Price Elasticity of Demand
Definitions for price elasticity of demand
Elasticity = responsiveness of consumer due to the price change of any commodity
According to Alfred Marshall: "Elasticity of demand may be defined as the percentage change in quantity demanded to the percentage change in price."
According to A.K. Cairncross : "The elasticity of demand for a commodity is the rate at which quantity bought changes as the price changes."
According to J.M. Keynes : "The elasticity of demand is a measure of the relative change in quantity to a relative change in price."
According to Kenneth Boulding : "Elasticity of demand measures the responsiveness of demand to changes in price."
The law of demand says that consumers will respond to decrease or increase in prices of goods and services. (other things remaining constant), but law of demand explains only the concept of change in prices of goods and services effects its demand, but does not explain to what extent demand changes if prices of goods increase or decrease. The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). The opposite also applies; a product is inelastic if a large change in price is accompanied by a small amount of change in demand.
Business men know that they face demand curves, but rarely do they know what these curves look like. Yet sometimes a business needs to have a good idea of what part of a demand curve looks like if it is to make good decisions. If Rick's Pizza raises its prices by ten percent, what will happen to its revenues? The answer depends on how consumers will respond. Will they cut back purchases a little or a lot? This question of how responsive consumers are to price changes involves the economic concept of elasticity.
As developed by Alfred Marshall, the concept of elasticity was applied to elasticity of price. But later on, the concept was made more broader. Elasticity of demand is a concept of showing the responsiveness of demand. As we well-known earlier, changes in demand can be caused by several factors which determine demand for a good or commodity. Obviously, demand is responsive to each of these factors i.e. But all the factors are not equally important from the point of view of either theoretical analysis or practical means. For example, take tastes or preference of the consumers, is an exogenous factor and there is no point in measuring the responsiveness of demand to this factor, though in practice this factor is important. Efforts, therefore are made to measure the responsiveness of demand to changes in certain important factors like price, income, prices of related products, sales promotion etc.
Let us take price as a factor for understanding the elasticity concept. When considering the responsiveness of the quantity demanded to change in price of a commodity, we may make some statements such as : 'The demand for sugar was more responsive to price-changes twenty years ago than it is today', or the demand for milk responds more to price changes than does the demand for tea'. It is thus clear that the degree of responsiveness of quantity demanded to price changes varies from product to product. Elasticity of demand indicates the degree of responsiveness of quantity demanded to changes in market price. Hence this becomes the concept of price-elasticity of demand.
DEGREES OF PRICE ELASTICITY
Different commodities have different price elasticities. Some commodities have more elastic demand while others have relative elastic demand. Basically, the price elasticity of demand ranges from zero to infinity. It can be equal to zero, less than one, greater than one and equal to unity.
According to Dr. Marshall : "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."However, some particular values of elasticity of demand have been explained as under ;
Types of Price Elasticity of Demand:-
MEASUREMENT OF PRICE ELASTICITY OF DEMAND
There are five methods to measure the price elasticity of demand.
Total Expenditure Method.
Point Elasticity of Demand.
Arc Elasticity of Demand.
Total Expenditure Method
Dr. Marshall has evolved the total expenditure method to measure the price elasticity of demand. According to this method, elasticity of demand can be measured by considering the change in price and the subsequent change in the total quantity of goods purchased and the total amount of money spend on it.
This method is also associated with the name of Dr. Marshall. According to this method, "price elasticity of demand is the ratio of percentage change in the amount demanded to the percentage change in price of the commodity." It is also known as the Percentage Method, Flux Method, Ratio Method, and Arithmetic Method.
Ed = Proportionate change in Quantity Demanded
proportionate change in price
Let us suppose that the percentage are as follows : The price falls by 1%; and the demand increases by 3%. Because the price falls, the 2% change in price can be shown by - 1 %. Thus : Ep = 2% /-1% = -2.
Arc Elasticity of Demand
According to Prof. Baumol: "Arc elasticity is a measure of the average responsiveness to price change exhibited by a demand curve over some finite stretch of the curve".
According to Leftwitch : "When elasticity is computed between two separate points on a demand curve, the concept is called Are elasticity."
Mrs.; Joan Robinson has given this method. She says that elasticity of demand can be measured with the help of average revenue and marginal revenue. Therefore, a sale proceeds that a firm obtains by selling its products is called its revenue. However, when total revenue is divided by the number of units sold, we get average revenue. On the contrary, when addition is made to the total revenue by the sale of one more unit of the commodity is called marginal revenue.
Ed =A / A - M
where Ed represents elasticity of demand, A = average revenue and M = marginal revenue.