Concept Of Price Elasticity Of Demand
The price elasticity of demand measures the degree of responsiveness of quantity demanded for a certain commodity to the change in its price. In other words, the price elasticity of demand is defined as the 'ratio of percentage change in the quantity demanded to the percentage change in price . It can be expressed as follows:
Price elasticity of demand (ep) = Percentage change in quantity of demand / Percentage change in price
Where, ep = Coefficient of price elasticity of demand.
The price elasticity of demand is always negative due to the inverse relationship between the price and quantity demanded. But for the sake of simplicity in understanding the magnitude of response of quantity demanded to the change in the price we ignore the negative sign and take into account only the numerical value of the price elasticity of demand.
Types Of Price Elasticity Of Demand
There are five types of price elasticity of demand. They are as follows:
1. Perfectly Elastic Demand
Demand is said to be perfectly elastic if negligible change in price would lead to infinite change in the quantity demanded. Visibly, no change in price causes in infinite change in demand.
2. Perfectly Inelastic Demand
When the demand for a commodity does not change despite change in price, the demand is said to be perfectly inelastic.
3. Unitary Elastic Demand
When the percentage change in the quantity demanded is equal to the percentage change in price, the demand for a commodity is said to be unitary elastic demand. For example, 10% change in price causes 10% change in demand.
4. Relatively Elastic Demand
When the percentage change in the quantity demanded for a commodity is more than percentage change in price, it is called relatively elastic demand. For example, if 10% change in price results, 20% change in quantity demanded.
5. Relatively Inelastic Demand
When the percentage change in the quantity demanded of a commodity is less than percentage change in the price, it is called relatively inelastic demand. For example, when 20% change in price causes 10% change in demand.
