what is price elasticity of demand ?

Concept of Elasticity of demand 

Price elasticity of demand is defined as a measurement of percentage change in quantity demanded in response to given given percentage change in own price of a commodity.

price elasticity of demand.

Measurement of price elasticity of demand.

There are two important methods of measuring price elasticity of demand.

1. Percentage change method, also called proportionate method.
2. Geometric method.

(1) percentage change method for proportionate method

This is the most popular method of measuring price elasticity of demand. Under this method, elasticity of demand is measured by the ratio of the proportionate percentage change in quantity demanded to the proportionate percentage change in price.

(2) Geometric method

Geometric method measures price elasticity of demand at different point on the different curve. It is also called point method of measuring elasticity of demand.  we are to  use this method only with reference to a linear demand curve, which is a straight line demand curve.

Factors affecting price elasticity of demand

 factors effecting price elasticity  of demand

Price elasticity of demand is high or low depending on various factors. some of the important determinants of price elasticity of demand are as under.

(1) Nature of commodity: ordinarily necessaries like salt, kerosene oil , match boxes , textbook seasonal vegetables etc.,  have inelastic demand. luxuries, like air- conditioner costly furniture, fashionable garments etc. have a elastic demand.

(2) Availability of substitutes:  Demand for good s which have close substitute (like, tea and coffee , being close substitute of each other) is relatively more elastic. Because, when price of such a good rises ,the consumer have the option of shifting to its substitute goods without close substitutes like cigarette and liquor, are generally less elastic in demand.

(3) multiple uses: Goods which can be put to multiple uses have elastic demand. electricity is an example, it is used for lighting ,room-heating, air conditioning, cooking, etc. If the price of electricity increase, it use may be restricted only to important purpose like lighting. accordingly, elasticity of demand is high.

(4) postponement of use:  Demand will be elastic four goods, the consumption of which can be postponed. demand for residential house maybe cited as an example. people lower their demand for residential Houses when interest rates on the loan are high.

(5) income level of the buyers:  Elasticity of demand for a good also depends on the income level of its buyers. if the buyers of a good are high-end  consumers  (with high level of income) they will not care for the price. Accordingly, elasticity of demand is expected to be low.

(6) habits of the consumers: Good to which consumers become habitual or addicted will have inelastic demand. cigarette liquor are examples, demand for cigarette and liquor does not reduce even when these goods are highly taxed.

(7) price level: elasticity of demand also depends on the level of price of the commodity. Elasticity of demand will be high at high level of the price of the commodity.  because at higher level of price, the ratio between lower segment and upper segment of demand curve tends to be low.

(8) Time period: Demand is inelastic in short period, and elastic in long period. it is because long period is long enough for a consumer to change his consumption habits.