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Elasticity of Demand
Ans:- Introduction:-
Demand always varies with price .The law of demand states that
there is an inverse relationship between price and quantity demanded. But
it does not tell us anything about the proportionate changes. When price of
any commodity changes, demand of that commodity is affected. But the
extent of variation is not uniform in all cases. In some cases, the variation is
extremely wide, while in some other cases it may be just nominal. The
extent of variation in demand is thus technically expressed as elasticity of
demand.
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The price elasticity of demand attempts to measure the relationship
between percentage change in price and percentage change in demand for
a give commodity.
Δ Dx
Price ed = Dx
Δ Px
Px
Δ Dx Px
Dx × Δ Px
Where,
D = Demand
P = Price
Δ = Change
X = Commodity
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economists have stated 5 types of price elasticity of demand. They are as
follows.
Price
D
P D
0 M M1 M2 X
Demand
3
It has also theoretical importance .But the commodity of absolute
necessity like salt seems to have perfectly inelastic demand .In this case
demand curve can be drawn as follows:-
Y D
Price
P2
P1
D X
0 M
Demand
In case of perfectly inelastic demand the demand curve would be the
straight vertical line .Here inelasticity of demand=0. Therefore Ed = 0
3. Unitary Elastic Demand:-
Y D
Demand P
P1 D
0 M M1 X
Price
4
In case of unitary elastic demand the demand curve would be
rectangular hyper bolla curve. Hence elasticity of demand=1 there for ed =1
Price
P1
X
0 M M1 Demand
5
Y
Price
P1
X
0 M M1
Demand
1. Necessaries:-
2. Luxries:-
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increase in demand .It may be noted that luxuries are the relative term.
What may be luxuries for one may be necessity for other.
3.Substitute Goods:-
For Example:-If the price of Lux falls relatively to Liril.The demand for Lux
will rise more than proportionately. The consumers who formally were using
Liril may turn to Lux. But in respect of commodities having no substitute
there demand will be somewhat inelastic.Therefore,the demand for
Salt,Onions,Potatoes,are highly inelastic.
5.Durable Goods:-
6. Level of prices:-
The demand for goods whose prices are either very high or
very low is inelastic. Generally very high priced goods are purchased by the
rich people and their demand is inelastic because they do not care about
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price.Smilarly, the very low priced goods are generally necessaries and
hence the demand for them is inelastic.
7. Complementary Goods:-
For Example:-Ink and Pen have inelastic demand for this reason.
%change in income
edy = ΔD Y
D × ΔY
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Where,
D=Demand
=Change
Y=Income
Income150
100
D X
0 10 12
Demand
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Following are the types of positive income elasticity:-
10
Y
Income 150
100
X
0 8 10
Demand
Demand
150
100
75
D X
0 10
Demand
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Q.4 short note: - cross elasticity of Demand
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Y
Price P1
Of
lux
P
D
X
0 M M1
Demand for liril
Conclusion:-
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Y
Price of car
P1 D
X
0 M M1
Demand for petrol
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