Price Elasticity of Demand and explained its Types

Price-elasticity-of-Demand

Price elasticity of demand (PED) refers to the degree of responsiveness of quantity demanded with respect to change in the price of that particular commodity, other things remain constant.

 it can be calculated as the percentage change in quantity demanded divided by the percentage change in price.

Formula of Price elasticity of Demand - Price Elasticity of Demand and explained its Types

% Δ quantity demanded = percentage change in quantity demanded

% Δ Price  = percentage change in price

For example, the price of a commodity falls from Rs 20 per unit to Rs 15 per unit and due to this, the quantity demanded of that commodity increases from 100 units to 150 units.

Then, The price elasticity can be calculated as:

Percentage change in demand = (change in demand/ original demand) *100

                      = (50/100) *100 =50%

Percentage change in price = (change in price/original price) *100

                        = (5/20) *100 =25%

Price elasticity of demand = 50/25 = 2

It means the quantity demanded increased by 2 time due to falling in price by Rs 5.

Degrees or Types of price elasticity of demand:

  1. Perfectly elastic
  2. Perfectly inelastic
  3. Unitary elastic
  4. Relatively elastic
  5. Relatively inelastic

1. Perfectly elastic ( PED = ∞):

The demand is said to be perfectly elastic when a small rise in price would result in a fall in demand to zero, while a small fall in price results in demand to become infinite. It is also known as infinite elasticity. It is a theoretical concept only as it has no importance in the practical world.

It is shown by a straight-line demand curve parallel to the horizontal axis.

For example, suppose the price of a commodity is rs 10 and its demand is 50 units. As the price falls to rs 9, its demand increases to infinity.

Perfectly elastic Demand  - Price Elasticity of Demand and explained its Types
Perfectly-elastic-Demand

In fig, the x-axis shows quantity demanded and the y-axis shows the price. Dd curve is the demand curve. The initial demand at price p is q units. When the price is slightly decreased, it leads to an increase in demand by a large amount i.e. Q1. It shows a perfectly elastic demand.

2. Perfectly inelastic (PED=0):

when demand doesn’t change with change in price( whether rising or fall), then demand is said to be perfectly inelastic. It implies that the demand remains constant for any value of the price. It is rarely found in real but the closest example we can take is water and other necessity goods.

 it is represented by a straight line parallel to the vertical axis.

For example, suppose the price of a bottle of water is rs 15 and its demand is 200 units. As the price increases to rs 20, the demand remains constant at 200 units. It implies the demand is perfectly inelastic.

Perfectly inelastic Demand  - Price Elasticity of Demand and explained its Types
Perfectly-inelastic-Demand

In fig, x-axis shows quantity demanded and y-axis shows the price. Dd is the demand curve. At the price p, the quantity demanded is q units. As the price increases to p1, there is no effect on the quantity demanded. It remains constant at initial quantity q. This implies that the demand is perfectly inelastic.

3. Unitary elastic ( PED = 1):

The demand can be said as unitary elastic when the percentage change in quantity demanded is equal to the percentage change in price. It is also known as unitary elasticity. It is an imaginary concept as rarely found in the practical world.

For example, suppose the price of a commodity is rs 50 and the quantity demanded in a specific market is 200 units. As the price increases to rs 60, its demand declines to 160 units. It implies the unitary elastic demand.

Unitary elastic Demand  - Price Elasticity of Demand and explained its Types
Unitary-elastic-Demand

In fig, the x-axis shows quantity demanded and the y-axis shows the price. Dd is the demand curve. At the price p, the quantity demanded is q units. As the price increases to p1, the quantity demanded decreases to q1 by an equal proportion. It implies that the demand is unitary elastic.

4. Relatively elastic ( PED > 1):

Relatively elastic demand occurs when a proportionate change in demand is greater than the proportionate change in price. It means that there will be a greater change in demand due to a small change in price. It is also known as highly elastic demand and more than unitary elastic demand.

For example, suppose the price of a commodity is rs 40 and the quantity demanded is 20 units. As the price declines to rs 30, its demand increases to 30 units. It implies a relatively elastic demand.

Relatively elastic Demand  - Price Elasticity of Demand and explained its Types
Relatively-elastic-Demand

 

In fig, x-axis shows quantity demanded and the y-axis shows the price. Dd is the demand curve. At the price p, the quantity demanded is q units. As the price is increased to p1, the quantity demanded is decreased to q1 units. Here, the change in price is less than the change in quantity demanded, therefore, it can be said as perfectly elastic demand.

Relatively inelastic demand ( PED <1):

The demand can be said as relatively inelastic when a proportionate change in quantity demanded is less than proportionate change in price. It means that the greater change in price leads to a smaller change in demand.

 for example, suppose the price of a commodity is rs 10 and the quantity demanded is 20 units. As the price increases to rs 15, the quantity demanded declines to 15 units. It implies a relatively inelastic demand.

Relatively inelastic Demand - Price Elasticity of Demand and explained its Types
Relatively-inelastic-Demand

In fig, the x-axis shows quantity demanded and the y-axis shows the price. Dd is the demand curve. At the price p, the quantity demanded is q units. As the price increases to p1, the quantity demanded fell to q1 units. Here, the change in price is more than the change in quantity demanded, therefore, it shows the relatively inelastic demand.

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