EORUPA SCIENCE & COMMERECE ACADEMY

Economics Notes

Q. No. 10: What do you understand by elasticity of demand? What factors determined elasticity of demand. Answer: INTRODUCTION: The law of demand expresses inverse relationship between price and quantity demand. When the economist construct a negatively sloped demand curve, he make s the assumption that price is the most important determinant of quantity demanded. Non-price determinants of demand can shift the position of demand curve to right and left. ELASTICITY OF DEMAND: The concept which measures the change in demand due to change in price is called elasticity of demand. DEFINITION: The definitions are as follows: The degree of responsiveness in Qd of a product in response to change in its price. According to LIPSY: The ration of percentage change in quantity demanded to the percentage change in price. CATEGORIES OF PRICE Ed: There are five categories of price elasticity of demand. 1) Perfectly inelastic demand (Ed = 0) 2) Perfectly elastic demand. (Ed = ) 3) Unitary elastic demand (Ed = 1) 4) Highly Elastic Demand (Ed > 1) 5) Less Elastic Demand (Ed < 1)
y-axis Ed = 0 Ed > 1

P R I C E
0

Ed = 1

Ed < 1 Ed =

Quantity Demanded

x-axis

Composed & Designed By: Abdul Basit Butt

0313-4143948

EORUPA SCIENCE & COMMERECE ACADEMY

Economics Notes
DETERMINANTS OF ELASTICITY OF DEMAND: The elasticity of demand for different products depends upon the following facts.

1: Nature of a Product: The elasticity of demand depends on the nature of a product. The E d for necessitates of life is less elastic. For example, a major change in price of wheat will not result in large change in Qd. the Ed for comforts and luxuries are more elastic. For example, a minor change in prices of T. V, Computers, etc. brings major change in Qd. 2: Availability of Substitutes: If the commodity has substitutes the elasticity of demand is more than 1. Because when price of a product increases the substitute becomes cheaper, as a result demand of substitute increases. 3: Goods Having Several Uses: If a commodity is having several uses, the demand is more elastic. For example, the demand of a computer is more than a typewriter even the price of a computer is high. 4: Price Level: The demand for goods, whose prices are very high or very low, is inelastic. Because high price products are purchased by the rich people only and they purchase them even prices go up. On the other hand, people are already purchasing sufficient quantity of low price products. 5: Durable Goods: Durable goods are having highly elastic demand because if price increase people use that commodity for a long period. 6: Compliments or Joint Product: The demand for the goods which are jointly demanded generally inelastic. For example,. If the price of petrol goes up the demand for a car will not fall to a larger extent. Hence Ed for cars is less than it. 7: Income Level: Income elasticity of demand for goods by the rich is very low because an increase in price does not effect their consumption expenditures. While, income elasticity of demand for goods by the poor is very high because a smaller change in price brings greater change in demand. 8: Taste, Habit & Fashion: A commodity which is liked by the people or it is in fashion then demand is less elastic. Because people purchase that commodity even at high price. 9: Share in Total Consumption Expenditure: If the share in total consumption expenditure is greater, then demand is more elastic and if the share in total consumption expenditure is less, then demand is less elastic. 10:Future Expectations: If price of the commodity is expected to rise or fall, a small change in price brings greater change in demand, then elasticity of demand is more than one. A consumer can postpone his demand according to future expectations.

Composed & Designed By: Abdul Basit Butt

0313-4143948