Download Industrial Economics and Management and more Schemes and Mind Maps Industrial economy in PDF only on Docsity! Elasticity of Demand – Measure of responsiveness Elasticity of demand are measures of responsiveness of quantity demanded of a product to different determinants of demand i.e. price, income, prices of substitute and complements, etc. The most popular elasticity of demand is the price elasticity of demand. There are three main types of elasticities of demand: the price elasticity of demand (so popular that it is generally referred to as simply elasticity of demand), income elasticity of demand and cross elasticity of demand. There are a range of factors which affect quantity demanded either directly or indirectly. The product’s own price is the most significant factor. Quantity demanded increases if the price of the product decreases and vice versa. The extent of this relationship between quantity demanded and price is measured by price elasticity of demand. Other significant demand determinants include income level of the consumers, the prices of substitute goods or complementary goods, etc. The income elasticity of demand measures responsive of demand to changes in income while the cross elasticity of demand tells us how demand changes when the prices of substitutes or complements changes. Price elasticity of demand Price elasticity of demand (PED) shows the relationship between price and quantity demanded and provides a precise calculation of the effect of a change in price on quantity demanded. We can use this equation to calculate the effect of price changes on quantity demanded, and on the revenue received by firms before and after any price change. For example, if the price of a daily newspaper increases from Rs. 1.00 to Rs. 1.20, and the daily sales fall from 500,000 to 250,000, the PED will be: – 50 / 20 = (-) 2.5 The negative sign indicates that P and Q are inversely related, which we would expect for most price/demand relationships. This is significant because the newspaper supplier can calculate or estimate how revenue will be affected by this change in price. In this case, revenue at Rs. 1.00 is Rs. 500,000 (Rs. 1 x 500,000) but falls to Rs. 300,000 after the price rise (Rs. 1.20 x 250,000). The range of responses The degree of response of quantity demanded to a change in price can vary considerably. The key benchmark for measuring elasticity is whether the co-efficient is greater or less than proportionate. PED can also be: a) Zero (0), which is perfectly inelastic. b) Less than one, which means PED is inelastic. c) Equals to one, is called unit elasticity. d) Greater than one, which is elastic. e) Infinite (∞), which is perfectly elastic.
