Meaning and Definitions of Elasticity of Demand

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Meaning and Definitions of Elasticity of Demand

The law of demand is only a qualitative statement. It does not express any quantitative relationship between the price and the quantity demanded. It only states that demand decreases with the increase in price and demand increases with the decrease in price. Thus, this rule. The price changes only indicate the direction of the change in demand, but. It does not tell how much the demand changes. The elasticity of demand measures this change. Does. – Prof. Marshall – “The demand of a commodity in the market is more or less elastic. It depends on whether the quantity of demand increases in a certain quantity or if the quantity of demand increases in a certain quantity. There is more or less. ” 

Prof. Benham- “The idea of ​​elasticity of demand, demand due to a slight change in price. The effect is on the quantity. ” 

Prof. Meyers – “Relative changes in price on a given demand curve. As a result, the measure of change in the quantity purchased is called elasticity of demand. ” Prof. Carencross – “The elasticity of demand of an object is the rate at which the quantity of demand changes as a result of changes.” 

Prof. Boulding- “The change in the quantity of a commodity due to a one percent change in the price of a commodity is called elasticity of demand.”

Prof. Samuelsson- “The idea of ​​elasticity of demand refers to the fraction of change in demand in response to the change in price, ie the reactive fraction in demand. This bridge depends on changes and is independent of the units used to measure price and quantity of goods. ” 

Mrs Joan Robinson – “The elasticity of demand can be derived by dividing the price by the proportional change of the relative change in the quantity purchased as a result of a slight change in the price at a given price.” This definition can be expressed as a formula as follows 

Elasticity of demand (proportional change in demand) 

Proportional change in price In short, elasticity of demand only indicates that demand changes due to change in price. How much change happens. The effect of price change is not uniform on all goods and services, but varies. In other words, elasticity of demand the value of the commodity and its. Is a measure of interpersonal relationships. 

Distinction between Law of Demand and Elasticity of Demand

The law of demand is a qualitative statement of the relationship between price and demand which tells us the direction of changes in demand as a result of changes in price. It tells us nothing about price, quantity or rate of changes in demand as a result of changes. In other words, this rule does not explain any quantitative relation between the price and the quantity demanded. This lack of demand law satisfies the assumption of elasticity of demand. 

Elasticity of demand 

(Forms of Elasticity of Demand)

Modern economists make extensive use of elasticity of demand. According to these economists, there are three main forms of price relativity (elasticity) of demand –

1. Price Elasticity of Demand –

Price elasticity of demand is the ratio of a given percentage change in the price of a commodity and the percentage change in the quantity demanded. Due to change in income level, her mother is called elasticity. Income elasticity of demand elasticity of demand can be calculated by the following formula… 

2. Cross Elasticity of Demand

When two items complement each other, when the price of one of them changes, the quantity demanded of the other item also changes. This is called the elasticity of demand. The following formula is used to find the horizontal elasticity of demand

Elasticity categories of demand 

(Degrees of Elasticity of Demand) –

The elasticity of demand for all goods is not the same, that is, the elasticity of demand for some goods is less and more of some goods. In principle, there is a tradition to divide the elasticity of demand into the following five categories –

1. Perfectly Elastic Demand,

2. Highly Elastic Demand,

3. Elastic Demand

4. Inelastic Demand,

5. Perfectly Inelastic Demand. . 

1. Perfectly Elastic Demand –

When there is no change in the price (or nominal change) of a commodity, when there is too much change in demand (too much demand or too much increase), then the demand of the commodity is said to be completely elastic. This situation is completely hypothetical and is not found in practical life. The curve of this type of demand is always flat, as shown in Figure 15. Figure 15 shows the quantity demanded on the OX line and the price on the OY line. PD is the demand line which is completely parallel to Ox, providing that the demand for the commodity has changed even if there is no change in the price of the commodity. In other words, the demand is OX1 to OX even if the value of the commodity is unchanged, or OX3 Done. Thus the DD demand line is showing the state of fully elastic demand. 

2. Highly Elastic Demand

When the change in the demand of an object is more than the ratio of the change in the price of the commodity, it is called highly elastic demand. Figure 16 shows the original demand for the OM item at the OP price. Now if the price increases to OP and the quantity demanded decreases to only OM1, then it will be a situation of highly elastic demand as demand has changed much more than the change in price. Similarly, if the value decreases to OP, and the demand for the commodity increases to OM2, then it will also be a condition of highly elastic demand. This is how the DD demand line is created. This line is called Semihorizontal, as is evident from Figure 16. 

3. Elastic Demand

When the demand for a commodity changes in exactly the same proportion as the price of the commodity has changed, it is called elastic demand. If the price of a commodity increases (or decreases) by 25% and its demand also decreases (or increases) by 25%, it will be called elastic demand. Figure 17 shows the state of elastic demand. In figure-17, OP is the fundamental value and OM is the original quantity demanded. Now if the price increases to OPA, then the demand decreases and the quantity demanded decreases to OM. Now if the contrast value is reduced to OPA, then the quantity demanded increases to OM2. In this case the quantity demanded changes as the quantity changes, so this condition is called equal to elastic demand condition or elasticity unit of demand. In this case the demand line makes an angle of 45 °.

4. Inelastic Demand

When the change in the demand of an item is in a much smaller proportion than the change in the price of that commodity, then the demand for that commodity is called inelastic. The condition of inelastic demand is displayed by the figure-18. In figure-18, OP is the original price and OM is basically the quantity demanded. Now if the price increases to OP and the quantity demanded becomes OM1 or the price decreases to OP, and the quantity demanded increases to OMA, then we come to the conclusion that the change in demand will be the price. Is much less than the change in. This is the situation of inelastic demand.

5. Perfectly Inelastic Demand –

When there is no change in the quantity demanded in spite of a wide or significant change in the price of an item, there is no change in the quantity demanded. Figure 19 shows the condition of completely inelastic demand. It is clear from the diagram that despite the wide change in the price of the commodity (ie, despite the price being more than OP. Or decreasing OP1), the quantity demanded of the commodity remains unchanged (OM), hence DD demand line The quantity of the object as a whole is showing the condition of inelastic demand. 

Factors that affect elasticity of demand 

The factors that affect elasticity of demand are the following: 

1. Nature of Commodity

Generally, the demand for goods that meet the mandatory requirements is irrational because these requirements cannot be satisfied for a long time. In contrast, demand for goods that meet casual needs is more elastic than average and demand for luxury items is more or more elastic. 

2. Price of a Commodity

Often the demand for goods which have a high price is more elastic. The elasticity of demand for goods that are of moderate value is normal, while the demand for very inexpensive or very low prices is very less elastic or inelastic. 

3-Availability of Substitutes –

If there are many substitute items available, then the demand will be more elastic. Because when the price of the commodity increases, other substitute goods will be used. Thus the prices of substitute goods also affect elasticity of demand. 

4. Alternative Uses of a Commodity –

Often, alternative uses are possible, their demand is more elastic, such that the demand for electricity is more elastic. 

5. Place of Use –

If the object is such that its use can be easily postponed for future, then its demand will be more elastic. But if the use of the object cannot be postponed (ie if it is absolutely necessary to purchase the object) then the demand of the object will be irresistible. 

6. Price Level

The price level also affects the elasticity of demand to a large extent. In the words of Prof. Marshall, “elasticity of demand is sufficient for high prices and as prices decrease, elasticity also decreases and if prices fall so much that the limit of satiety is reached then elasticity will slow down. – It dissolves slowly. ” 

7. Income Group

The elasticity of demand depends on which group or category of income the buyer belongs to. The demand for goods is generally irresistible to the affluent class (rich), while the demand for goods is more elastic for the poor class because even a slight change in the price is very important for the poor.

8. Effect of Distribution of Wealth

Prof. Tossig states that “In general there is uneven distribution of wealth in society and elasticity of demand becomes elastic and elastic with equal distribution of wealth.” The reason for this is that when there is an uneven distribution of wealth in the society, the number of middle class people is less. Most people are either very rich or poor. The poor people are able to satisfy only the essentials of life, while they use the items of dense cost-effectiveness openly. In other words, the demand of the rich class of the lower class makes the people angry. opposite of this. In the case of equal distribution of wealth, when there is a large number of middle class. It is natural for demand to be elastic. 

9. Proportion of Expenditurate Income –

The demand of those items on which the consumer spends a small fraction of his income is irresistible. In contrast, the demand for goods / services consumers spend a large fraction of their income would be more irrational. 

10. Joint Demand

For items that have a combined demand, the demand for the pan and ink, their demand often changes in one direction, in other words, if the demand for the pan is constant (irrigated) then the demand for ink will also be inelastic. 

11. Effect of Time

Generally, the shorter the time, the less elastic the demand of goods is and the longer the elasticity of demand is more elastic. In the words of Prof. Marshall – “The elasticity of demand can be known only after some time. Changes in short-term prices have almost no effect on the demand of the commodity, but in the long run the probability of its substitution effect increases and in such a situation, there can be rapid changes in demand. ” 

12. Nature and Habit

The nature and habit of the consumer also has a wide impact on elasticity of demand. The demand for the items which go on the habit of use is often irresponsible. 

13. State Control –

Sometimes the government interferes with economic activities through price control etc. In such a situation, the demand often becomes inelastic. 

14. Estimates of Future Prices

Generally, the demand for commodities which are likely to rise in price is more elastic, while the demand for prices is likely to be inelastic. 

Importance of elasticity of demand 

In economics, elasticity of demand has great importance from both theoretical and practical perspectives. Its importance can be explained as follows- 

1. Theoretical Importance –

The idea of ​​price elasticity of demand is very helpful in understanding the ideas of poverty between pricing, taxation and conflicting conditions. With its help it can be known what is the effect of consumption on the basic growth. 

2. Practical Importance –

Clarifying the practicality of elasticity of demand, Lord Keynes wrote – “The greatest gift of Marshall is the principle of demand without which it is never possible to discuss the principles of price and distribution.” The practical importance of elasticity of demand can be explained as follows

(i) Importance in Price Determination

The elasticity of demand has a very important importance in the area of ​​pricing; like- 

(a) In determining the equilibrium of the firm – The firm is in equilibrium condition only when the marginal income is equal to the marginal cost (ie MC = MR), but marginal income depends mainly on elasticity of demand. 

(b) Under monopoly- (a) The monopolistic producer / seller sets the price of his goods for the purpose of maximizing his profit is affected by the elasticity of price demand. In general, if the demand for the monopolistic item is elastic, the monopolist will keep the commodity at a lower price so that it can maximize its profit by selling the maximum quantity of the commodity. But if the demand for the commodity is irreducible then it (monopoly) will be benefited by setting the higher price of the commodity. 

(B) Monopolistic producers adopt a price differentiation policy with the aim of maximizing their profits. In this case, the producer is guided by the ‘elasticity of demand’. 

 (C) While adopting Dumping, monopoly is also affected by the elasticity of demand in different markets. 

(c) Joint Supply – The idea of ​​elasticity of demand also plays an important role in pricing of goods of joint supply. Generally, the value of elastic object is low and the value of an inelastic object is high. 

(ii) Importance in the field of distribution

(Importance in Distribution)-

Production is the collective result of the means of origin, so it is an imperative to award different means of production to their services… and this award is influenced by the elasticity of demand. Often the producer gives more rewards to irrigated demand and less to elastic demand… tools. 

(iii) Importance for Government

(Importance for the Government)-

At present, the government carries out various economic activities, so the elasticity of demand also has special significance for the government. –

(a) The Finance Minister takes into account the elasticity of demand while imposing tax because it is easy to increase income by levying tax on items with inelastic mogs. 

(b) Every government wants to impose taxes on different sections of the society in such a way that everyone has to pay equitable tax, so the government takes the help of the idea of ​​demand for tax. (c) Often the government whose industries demand for goods would be irresistible. Public Utility Services declares ownership and management and ownership. Thus, consideration of elasticity of demand is very useful in determining practical economic policy.

(d) The elasticity of demand also proves useful in determining the appropriate exchange rate. 

 (iv) Helpful for determining Freight The elasticity of demand is also helpful in determining the rate of freight for traffic.

(v) In the field of international trade (Helpful for Foreign Business) – The idea of ​​elasticity of demand is very useful because the terms of trade between two countries are affected by the elasticity of demand for imports and exports. 

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