Question

3.1 Briefly explain price elasticity of demand and how it is measured.

3.2 Explain with diagrams and relevant examples, THREE (3) categories of price elasticity of demand.

3.3 Explain any THREE (3) determinants of price elasticity of demand.

Answer 1

3.1))) 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 .

It can be measured in five methods:

1. Total Expenditure Method.

Price Elasticity of Demand can be measured by considering the change in price and the subsequent change in the total quantity of goods purchased and the total amount of money spent on it.

Total Outlay = Price X Quantity Demanded

2. Proportionate Method.

It is also called as percentage method.Price Elasticity of Demand is the ratio of percentage change in the amount demanded to the percentage change in price of the commodity.

3. Point Elasticity of Demand.

Consideration a straight line demand curve and measures elasticity at different points on the curve.

(change in demand/original demand)/(change in price/original price)

4. Are Elasticity of Demand

Arc elasticity is a measure of the average responsiveness to price change exhibited by a demand curve over some finite stretch of the curve.

(change in demand/(original demand+new demand))/(change in price/(original price+new demand))

5. Revenue Method.

Price Elasticity of Demand can be measured with the help of average revenue and marginal revenue.

EA = A/ A-M

3.2 ) ))

1. Perfectly Elastic Demand (EP = ?)

The demand is said to be perfectly elastic if the quantity demanded increases infinitely or indefinitly 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 equal proportionate increase in demand from OM to OM1. Likewise, when price increases, the demand decreases in the same proportion.

3.3 )))))) The three determinants of price elasticity of demand were

1. The price of the good or service.

The law of demand states that when prices rise, the quantity of demand falls. If the quantity demanded responds a lot to price, then it's known as elastic demand. If the volume doesn't change much, regardless of price that's inelastic demand.

2. Prices of related goods or services. These are either complementary (purchased along with) or substitutes (purchased instead of).

The price of complementary goods or services raises the cost of using the product you demand, so you'll want less.

3. Income of buyers.

When income rises, so will the quantity demanded. When income falls, so will demand.

4. Tastes or preferences of consumers.

When the public’s desires, emotions or preferences change in favor of a product, so does the quantity demanded.

5. Expectations.

When people expect that the value of something will rise, they demand more of it. Demand didn't increase until people expected future prices would, too.

(Image copied due to unavailbility,consider it)