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Question
Explain the concept of price elasticity of demand.
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Solution
- Price elasticity of demand refers to the degree of responsiveness of quantity demanded to a change in price. In simple words, the elasticity of demand is the ratio of the percentage change in quantity demanded of a commodity to a percentage change in its price.
- Conversely, if the quantity demanded changes very little with a substantial price change, the product is said to have low price elasticity (inelastic).
- Mathematically, PED is calculated as the percentage change in quantity demanded divided by the percentage change in price.
- High elasticity suggests that consumers are more price-sensitive, making it a critical concept for businesses in setting prices and for economists studying market behaviours.
- Formula: Ed = `(Delta Q)/Q xx P/(Delta P)`
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| 1. Increase or decrease in demand for a commodity does not cause any change in its price. | (a) Effect on supply, in the case of Perfectly Elastic Demand. |
| 2. Increase or decrease in demand causes a change in the price of the commodity. Equilibrium quantity remains constant. | (b) Effect on demand, in the case of Perfectly Inelastic Supply. |
| 3. Increase or decrease in demand cause a change in the price of the commodity. Equilibrium quantity remains constant. | (c) Effect on demand, in the case of Perfectly Elastic Supply. |
| 4. Increase or decrease in demand for a commodity does not cause any change in its price. | (d) Effect on supply, in the case of Perfectly Elastic Demand. |
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