Table of contents |
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Meaning of Elasticity of Demand |
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Degrees of Price Elasticity of Demand |
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Factors Influencing Demand Elasticity |
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Method of Measurement |
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Significance of Elasticity of Demand |
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The elasticity of demand assesses how responsive the quantity demanded of a good is to changes in its price, the price of other goods, and changes in the consumer's income. This concept was first introduced by Alfred Marshall, who defined price elasticity of demand as the ratio of relative change in quantity demanded to relative change in price.
Factors
Nature of the Factor
Elasticity of Demand
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Revision Notes: Elasticity of Demand
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There are three methods to measure the price elasticity of demand: Total Expenditure Method, Proportionate Method and Geometric Method.
Price elasticity of demand refers to the responsiveness of the quantity demanded of a good to changes in its price. It is calculated by dividing the percentage change in demand by the percentage change in price. This measure is unitless, meaning it does not depend on the specific units used for price and quantity. However, it is typically a negative number because demand usually falls when prices rise.
The formula for price elasticity of demand is: e p = Percentage change in demand/Percentage change in price
e p = ( Δ Q/Q ) × 100 / ( Δ P/P ) × 100
Where: e p = Price elasticity of demand Δ Q = Change in demand Δ P = Change in price Q = Original demand P = Original price
Total Expenditure Method
Elasticity of demand is a crucial concept in economics with applications in various fields such as:
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Geometric Method (Point Method)
4. Cross Elasticity of Demand