The first and most fundamental concept we learn in Economics is ‘demand.’ Demand is defined as the general public’s ability and desire to purchase a good or service. Demand is a microeconomic variable that deals with the economy’s ‘what is likely to happen’ component. According to the chapter, demand is an important concept for Commerce students to understand. Regardless of the field of study, everyone requires a fundamental understanding of demand.

Meaning Of Demand 

Demand refers to the number of commodities that a consumer is willing and able to buy at varying prices during a specific time.

What is the Law Of Demand?

When all other variables are held constant, the Law of Demand explains the inverse relationship between a commodity’s price and the quantity demanded.

Simply put, if all other factors remain constant, when the price of a good rises, its demand falls.

Assumptions 

• The income of consumers should not change
• There should be no change in taste and preference
• The product’s units must be homogeneous
• It should be normal goods
• The price of related goods should not change

Factors Affecting Elasticity

Nature of Goods 

Mainly goods are necessary goods and luxury goods. Necessary goods with high inelastic demand like grains, medicines, etc., are very low, comprising luxury goods with very high price elasticity. A consumer will buy necessary goods at any price but not luxury goods.

Price Level

High-priced goods like diamonds and goods with low prices like matchboxes have low price elasticity because consumers will demand the same quantity at every price. But middle-class goods such as scooters, watches, etc., have high price elasticity. 

The Number of uses 

The elasticity of a commodity like milk is very high as it can be used for many purposes. Any change in its price will affect the demand. Where a product like Bengals has a single-use, so they are inelastic.

Habits 

If someone is customary for a product, the product will have inelastic demand, like the demand for cigarettes will be inelastic for the addicts. 

Substitutes Availability 

Demand for a commodity will be more elastic if its closed substitute is available in the market. For instance, demand for coca-cola is elastic because of substitutes like Pepsi, commodities like salt milk have no close substitute, so their demand will be inelastic. 

The Proportion of income spent

If a consumer spends a large portion of his income on a product, then the demand for it will be elastic because any price change will affect his budget. And the demand will be inelastic for a product like Matchbox as the consumer spends a very small part of his income.

Importance of Elasticity of Demand 

Elasticity of demand is very useful for producers, farmers, and the government. Like

• It is useful to producers as every producer has to decide the price of a product while deciding price elasticity considering the demand of his product is less elastic. He fixes up higher prices and vice versa. 
• It is important in factor pricing. Inelastic factors are paid higher prices like workers produce and products having inelastic demand can easily get their wages raised
• It is useful to a finance minister as it helps impose taxes. The taxes of the commodities whose demand is less are elastic, so the revenue from taxes can be raised
• It is important in traditional trade as it helps determine the terms of trade between two countries.

The degrees/ kinds of price elasticity are perfectly inelastic when the quantity demanded does not change when the price of commodity changes. Ed = 0

• Inelastic demand when the % of price change is higher than the % change in demand. Ed < 1 (less than)
• Unitary elastic demand when the % change in demand is equal to the % change in price. Ed = 1
• More than unitary elastic demand when the change in demand Is bigger than the price change. Ed > 1 (inelastic)
•  Demand is perfectly elastic when the price change is small or without any change in price causes an infinite change in demand. Ed = infinity

About Elasticity of Demand,

The degree of responsiveness of the quantity demanded of a good to a change in any of its determinants, such as income or the consumer price of other commodities, is defined as demand elasticity.

What is the price elasticity of demand?

The extent to which the quantity demanded of a product reacts to a change in its price is termed as price elasticity of demand.

Conclusion: 

Price and demand are inversely related; as the price rises, The product’s demand falls. The law of demand is applied in this case. The law of demand is only applied when all other factors remain constant, such as the price of related goods, the consumer’s income, taste, and preference. Whereas Price levels, product or service type, income levels, and the availability of any potential substitutes are all factors that influence a product’s demand elasticity