Question

Discuss the concept of elasticity of demand and its role in making economic decisions.

Answer 1

• Price elasticity of demand measures the responsiveness of consumers to a change in the price of a particular good or service.
• Higher the price elasticity of demand, more is the responsiveness of consumers to a price change of a good or service.
• When price elasticity of demand is greater than 1 (elastic demand), then the demand for the good is sensitive to an increase in price or we can say that the quantity demanded changes by a greater percentage than changes in price.
• If price elasticity of demand that is less than 1 (inelastic demand), then change in price leads to a smaller percentage change in demand.
• However, if it equal to 1 (unit elastic), then the percentage change in price leads to an equal percentage change in quantity demanded.
• The concept of elasticity for demand has a great role in making economic decisions like determining prices of different factors of production i,e. cost of factors of production depends upon their elasticity of demand as stated above.
• The elasticity of demand for a good or service determines its price.
• Also since the changes in demand depends upon the change in price, therefore its knowledge becomes important in the determination of the output level.
• The elasticity of demand is the foundation or the underlying principle of demand forecasting.
• It's knowledge also plays a great role in determining the policies by the government .