hargeisa

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 13 (2442 words) Published: April 1, 2014
First section: Information
Price elasticity of demand
Elasticity is a term widely used in economics to denote the “responsiveness of one variable to changes in another.” In proper words, it is the relative response of one variable to changes in another variable. The phrase “relative response” is best interpreted as the percentage change. Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one per cent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall.

Alfred Marshall (26 July 1842 – 13 July 1924) was one of the most influential economists of his time. His book, Principles of Economics (1890), was the dominant economic textbook in England for many years. It brings the ideas of supply and demand, marginal utility, and costs of production into a coherent whole. He is known as one of the founders of economics. And he stated “elasticity of demand” in his book Principles of Economics, published in 1890. He described it thus: "And we may say generally: the elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price". He reasons this since "the only universal law as to a person's desire for a commodity is that it diminishes... but this diminution may be slow or rapid. If it is slow... a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case... the elasticity of his wants, we may say, is great. In the latter case... the elasticity of his demand is small." Mathematically, the Marshallian price elasticity of demand was based on a point-price definition, using differential calculus to calculate elasticity and it is as follows:

There is another common definition for price elasticity of demand “is the change in the quantity of demand as a result of a change in the price of the goods available for sell, remaining all other influences on the quantity demanded constant”

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price by keeping other factors constant.
The common formula which is used for price elasticity of demand is:

But the most accurate formula for calculating it is:

Types of price elasticity of demand
There are five types for price elasticity of demand according to the change in price and quantity demanded and can take on any value between zero and infinity: 1. . Perfectly elastic demand: The demand is said to be perfectly elastic when a very insignificant change in price leads to an infinite change in quantity demanded. A very small fall in price causes demand to rise infinitely. Likewise a very insignificant rise in price reduces the demand to zero. This case is theoretical which is never found in real life. 2. Perfectly inelastic demand: The demand is said to be perfectly inelastic when a change in price produces no change in the quantity demanded of a commodity. In such a case quantity demanded remains constant regardless of change in price. The amount demanded is totally unresponsive of change in price. The elasticity of demand is said to be zero. 3. Relatively elastic demand: The demand is relatively more elastic when a small change in price causes a greater change in quantity demanded. In such a case a proportionate change in price of a commodity causes more than proportionate change in quantity demanded. If price changes by 10% the quantity demanded of the commodity change by more than 10% i.e. 25%. The demand curve in such a situation is relatively flatter.

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