Price Elasticity of Demand

Elasticity is the relative change in the dependent variable divided by the relative change in the independent variable. Elasticity of demand may be of various type i.e. Price, income and cross elasticity of demand. Elasticity of demand is a part of demand analysis and it is useful in cases where demand curve analysis fail to provide reliable results. For Example, Demand curve provide measure of responsiveness to prior change in absolute terms but fails to compare the responsiveness of different commodities which might be measured in different units.

Price Elasticity of Demand

The price elasticity of demand is the responsiveness of the quantity demanded of the good to change in the good’s price, other thing held equal. That is, the change in quantity demanded due to change in price is known as price elasticity of demand.

The formula for calculating price elasticity of demand is:

Price Elasticity of Demand (ε) =Relative Change in Quantity/Relative Change in Price

Types of Price Elasticity of Demand

(1)   Unity Elasticity : The change in demand is exactly equal to change in price

(2)   High Elasticity (More than unity) : The change in demand is more than change in price

(3)   Perfectly elastic: It refers to situation where slight change in price of a commodity cause an infinite change in quantity demanded of that commodity. The demand in such a case is hyper sensitive and elasticity of demand is infinite.

(4)   Low Elasticity: The change in demand is less than change in price.

(5)   Zero Elasticity: There is no change in demand and only price changes.