Measurement of Price Elasticity Of Demand

The responsiveness of demand to changes in demand determinants is referred to as demand elasticity. Price elasticity of demand, income elasticity of demand, and cross elasticity of demand are the three types of elasticity of demand. 

The price elasticity of demand measures how much a commodity’s demand changes when its price changes. The income elasticity of demand is a measurement of how a change in a consumer’s income affects their desire for a certain product. There are occasions when a price adjustment in one product impacts demand for another, referred to as cross price elasticity of demand.

Measurement of Price Elasticity of Demand

The price elasticity of demand measures how factors like price and income influence a product’s demand. The price elasticity of demand measures has a variation in the price of a product that influences the demand for that product. Price Elasticity of Demand is denoted PED or Ep. The price elasticity of demand (PED) may be calculated as follows:

Price Elasticity of Demand (PED or Ep) = % change in quantity demanded / % change in price                                                                          or

                                                              Ep = Δq / Δp x p/q                                                             

change in quantity demanded = new quantity (Q2) − initial quantity (Q1) / initial quantity (Q1) × 100

change in price = new price (P2)−initial price / (P1) initial price ( P1) × 100

Solved example:

The market demand for a commodity priced at Rs 50 per unit was ten units per day. Demand rose to 60 units after which the product’s price was reduced to Rs 8. Determine the price elasticity of demand.

The price elasticity of demand may be calculated as follows: –

Ep = % change in quantity demanded / % change in price

After applying this formula, you get, 

Ep = 20 / -20 = -1    

Economists measure PED in coefficients. Based on the coefficient, demand for a product might be elastic, perfectly elastic, inelastic, or perfectly inelastic in response to price changes. According to the law of demand, a good’s price and demand are inversely related. The PED coefficient is virtually negative in most cases due to this. However, economists tend to neglect the negative sign in everyday usage.

Types of Price Elasticity of Demand

Perfectly elastic demand, relatively elastic demand, perfectly inelastic demand, relatively inelastic demand and unitary elastic demand are the price elasticity of demand types. They are briefly described below:

• Perfectly elastic demand: When the price remains constant, but the demand, i.e. the rise or reduction of a commodity, is perfectly elastic. As a result, the X-axis is parallel to the demand curve.Here, EP = ∞.

• Perfectly inelastic demand: When demand for a commodity is perfectly inelastic, it remains constant or does not vary even when the price changes, i.e. rise or fall. The demand for salt is a good example of perfectly inelastic demand. Here, EP = 0.

• Relatively elastic demand: When the proportionate change in demand exceeds the proportionate change in price, demand is said to be relatively elastic. In other words, a little change in price will induce a larger change in demand. Hence, the demand curve slopes from left to right. Luxury products are one example of this. Here, EP ˃ 1.

• Relatively inelastic demand: When the proportional change in demand is smaller than the proportionate change in price, demand is said to be relatively inelastic. In other words, a larger change in price will result in a smaller change in demand. Hence, the demand curve slopes downward but is steeper from left to right. The necessary commodities are an example of this. Here, EP ˂ 1.

• Unitary elastic demand: When the proportional change in demand equals the proportionate change in price, the demand is said to be unitary elastic. In other words, the change in demand is the same as the change in price, which may rise or fall. Therefore, the demand curve is a rectangular hyperbola that slopes downward from left to right. Comfort goods are examples of this. Here, EP = 1.

Factors that affect Price Elasticity of Demand

Following are some factors that influence the Price Elasticity of Demand:

• Number of substitutes available: When a product has multiple substitutes or brands, its demand elasticity is large because customers can switch from one brand to another based on price changes. Chocolates, for example, are an excellent example of alternatives. Chocolates are available in a variety of brands for consumers to pick from.

• Product cost in relation to income: When a family’s income fluctuates, so does their demand for products and services. As a result, demand for goods and services becomes elastic.

• Loyalty to a brand: Consumers might be devoted to a certain brand. In such circumstances, a change in the product’s price does not affect the demand for that product. As a result, brand loyalty renders demand inelastic.

• Necessity goods: Medicines and gasoline are examples of Necessary Goods with inelastic demand. Since customers must acquire these commodities regardless of price changes, demand stays unresponsive.

Conclusion

To summarise, When the price increases by 1% and all other parameters stay constant, the price elasticity of demand is the percentage change in the amount required. When the elasticity is 2, a 1% increase in price results in a 2% drop in demand. Other elasticities are used to calculate how the quantity required varies as a function of other variables. 

Price elasticities are negative unless under extraordinary circumstances. The expression ‘more elastic’ refers to the elasticity of a good being of higher size, independent of sign. Products with positive elasticity are rare exceptions to the law of demand. The price elasticity of demand ranges between zero and (minus) infinity.