticity of Demand Introduction  Economists, to measure the extent of variation in the quantity demanded, used the term ‘ELASTICITY’.  To measure the elasticity of demand, two variables are considered: ➢ Demand ➢ Determinant of demand • For measuring the elasticity coefficient, a ratio is made of these two variables • Elasticity of demand=percentage change in quantity demanded/percentage change in determinant of demand Kinds of elasticity of demand  There are three kinds of elasticity of demand: I. Price elasticity of demand II. Income elasticity of demand III. Cross-price elasticity of demand I. Price elasticity of demand • Definition: The extent of variation in the quantity demanded with the change in the price of the product is called price elasticity of demand. • The coefficient of price elasticity(e) is measured as • e=% change in quantity demanded /%change in price • Since the relative change of variables can be measured either in terms of percentage change or proportional change, elasticity can be alternatively expressed as: • e=proportional change in quantity demanded/proportional change in price • Representing in symbols, e=ΔQ÷Q/ΔP÷P • Rearranging, e=ΔQ/Q X P/ΔP • Owing to the inverse price demand relationship, the coefficient of price elasticity of demand of demand is usually negative. • However, economists report it as a positive number, referring to its absolute value for the sake of convenient comparison and analysis. • Depending on the magnitude and proportional changes involved in data on demand and price, one may obtain various numerical values of coefficient of price elasticity , ranging from 0 to ∞ • Therefore, when e>1 – price elastic and e<1 – price inelastic • This knowledge is very useful in determining pricing policies and other business decisions. Types of price elasticity  Marshal has suggested a three-fold classification of price elasticity of demand based on numerical coefficient of price elasticity in terms of unity.

Downloaded from www.apnenotes.co 3 Perfectly inelastic demand  When the demand for a commodity shows no response to a change in the price, it is called perfectly inelastic demand  Irrespective of the change in the price, there is no change in the demand  The numerical coefficient is zero, e=0  The shape of the demand curve is vertical straight line  Also, a theoretical consideration, but absolute necessities like salt and medicines seem to have perfectly inelastic demand