DEGREES OF PRICE ELASTICITY OF DEMAND

DEGREES OF PRICE ELASTICITY OF DEMAND

Demand for a product is sensitive or responsive to price changes. The variation in demand is, however, not uniform with a change in price. In case of some products, a small change in price leads to a relatively larger change in quantity demanded. For example, a decline of 1% in price leads to 8% increase in the quantity demanded of a commodity. In such a case, the demand is said to be elastic. There are other products where the quantity demanded is relatively unresponsive to price changes. A decline of 8% in price, for example, gives rise to 1% increase in quantity demanded. Demand here is said to be inelastic.

The terms elastic and inelastic demand do not indicate the degree of responsiveness and unresponsiveness of the quantity demanded to a change in price. The economists therefore, group various degrees of elasticity of demand into five categories. (1) Infinitely elastic, (2) Perfectly inelastic, (3) Unitary elasticity, (4) Relatively elastic, and (5)

Relatively inelastic demand.

(1) Perfectly elastic demand: A demand is perfectly elastic when with a small increase in the price of a good, its quantity demanded by the consumers drops down immediately to zero. Perfect
elasticity demand implies that individual producers can sell all they want at a ruling price (Rs. 4.0 per unit) but cannot charge a higher     price. If any producer tries to charge even one penny more, no consumer would buy his product. The consumers would prefer to buy the good from another producer who sells the same good 0- 2 – at the prevailing market price of Rs. 4 per unit. The consumers will buy any quantity at Rs. 4.0per unit. At a price below Rs. Four, quantity  demanded is. infinite. A perfectly elastic demand              0        10    20     30    40

curve is illustrated in fig. 6.1. It shows that the                   Fig. 6.1 Quantity demand curve DID/ is a horizontal straight line which indicates that the quantity demanded is extremely (infinitely) responsive to price. Even a slight rise in price (say Rs. 4.02), drops the quantity demanded of a good to1 zero: The curve DD’ is infinitely elastic. The elasticity of demand as such is equal to infinity.

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