Price Elasticity of Demand

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1.1      Elasticity of Demand

Elasticity of demand is defined as the quantum of responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends.

These variables are price of the commodity, prices of the related commodities, income of the consumers and other various factors on which demand depends. Thus we have price elasticity, cross elasticity, elasticity of substitution and income elasticity.

Elasticity thus helps in determining the response to change in one of these factors to quantity demanded.

1.1.1     Price Elasticity of Demand

Price elasticity of demand expresses the response of quantity demanded of a good to a change in its price, given all other factors like income, preference etc. remain unchanged.

1.1.2     Methods of Calculating Price Elasticity

Point Elasticity

In point elasticity, we measure elasticity when there is a very small movement in price.

Formula = % change in Quantity / % change in price

Arc Elasticity

When the price change is somewhat larger or when price elasticity is to be found between the two distant prices the question arise which price and quantity should be taken as base for calculating the % change.

This is because elasticities found by using original price and quantity figures as base will be different from the one derived by using new price and quantity figures. Therefore, in order to avoid confusion, generally averages of the two prices and quantities are taken as (i.e. original and new) base.

The arc elasticity can be found out by using the formula:

 arc method

Price elasticity of demand will always result in negative answer due to negative relationship between price and demand. For this reason we always ignore the sign while writing price elasticity of demand.