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Price elasticity of Demand Types and Importance
following are the meaning, types and importance
Price elasticity of Demand:
Price elasticity of Demand (Ep) measures the degree of responsiveness / sensitivity of the quantity demand for a good or service to changes in its own price, holding constant the values of all other variables in the demand function. Similarly, it is the relationship between a proportionate change in price and a proportionate change in demand, other things remaining the same. Usually, it is expressed in percentage.
In Mathematical form, it is expressed as
Ep = ( Proportionate Percentage change in quantity demanded of commodity X / Proportionate Percentage in price of X )
For example, suppose in response to a 10% fall in price of a particular type of Coffee, the quantity demanded for it in three months increases by 20%, then the price elasticity of demand would be
Ep = (20% / -10%)
Hence, the demand elastic which would mean that a one percentage point fall in price would lead to two percentage point increase in demand.
Degrees of Price elasticity of Demand
Following are the degrees of price elasticity of demand.
a. Price (relatively) Elastic Demand (Ep > 1)
If a smaller change in price leads to greater change in quantity demanded, it is called relatively elastic or simply elastic demand. Generally, demand for comfortable goods is relatively elastic; demand is more responsive (Demand respond more than proportionately) to a change in price.
b. Price (Relatively) inelastic demand (Ep<1)
If proportionate change in quantity demand is less than the proportionate change in price, the demand for the commodity is (relatively) inelastic. This means that demand for a good is not very responsiveness or sensitive to changes in its own price.
c. Unitary Elastic (Ep = 1)
If proportionate change in quantity demanded is equal to proportionate change in price, it is the case of unitary elastic demand. In this case, the percentage change in price equals the percentage change in quantity demanded.
d. Perfectly inelastic demand (Ep=0)
Irrespective of change in price if the quantity demanded remains the same, it is said to be perfectively inelastic demand. Here, elasticity of demand is zero. A change in price will have no influence on quantity demanded.
e. Perfectively / Infinitely elastic demand (Ep = Infinity)
When quantity demanded responds infinitely even if there is no change in the price, or even a small change price will result quantity demanded fall to zero, it is called perfectly elastic demand.
Importance / Uses of Price Elasticity of Demand in Business Decision Making
The concept of price elasticity of demand has important practical applications in managerial decision making. A businessman has often to consider whether a lowering of price will lead to increase in the demand for his product, and if so, to what extent and whether his profits would increases as result thereof. In this condition, the concept of elasticity of demand becomes very useful to make the decision.
A monopolist adopts a price discromination policy only when the leasticity of demand of different consumers or sub-markets is different.
Public Utility Pricing:
In case of public utilities which are run as monopoly undertakings. For example, elasticity, water supply, railways and postal services, price discrimination is generally practiced, charging higher prices from customers or users with inelastic demand and lower prices in case of elastic demand.
Production decisions: Price elasticity of demand can also help firms make production decisions. If the demand for a product is highly elastic, the firm may need to produce a greater quantity of the product in order to lower its per-unit cost and be able to lower the price.
- Joint Supply
- Supper Markets
- Use of Machines
- Factor Pricing
- International Trade
- Shifting of Tax Burden
Hence, these are the Price elasticity of Demand Types and Importance.
Other Important Links
a. Elasticity of Demand: CLICK HERE
b. BBS 1st Year All subject Notes: CLICK HERE
Frequently Asked Questions:
What is Price elasticity of Demand?
= It is measures the degree of responsiveness / sensitivity of the quantity demand for a good or service to changes in its own price, holding constant the values of all other variables in the demand function.
Types of Price elasticity of Demand.
= Following are the types:
- Price (relatively) Elastic Demand (Ep > 1)
- Price (Relatively) inelastic demand (Ep<1)
- Unitary Elastic (Ep = 1)
- Perfectly inelastic demand (Ep=0)
- Perfectively / Infinitely elastic demand (Ep = Infinity)