Elaaticity Of Demand

Elasticity of Demand- It refers to response shown by demand due to change in price of commodity.
                    In other words, it refers to percentage change in quantity demand due to percentage change in price.

▶ Measurement Of Price Elasticity
1. Total Expenditure Method
2. Percentage Method

1. Total Expenditure Method(TE) :-
     TE= P×Q.              where, P= Price
                                               Q= Quantity

According to Prof. Marshall. There are three situations or cases.

Case 1. ed = 1 or ed = unitary  [ed means elasticity of demand].

Elasticity of demand is 1 if a rise or fall in own price of the commodity cause no change in Total Expenditure on the commodity.
                         ⚫P⬆ , P⬇   TE= Constant

Case.2   ed < 1 or  ed < unitary

Elasticity of demand is less than unitary if a fall in own price of the commodity causes a fall in Total Expenditure, and a rise in own price of the commodity causes a rise in Total Expenditure.
                      ⚫P⬆ TE⬆ and P⬇ TE⬇

Case.3   ed > 1 or  ed > unitary

Elasticity of demand is greater than unitary if a fall in own price of the commodity causes a rise in Total Expenditure and a rise in own price of the commodity causes a fall in Total Expenditure of the commodity.
                     ⚫P⬆ TE⬇ and P⬇ TE⬆

2. Percentage Method:-  
ed= (-) % change in Q ÷ % change in P------- eq (i)
where, Q = Quantity
P = Price

   ⚫ % change in Q= ∆Q/Q × 100 ----------- eq (ii)
   ⚫ % change in P= ∆P/P × 100 ------------ eq(iii)

So, putting the value of eq(ii) and eq(iii) in eq(i).

       ed= (-) ∆Q/Q × 100 ÷ ∆P/P × 100
       
          = (-) ∆Q/Q × P/∆P

▶ Factors effecting Elasticity Of Demand

1. Nature of Commodity -
     Necessities Commodity - Less Elastic
     Comfort/ Luxuries Commodity - High Elastic

2. Presence of Substitute -
     More Substitute - More Elastic
     Less Substitute -  Less Elastic

3. Income Level of Consumer -
      High Income - Less elastic
      Low Income - More elastic

4. Price Level of Commodity -
      High Price - High Elastic
      Low Price - Less Elastic

5. Proportion of Income spend on Commodity -
      High Portion - High Elastic
      Less Portion - Less Elastic

6. Time Period -
      Short time period - Less Elastic
      Long time period - More Elastic

7. Multiple Uses -
     More Multiple Uses - More Elastic
     Less Multiple Uses - Less Elastic

8. Postponement of Uses -
     If postponement possible - More Elastic
     If postponement not possible - Less Elastic

9. Habit of Customer -
     Habitual - Less Elastic
     Not Habitual - More Elastic