University:
Minnesota State University Moorhead
Course:
ECON-202 | Principles of Economics I: Micro
Academic year:

2023
Views:

348

Pages:

3
Author:

Accinkiquicpqw

Types of Elasticity Types of Own (Price) Elasticity of Demand: For all types of commodities, the rate of change of quantity demanded to a change in own price is not uniform. For some commodities, demand is said to be more responsive to price changes compared to other commodities. That is why there are various types of elasticities of demand. They are of the following five types: (1) Elastic Demand (EP > 1): Demand is said to be elastic if the change in price causes a more than proportionate change in quantity demanded. A 10 p.c. change in price causes quantity demanded to change by more than 10 p.c. In other words, if E is greater than one, demand is said to be elastic . Normally, demand is elastic for luxury goods. Let the price of gold per gm decline from Rs. 160 to Rs. 140. As a result, demand for gold rises from 1,000 kilograms to 2,000 kilograms. Thus, EP = 1,000/1,000 ÷ 20/160 = 1,000/20 .160/1,000 = 8 Since elasticity of demand for gold is greater than one, gold is a luxury item. (2) Inelastic Demand (EP < 1): When the change in price causes a less than proportionate change in quantity demanded, demand is inelastic. A 10 p.c. cut in price may cause quantity demanded to fall by, say, 1 p.c. Thus, demand is said to be inelastic (Ep< 1), shown in. Usually, demand is inelastic for necessary goods. Suppose that following a drop in the price of wheat from paisa 40 per kilogram to paisa 20 per kilogram, demand for wheat rises from 1,600 kilograms to 2,000 kilograms. This means EP = 400/160 ÷ 20/40 = 400/20. 40/1,600 = 0.5 Thus, wheat has an inelastic demand since EP < 1 and wheat is a necessary article. (3) Unit elasticity of Demand (EP = 1): When the change in price causes the same proportionate change in quantity demanded, demand has unit elasticity. A 10 p.c. decline in price will lead to an exactly 10 p.c. increase in quantity demanded. Then EP = 1 . Suppose that the price of a commodity declines from Rs. 200 to Rs. 100 per kilogram. As a result, demand for that commodity rises from 400 kilograms to 800 kilograms. Thus, EP = 400/400 ÷ 100/100 = 400/100. 100/400 = 1 (4) Perfectly Elastic Demand (EP = ∞) When a slight change in price causes a great change in quantity demanded, the value of elasticity of demand tends to be infinity and demand is said to be infinite or perfectly elastic. In this case, the demand curve (DD,) becomes parallel to the horizontal axis . Under perfectly competitive market, the demand curve for a product of an individual firm becomes perfectly elastic. (5) Perfectly Inelastic Demand (EP = 0): If quantity demanded becomes completely unresponsive to price changes, the coefficient tends to be zero. In this case, whatever the price, even if it is zero, quantity demanded will remain fixed at a particular level. The demand curve, thus, becomes parallel to the vertical axis and demand is said to be completely (perfectly) inelastic. Thus, elasticity of demand varies from zero to infinity. The relation between elasticity of demand and total outlay (P × Q = TR) may be presented here in a tabular form: