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Questions
Explain price elasticity of demand.
Explain Price Elasticity of Demand. Draw the various degrees of it with diagrams.
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Solution
Price Elasticity of Demand (PED) examines how sensitive the quantity looked for of a commodity is to a change in its price while maintaining all other factors constant.
`E_p = ("% Change in Quantity Demanded")/("% Change in Price")`
`E_p = (DeltaQ"/"Q)/(DeltaP"/"P)`
where:
- Ep = Price Elasticity of Demand
- ΔQ = Change in Quantity Demanded
- ΔP = Change in Price
- Q = Initial Quantity Demanded
- P = Initial Price
Degrees of Price Elasticity of Demand:
- Perfectly Elastic Demand: The quantity demanded changes infinitely in response to a very slight change in price. For example, Highly competitive markets for identical products.
- Horizontal demand curve.
- Infinite responsiveness to price changes.
- Perfectly inelastic Demand: The quantity demanded remains constant, regardless of changes in prices. For example, life-saving drugs and essential goods such as salt.
- Vertical demand curve.
- Zero responsiveness to price changes.
- Unitary Elastic Demand: Percentage change in quantity demanded is exactly equal to the percentage change in price. For example, certain everyday goods.
-
Demand changes exactly in proportion to price changes.
-
- Relatively Elastic Demand: Percentage change in quantity demanded is greater than the percentage change in price. For example, luxury goods, electronics.
- High responsiveness to price changes.
- Relatively Inelastic Demand: Percentage change in quantity demanded is less than the percentage change in price. For example, necessities like milk and water.
- Low responsiveness to price changes.
Notes
Students should refer to the answer according to the question.
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