Price Elasticity Of Demand
According to the law of demand, there is an inverse relationship between price and quantity as the price goes up quantity demand goes down and as prices go down quantity demand goes up. But now moving to the next step that how much more or less the buyer would buy as the price goes down or up. This is the idea of elasticity of demand.
Elasticity of Demand:
The elasticity of demand measures how sensitive the buyer is in purchasing decisions to the change in price. This means that how the quantity demanded changes as the price of the goods or services changes. This change varies from product to product. It depends on how many substitutes for this product present, is it a necessity or luxury. Like if we take the example of a restaurant the small amount of change in price would make a big impact on the quantity demanded. These are the products that are considered as elastic.
In-elasticity of Demand:
Inelasticity of demand measures whether a change in price made any big impact on demanded quantity in the market or not. Take an example of a change in the price of toothpaste: it would not be going to make a big impact because the consumer does not pay much attention to change in prices of daily use products. Another example is an increase in the prices of gasoline because consumers can’t use any other thing to make their cars work except gasoline so the quantity demanded would not change much in that case. Such products whose quantity does not change much with the change in price are called inelastic.
Graphical Analysis of Inelastic Demand Curve:
Lets again consider the example of gasoline as the price of gasoline increase as shown in the graph below the quantity demanded decreases but just a little bit. This shows that the quantity demanded of gasoline is insensitive to the price change. If we see it from another direction that if the price goes down the quantity demanded increases but just a little bit. So it means that if the price goes up consumers will purchase a little bit less and as the prices go down consumers will purchase a little bit more. The reason for this trend is that the products whose demand is inelastic have very fewer substitutes.
Graphical Analysis of Elastic Demand Curve:
Take an example of restaurants as the prices go down a little bit the quantity demanded increases with a greater amount. It shows the sensitivity of price change to the quantity demanded. Similarly, if the prices goes a little bit up the quantity demanded would decrease with significant amount. The reason for this trend is because the elastic products do have other substitutes available in the market or these products are luxuries.
Graphical Analysis of Perfectly Inelastic Demand Curve:
Consider the example of insulin for which the demand curve is a vertical straight line as shown in the graph below this is the example of the perfect inelastic case. In this example, it means as the price of insulin goes up there is no change in quantity demanded. The reason is that the patients have no other choice, without their medicine they can’t live, so no matter what the price is they have to purchase it. So it means as price goes up the quantity demanded remains the same.
Graphical Analysis of Perfectly Elastic Demand Curve:
Take an example of steel for which the demand curve is a horizontal straight line as shown in the graph below. It means as the quantity demanded increases the supplier can not be able to increase the prices the reason is as the supplier increase the price no one would buy from them so they have to sell the steel at the market price.
Graphical Analysis of Unit Elastic Demand Curve:
Take an example of digital cameras if the price of the digital camera goes up by 5% and demand goes down by the exact same amount that is 5% it means the demand curve is unit elastic. Similarly, as the prices go down by 5% the quantity would increase by 5%. This is the concept of unit elastic demand curves in which demand and price change by exactly the same amount.
Price Elasticity of Demand Coefficient:
After getting the concept of elastic and inelastic demand curves economists also introduced the formula to measure the demand for particular goods or services that either it’s sensitive to the price change or not. For that, they defined the coefficient Ed as:
Ed = Percentage change in Quantity / Percentage change in price
So it basically the purpose of the formula to show what kind of demand it is. Let’s discuss the five cases one by one.
- Elastic demand curve: In the case of an elastic demand curve as we see a small change in price causes a large change in quantity demanded so according to the formula when the change in the denominator is less than a change in the numerator so the Price Elasticity of Demand Coefficient Ed would be greater than 1 (>1).
- Inelastic demand curve: In inelastic demand curve the change in the denominator is greater than a change in the numerator so the Price Elasticity of Demand Coefficient Ed would be lessor than 1 (<1) because in inelastic demand curve as we see a large change in price causes a small change in quantity demanded.
- Perfectly Inelastic demand curve: In the case of Perfectly Inelastic demand curve if there is a change in price it will not affect the quantity demanded at all so it means in the formula the numerator is zero and we know if we divide anything with zero the answer would be zero so Price Elasticity of Demand Coefficient Ed would be zero is this case.
- Perfectly elastic demand curve: In a perfectly elastic demand curve, there is no change in the price so in the formula denominator would be zero so the Price Elasticity of Demand Coefficient Ed would be infinity is this case.
- Unit Elastic: In this case as the change in price and quantity is equal so that’s why the answer would be 1 because both numerator and denominator would cancel out each other.
Also Read: How does the market equilibrium change as the supply and demand shifts?
