Price Elasticity of Demand

Law of demand tells us that people buy more of the product as its price fall and lesser amount of a product if its prices raises but how much more or less they will buy that amount varies from product to product and for the same product over different price stage price elasticity of demand measures the sensitivity or responses of customer to change in price of a product. For some product the customers are highly responsive to price changes, demand of such product is called Elastic. For some other products customer may less attention to price changes demand of such product is inelastic

Price Elasticity Coefficient

It measures the degree of elasticity or inelasticity of demand.

Ed= % change in quantity demand of product/ % change in price

Elastic Demand

Demand is elastic if a specific percentage change in a price results in larger percentage change in quantity demanded. If Ed is greater than 1 then the demand is elastic.

Inelastic Demand

If a specific percentage change in price produces a smaller percentage in quantity demanded then the demand is inelastic. Ed is less than 1.

Unit Elastic Demand

Percentage change in price and percentage change in quantity demanded is equal the demand is unit elastic and Ed is equal to 1.

Perfectly Inelastic Demand

Demand is perfectly inelastic if customer is completely unresponsive to price changing. The price elasticity coefficient is zero because there is no response to change in price. An example can be a heroin addict demand for heroin or diabetic demanded for Insulin.

Perfectly Elastic Demand

Perfectly elastic demand is the one in which people are completely responsive to price change. In that case the price elasticity co-efficient is infinity. For example when a seller reduce its price of product the whole customer will buy from him.

business economics

March 05, 2019