The response of the consumers to a change in the price of a commodity is measured by the price elasticity of the commodity demand.
Price Elasticity
The response of the consumers to
a change in the price of a commodity is measured by the price elasticity of the
commodity demand. The responsiveness of changes in quantity demanded due to
changes in price is referred to as price elasticity of demand. The price
elasticity of demand is measured by dividing the percentage change in quantity
demanded by the percentage change in price.
For example:
Quantity demanded is 20 units at
a price of Rs.500. When there is a fall in price to Rs. 400 it results in a
rise in demand to 32 units. Therefore the change in quantity demanded is12
units resulting from the change in price of Rs.100.
The Price Elasticity of Demand is
= 500 / 20 x 12/100 = 3
The Determinants Of Price Elasticity Of Demand
The exact value of price
elasticity for a commodity is determined by a wide variety of factors. The two
factors considered by economists are the availability
of substitutes and time. The
better the substitutes for a product, the higher the price elasticity of
demand.. The longer the period of time, the more the price elasticity of demand
for that product. The price elasticity of necessary goods will have lower
elasticity than luxuries.
The
elasticity of demand depends on the following factors:
1.
Nature of the commodity: The demand for necessities is inelastic because the demand does not
change much with a change in price. But the demand for luxuries is elastic in
nature.
2.
Extent of use: A commodity having a variety of uses has a comparatively elastic
demand.
3.
Range of substitutes: The commodity which has more number of substitutes has relatively
elastic demand. A commodity with fewer substitutes has relatively inelastic
demand.
4.
Income level: People with high incomes are less affected by price changes than people
with low incomes.
5.
Proportion of income spent on the
commodity: When a small part of income is
spent on the commodity, the price change does not affect the demand therefore
the demand is inelastic in nature.
6.
Urgency of demand / postponement
of purchase: The demand for certain
commodities are highly inelastic because you cannot postpone its purchase. For
example medicines for any sickness should be purchased and consumed
immediately.
7.
Durability of a commodity: If the commodity is durable then it is used it for a long period.
Therefore elasticity of demand is high. Price changes highly influences the
demand for durables in the market.
8.
Purchase frequency of a product/
recurrence of demand: The demand for frequently
purchased goods are highly elastic than rarely purchased goods.
9.
Time: In the short run demand will be less elastic but in the long run the
demand for commodities are more elastic.The following are the possible combination of
changes in Price and Quantity demanded. The slope of each combination is
depicted in the following graphs. 1.Relatively Elastic Demand (Ed >1) a small percentage change
in price leading to a larger change in Quantity demanded.
2.Perfectly Elastic Demand (Ed = ∞) a small change in price
will change the quantity demanded by an infinite amount.
3.Relatively Inelastic Demand (Ed < 1) a change in price leads
to a smaller percentage change in quantity demanded.
4.Perfectly Inelastic Demand (Ed = 0) the quantity demanded does
not change regardless of the percentage change in price.
5.Unit Elasticity of Demand (Ed =1) the percentage change in
quantity demanded is the same as the percentage change in price that caused it.
Tags : Managerial Economics - Demand Analysis
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