Elasticity of Demand refers to the degree or the extent of the change in demand in response to a given change in price. The change in demand, however, is not always proportionate to the change in price. A slight change in price may lead to a considerable change in demand. In such a case we say that demand is elastic. Sometimes and in some cases, on the other hand, a considerable change in price may be followed by a slight change or practically no change in the quantity demanded. We shall then say that the commodity has an inelastic demand. Demand, however, cannot be entirely insensitive is changes in price. As such there are few commodities for which the demand is inelastic. Elasticity is all question of degree. Instead of saying, therefore, that the demand for a commodity is elastic, we should say it is more elastic; and instead of saying that demand for a commodity is inelastic, we should say it is less elastic.
We can have a better understanding of demand elasticity by comparing the response of demand to a given change in price in the following two diagrams representing price – quantity relationship for two goods A and B respectively.
Demand cuvre for good A and demand curve for good B. for a given price OP0, the quantity demanded of good A for the same price OP0, the quantity demanded of good B is OM0. Now, if the price goes up to OP1, for both goods A and B, the quantity demanded of good A declines to OQ1 by an amount Q0Q1. With the same fall in price, the quantity of B decreases to OM1, i.e. by an amount M0M1. Clearly change in demand for good A has reacted sharply to given change in price. The same is true when the price for both goods falls to OP2. Where quantity demanded increases from OQ 0 to OQ2 for good A and from OM0 to OM2 for good B. clearly the increases Q0 Q2 is much bigger than M0M2. Thus, other things beings the same, a flatter demand curve shows greater response of quantity demanded to change in price and a steeper demand curve shows low response.
The demand for a good may change due to change in many variables such as changes in the price of a good, changes in consumer’s incomes, changes in the prices of other goods, etc. but here we assume all other things as being given and constant and study the responsiveness of demand to changes in the price of a good only. Being the degree of change in the demand to a given change in price, this is more appropriately called the Price- elasticity of demand. But to make the term shorter, usually we call it elasticity of demand.SUBMIT ASSIGNMENT NOW!