Question

Students are required to write a blog on the elasticity of demand. Blog should include following aspects;

Concept of elasticity.

Classification of elasticity of demand based on its value.

Determinants of elasticity of demand.

Answer 1

Elasticity of demand is a very important economic concept that measures the responsiveness of demand towards the price change of goods and services. It is applied in pricing decisions also and helps government to apply taxes upon those goods that bring addiction. Further, the government identifies the necessity goods and ensure that prices are kept at lowest to make these goods available for the people.
As per the formula,
Elasticity of demand = % change in demand / % change in price

Elasticity of demand can be categorized into different classes on the basis of value of elasticity. If the elasticity of demand is 0, then it means that elasticity of demand is perfectly inelastic in nature and demand does not change with the change in price. When elasticity is 1, then demand is unitary elastic. It means that there is an equal % change in demand due to the % change in price. If the elasticity of demand is greater than 0 and less than 1, then demand is relatively inelastic in nature. It creates an opportunity for the firms to increase the price and earn more revenue. If the elasticity is greater than 1 and less than infinite, then the elasticity of demand is relatively elastic in nature. Here, small price increase can cause bigger decrease in demand. If elasticity is ∞, then the demand is perfectly elastic in nature.

There are different factors or determinants that affect elasticity of demand. The first determinant is the presence of close substitutes. If substitutes are present, then demand of a commodity will be more elastic in nature and vice versa. The second determinant is the proportion of the income, spent upon a particular commodity. Higher proportion spent, will make demand to be more elastic and vice versa. The third determinant is the presence of complementary goods. It also affects the elasticity of a particular commodity if it's complementary goods are present. The next factor is the number of usages of one commodity. If a product can be used for many purposes, then its demand is relatively inelastic in nature.