Question

Explain with diagrams and relevant examples, THREE categories of price elasticity of demand

Answer 1

Answer:-

Price elasticity of demand measures the responsiveness of demand after a change in a product's own price. It measures the sensitivity of the quantity demanded to changes in the price.Demand is inelastic if it does not respond much to price changes, and elastic if demand changes a lot when the price changes. Necessities tend to have inelastic demand.

1. Perfectly Elastic Demand (EP = ?)

The demand is said to be perfectly elastic if the quantity demanded increases infinitely or indefinitely with a minimum fall in price or quantity demanded falls to zero with a minimum rise in price. Thus, it is also known as infinite elasticity. It does not have practical importance as it is rarely found in real life.

In the given figure, price and quantity demanded are measured along the Y-axis and X-axis respectively. The demand curve DD is a horizontal straight line parallel to the X-axis. It shows that negligible change in price causes infinite fall or rise in quantity demanded.

2. Perfectly Inelastic Demand (EP = 0)

The demand is said to be perfectly inelastic if the demand remains constant whatever may be the price irrespective of price rise or fall. Thus it is also called zero elasticity. It also does not have practical importance as it is rarely found in real life.

In the given figure, price and quantity demanded are measured along the Y-axis and X-axis respectively. The demand curve DD is a vertical straight line parallel to the Y-axis. It shows that the demand remains constant whatever may be the change in price. For example: even after the increase in price from OP to OP2 and fall in price from OP to OP1, the quantity demanded remains at OM.

3. Unitary Elastic Demand ( Ep = 1)

The demand is said to be unitary elastic if the percentage change in quantity demanded is equal to the percentage change in price. It is also called unitary elasticity. In such type of demand, 1% change in price leads to exactly 1% change in quantity demanded. This type of demand is an imaginary one as it is rarely applicable in our practical life.

In the given figure, price and quantity demanded are measured along Y-axis and X-axis respectively. The demand curve DD is a rectangular hyperbola, which shows that the demand is unitary elastic. The fall in price from OP to OP1 has caused an equal proportionate increase in demand from OM to OM1. Likewise, when price increases, the demand decreases in the same proportion.