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# Chapter Notes - Elasticity Of Demand, Class 12, Economics | EduRev Notes

## Commerce : Chapter Notes - Elasticity Of Demand, Class 12, Economics | EduRev Notes

The document Chapter Notes - Elasticity Of Demand, Class 12, Economics | EduRev Notes is a part of the Commerce Course Economics Class 11.
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ELASTICITY OF DEMAND :: It is degree of responsiveness of demand due to change in ANY VARIABLE AFFECTING DEMAND.

PRICE ELASTICITY OF DEMAND (ED) :: It is DEGREE OF RESPONSIVENESS OF DEMAND due to CHANGE IN ITS PRICE.

MARSHAL“ Price elasticity of demand may be defined as percentage change in demand due to percentage change in price.  (-) indicates inverse relationship between Quantity demanded and price . However it is more common to say that Ed is 1.25 than to say it is (-) 1.25. So negative sign must be ignored

PROPERTIES // FEATURES

(1) QUALITATIVE AS WELL AS QUANTITATIVE :: It not only focus on direction of change but also TELLS MAGNITUDE OF CHANGE in demand i.e how much demand  changes due to change in price.

(2) ELASTICITY IS A UNIT FREE MEASUR :: It is measure in percentage terms therefore it is independent of choice of units that is not affected whether the quantity demanded is measured in kg or tonnes and whether price is measured in rupees or dolllars .This feature FACILITATES COMPARISION BETWEEN TWO OR MORE GOODS

(3) At the intersection of two demand curves the curve which is MORE FLATTER IS MORE ELASTIC OR HAVE HIGHER ELASTICITY

(4) Elasticity can be categorised into FIVE DEGREES depending upon its COEFFICIENT OR VALUES

DEGREES  // TYPES OF ELASTICITY

(1) PERFECTLY INELASTIC (Ed = 0) :: It is a case when QUANTITY DEMANDED DONOT CHANGES with change in price of good.  EXAMPLE :: In case of demand for absolute essential (rare medicine) or Demand for addiction of undesirable product like Opium.

(2) PERFECTLY ELASTIC (Ed = α) :: It is a case when DEMAND CHANGES INFINITELY without change in  price or with very small change in price .In other words , there will be infinite rise with small fall in price and demand becomes zero with small rise in price  EXAMPLE :: A buyer increases or decreases demand due to future expectation even when there is no price change

(3) LESS THAN UNITARY ELASTIC OR INELASTIC (ED < 1) :: It is a case when proportionate (%) change in demand is LESS THAN proportionate(%) change in price.

 THE CURVE IS LESS FLATTER // STEEPER EXAMPLE :: Necessary good like basic food items , FAN , Salt

(4) UNITARY ELASTIC  (ED = 1) :: It is a case when proportionate(%) change in demand is SIMILAR TO proportionate(%) change in price.

EXAMPLE :: Normal and Comfort Goods like Cooler, SCOOTER

THE CURVE IS RECTANGULAR HYPERBOLA (a curve which extends to X and Y axis uniformly without touching them)

A SPECIAL CASE :: In this elasticity on all points on demand curve is same i.e equal to one and thus all rectangular areas under the curve are equal i.e  Area PABO = P1CDO.  which is Price * Quantity = expenditure like

 Px Qx = 500  ( a constant value) (5) MORE THAN UNITARY ELASTIC OR ELASTIC (ED > 1) :: It is a case when proportionate(%) change in demand is MORE THAN proportionate(%) change in price.

 THE CURVE IS MORE FLATTER EXAMPLE :: Luxury Goods like Car , A.C and Jewellery

DEGREES OF ELASTICITY OF DEMAND - A COMPARISION

 Type of eD Coefficient Description Type of Good Shape of Demand Curve Per fectly inelast ic demand eD = 0 Quantity demanded doesn’t changes with change in price Essentials like life saving drugs or OPIUM Vertical // Parallel to Y - Axis Inelastic 0 < eD < 1 % change in Quantity Demanded < % change in Price Necessities like food, fuel Steeper Curve / Less Flatter Unitary elastic demand eD = 1 % change in Quantity Demanded =  % change in Price Normal goods Re cta ngular hyperbola. Elastic demand 1 < eD < ∞ % change in Quantity Demanded > % change in Price Luxuries like eating in a 5-star hotel Flatter curve Perfectly elastic demand eD = ∞ When price doesn’t changes with change in Quantity demanded Im agi na ry situation (It exist under perfect competition) Horizontal // parallelto X -axis  METHOD FOR MEASUREMENT OF ELASTICITY OF DEMAND (1) PROPORTIONATE OR PERCENTAGE OR FLUX METHOD (-) indicates inverse relationship between Quantity demanded and price . However it is more common to say that Ed is 1.25 than to say it is (-) 1.25. So negative sign must be ignored

(2) POINT / STRAIGHT LINE DEMAND CURVE METHOD GEOMETRIC METHOD

It is a graphical method where elasticity of demand at different points on SLDC is measured. In order to measure elasticity, the lower portion from a point on the curve is divided by upper potion. ⇒ It is useful WHEN PRICE CHANGE IS VERY SMALL .

A straight line demand curve { also known as Linear Demand Curve} touching X-axis at point ‘E’ and Y -axis at point ‘A’ is drawn. Point ‘C’ is mid point

 POINT L.P // U.P ED At “E” 0 / AE ED = 0 { PERFECTLY INELASTIC}Since zero divided by denominator is zero . {lower segment = 0} At “D” DE / DA ED < 1 ( INELATSIC ) as DE < DA Since numerator is less than denominator At “C” CE / CA ED = 1 ( UNITARY ) as CE  =  CA Since numerator is equal to denominator At “B” BE / BA ED > 1 ( ELASTIC) as  BE >  BA Since numerator is more than denominator At “A” AE / 0 ED = (PERFECTLY ELASTIC)Since numerator divided by zero is infinite {upper segment = 0} ⇒ Ed at the mid-point on thedemand curve is unity,at a point above the mid-point it is elastic and at a point below the  mid-point It is inelastic.

(3) TOTAL EXPENDITURE OR OUTLAY METHOD

This method was EVOLVED BY MARSHAL and in this Elasticity of demand is measured in terms of RELATIONSHIP BETWEEN PRICE OF THE COMMODITY AND EXPENDITURE INCURRED.

Thus this method has an important practical implication from point view of DECISIONMAKING BY A PRODUCER OR FIRM (as expenditure of consumer is revenue to producer or firm)

 ED > 1 (ELASTIC) ED = 1 (UNITARY) ED < 1 (INELASTIC) For a price change demand changes  proportionally more.This causes expenditure to move in reverse direction of pr ic e. Thus PRI CE AND EXPENDIT URE ARE INVERSELY RELAT ED i.e price increases , expenditure decreases and price decreases , exp. increase For a price change demand changes  proportionally same.This causes expenditure to remain constant.Thus PRICE INCREASES OR DECREASES EXP. REMAINS CONSTANT For a price change demand changes proportionally less This causes expenditure to move in same direction of price.THUS PRICE AND EXP. ARE PO SIT IVELY R ELAT ED i.e price increases , expenditure increases and price decreases expentidure decreases LIMITATION OF EXPENDITURE METHOD :: This method suffers from one major defects . It FAILS TO GIVE THE EXACT MAGNITUDE // VALUE OF ELASTICITY. Hence this method is restrictive and provides only a rough measure of elasticity.It only tells whether the Ed is greater than one or less than one or equal to one

(a) Ed < 1 (inelastic)  :: Part AB as it represents positive relation between price and Exp.
(b) Ed = 1 (unitary)     :: Part BC as Exp. remains constant with increase in price.
(c) Ed > 1 (elastic)      :: Part CD as it represents negative relation between price and Exp. FACTOR AFFECTING MAGNITUDE  OF PRICE Ed

WHY DO DIFFERENT GOODS HAVE DIFFERENT ELASTICITY

(1) NATURE OF GOOD.

(a) In case of NECESSARY GOODS which are essential to life like food , match box, fan, kerosene oil . As these goods are required for human survival, a buyer has to buy irrespective of price. Therefore DEMAND IS INELASTIC
(b) In case of COMFORT GOOD like cooler , transistor the demand is unitary elastic
(c) In case of LUXURY GOODS which are for enjoyment but are not essential to life like Car, A.C , therefore  any change in price has a great impact on  demand and thus DEMAND IS ELASTIC

 The term LUXURY IS A RELATIVE TERM as any item (A.C.) which may be a luxury for poor ,may also be a necessity for a rich person

(2) AVAILABILITY OF CLOSE SUBSTITUTE.

(a) If case of ABSENCE OF SUBSTITUTE the demand for the product is INELASTIC as increase or decrease in price will not make consumer to shift demand .

EXAMPLE :: demand for staple food (rice) in W est Bengal or Recommended book

(b) If CLOSE SUBSTITUTE ARE EASILY OR READILY AVAILABLE, even a very small increase will make consumer to shift to other goods and hence demand would be ELASTIC OR HIGH.

Example :: Demand for coldrinks and Cosmetics

 It should be noted that while as a group a good or service may have inelasticdemand, but when we consider its various brands, we say that a particular brand has elastic demand.Thus while demand for petrol is inelastic, the demand for Indian Oil’s petrol is elastic.

(3) GOODS WITH DIFFERENT USES.

(a) Go ods with o nly FEW USES like paper have low pri ce Ed i.e demand is INELASTIC
(b) Goods with MANY USES LIKE MILK AND ELECTRICITY ARE ELASTIC because fall in price will make consumer to use more good (milk) for other purpose  of cheese making, Curd  Sweet making.Similarly if tariff of electricity increases it will be used for more important purpose like lighting and less for purposes of room heating, air-conditioning.

(4) COMPLEMENTARY GOODS :: These goods have INELASTIC DEMAND as there demand is joint.

EXAMPLE :: demand for car means high demand for petrol even if price of petrol is rising

(5) POSTPONEMENT OF USE ::

(a) If demand for the commodity CANNOT BE POSTPONED then demand is INELASTIC.

Example :: Demand for textbook during examination

(b) If demand CAN BE POSTPONEMENT then DEMAND IS ELASTIC like people may postpone their demand for residential houses when interest rates on the loans are high

(6) PROPORTION OF TOTAL EXPENDITURE SPENT ON GOODS.

(a) If amount spent on a product consti tute only a MINOR PART OF TOTAL EXPENDITURE then demand would be INELASTIC

Example :: Salt, toothpaste , newspaper, needles

(b) If amount spent on a product constitute MAJOR PART  OF TOTAL EXPENDITURE then demand would be  more sensitive to price change and HENCE ELASTIC

Example :: Demand for clothes

(7) PRICE LEVEL

(a) LOW PRICED ARTICLES have INELASTIC DEMAND as change in price is very small and thus doesnot effect consumer budget significantly
(b) HIGH PRICED ARTICLES have ELASTIC DEMAND as even a small change in price is very large in absolute terms and effect consumer budget significantly

(8) TIME PERIOD. ::

(a) In case PERIOD IS SHORT, the taste and preference of consumer cannot be changed and hence demand of product remains more or less unchanged which makes DEMAND INELASTIC
(b) In case of LONGER PERIOD , taste can be changed which makes DEMAND ELASTIC

Example : The  demand for Oil was inelastic 30 years ago when OPEC was formed . But now alternative types of energy (Solar, CNG) have been developed and its demand is elastic today

(9) HABITS. ::

If a consumer is habitual to particular commodity like Cigarette , Coffee then DEMAND IS INELASTIC as consumer will need it at any cost.
However sometimes some product which are not essential in demand becomes essential for others like eating in 5-star hotel for rich person have inelastic demand as they are habituated to it.

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