ELASTICITY OF DEMAND
The elasticity of demand refers to the sensitiveness or responsiveness of demand to changes in price. Price elasticity of demand is usually referred to as elasticity of demand. Also, there are income elasticity of demand and cross elasticity of demand.
- Price Elasticity of Demand
It is the ratio of proportionate change in quantity demanded of a commodity to a given proportionate change in its price. Price elasticity of demand (EP) is, thus, given by:
Ep = (Percentage change in quantity demanded) / (Percentage change in Price)
= {(Δ Q x 100)/Q} / {(Δ P x 100) / P}
= (Δ Q / Δ P) X (Q / P)
Where Q = quantity demanded of a commodity; P= Price.
Let us suppose that a consumer demands 10 oranges when its unit price is Re. 1. If its price falls to 95 paise, he demands 12 oranges. Now, the price elasticity of demand can be estimated as follows:
Ep = (2 /10 x100) / (-5 /100 x 100) = -4
As the price falls by 5 percent, the quantity demanded rises by 20 percent. Now, the coefficient of elasticity of demand is minus 4. Thus, it could be concluded that there is a four percent increase in the quantity demanded of orange due to a one percent decrease in its price.