Price of demand

Price of demand is generally defined as a metric for measuring the change in utilization of a particular product in regards to its price change. A product is said to be elastic if a change in its price causes a significant change in the supply or demand of the product while it is inelastic if the change in price does not cause very much change in the demand or supply of the product. If a substitute of the mentioned product is available then its elasticity is severely affected. Similarly, if no proper substitutes for the mentioned product are available and the product is vital then the demand for this product will not change with the price. 

Importance of price elasticity of demand

Price elasticity of demand means that drivers will continue to irrespective of the change in their price. On the other hand, price elasticity for some goods may be very high. Hence, an increase or decrease in the price of the product causes a significant change in its demand or supply. 

Types of Price Elasticity of Demand

Price elasticity of demand is of several types which have been outlined in the following.

Perfectly elastic demand:

When a significantly small change in price which can either be a rise or a fall in the price of a particular product causes a rather large change in its demanded quantity then the demand is said to be perfectly elastic. 

Relative elastic demand:

When a percentage or proportionate change in price either rises or falls ultimately resulting in a percentage or proportionate change that is a fall or rise in the quantity demand, then the demand is said to be relatively elastic.

Unitary elastic demand:

The unitary demand for elasticity occurs when the fall or rise in prices ultimately results in equivalent variation that is fall or rise in demand. Numerically the value of unitary elastic demand is almost equal to 1. 

Relatively inelastic demand:

When a proportionate or percentage change which can either be a rise or fall in price ultimately results in comparatively less than the proportionate or percentage change that is either a fall or rise in demand is defined as relatively inelastic demand. 

Perfectly Inelastic Demand:

When a particular change which can either be a fall or rise in the price of the product does not cause any particular change in its demand which can either be a rise or fall in the demanded quantity, then the demand is said to be perfectly inelastic. 

The price elasticity of demand measures

Over time Economists have developed several methods for measuring price elasticity whose formulas have been discussed in the following.

Proportion or Percentage method: The formula that is used in this method for computing price elasticity of demand is 

ep = -Proportionate change in demanded quantity /proportionate price change

 = – %Δ Qd/ %Δ P

 = – ΔQ/ Δ P * P/Q

Where 

ep is the price elasticity of demand, Q is the Original demanded Quantity, P is the original price, and ΔQ and Δ P are quantity change and price change respectively. 

Total Expenditure or Total outlay method: Mathematically TE = Q * P where TE is total expenditure and Q and P are quantity and price. 

Geometric or Point Method: This method is also referred to as the point method as it is used for measuring elasticity within a finite or particular point within the demand curve. Symbolically geometric or point elasticity is expressed as ep = ΔQ/ Δ P * P/Q where ep is the price elasticity of demand, Q is Original demanded Quantity, P is the original price, and ΔQ and Δ P are quantity change and price change respectively. 

Arc Method for measuring Price Elasticity of demand: The formula is Ep = ΔQ/ Δ P * P1+P2/Q1+Q2 where ΔQ and Δ P are quantity change and price change, P1, P2 are initial and final price and Q1, Q2 are Initial and final demanded quantity. 

Conclusion

The whole article has been written concerning one of the core economic concepts of price elasticity of demand. This concept helps in knowing how the demand for a particular product will vary according to its price. Under this main topic, the different types and different measures of price elasticity of demand have also been discussed.