Price Elasticity
of Demand
1. Price elasticity of demand:- It is a measure of the degree of responsiveness of
the demand for a commodity to a change in its price.
- Importance of Elasticity of Demand:-
1) To a
producer: - Every producer, especially a monopolist has to decide its
output and price at which he has to sell it. If demand for his product is
elastic, he will keep the price low to earn maximum profit.
2) To a finance minister - Before
charging taxes, finance minister takes into consideration, elasticity of those
commodities, which are to be taxed. He often charges high taxes on those
commodity which have inelastic demand.
3) Useful in factor pricing - The factor
having inelastic demand can obtain a higher price than those with elastic
demand.
4) Useful in international trade - If a
country knows that the commodity produced in a country have inelastic demand in
international market, then high prices can be charged for exporting goods.
- Factors Affecting Elasticity of Demand
S.No.
|
Basis
|
Elastic
|
Inelastic
|
1
|
Availability of
substitute goods
|
If substitutes are
available
|
If substitutes are
not available
|
2
|
uses of the
commodity
|
If the commodity
have different uses, its
demand will be
elastic
|
Single use
Commodity
|
3
|
Taste &
preferences
|
Different type of
brand
|
If only on brand
is available
|
4
|
Level of Income
|
Low level of
income
|
High level of
Income
|
5
|
Habit
|
Non Habituated
|
Habituated
|
6
|
Postponement of
Consumption
|
Postponement
Possible
|
Postponement not
Possible
|
7
|
Proportion of
total exp. on the product
|
Major
|
Minor
|
8
|
Time Period
|
Long time
|
Short Time
|
9
|
Price of Goods
|
Highly Priced
|
Low Priced
|
Very Short Answer Type Question-
Q1. How is
percentage change in quantity demanded calculated?
Ans. %age change in quantity demanded = %change in Q.D. / %age change in Price
Q2. Define
Price Elasticity of demand?
Ans.
It refers to the degree of responsiveness of quantity demanded to change in its
price.
Q3. Draw a
demand curve with unitary elasticity.
Q4. When is demand for a commodity said to be
perfectly in elastic?
Ans.
When demand does not change with change in its price.
Q5. What makes the demand for a good more or less
elastic ? State one factor.
Ans.
Availability of substitutes.
Short Answer Questions (3/4 Marks)
Q1. Draw demand
curves showing price elasticity equals to
(a) 0, (b) 
, (c) 1.
, (c) 1.
Ans.
Q2. What is
meant by elasticity of demand .State any three factors that affect it?
Ans.
It refers to the degree of responsiveness of the quantity demanded of a good to
a change in its price.
Factors affecting it:-
a)
Availability of
close substitutes.
b)
Price level.
c)
Uses of Commodity
Q3. What will
be the price elasticity of demand be in the following cases?
a) Rise in
price of the Commodity, increases total household expenditure on it.
b) A rise in
the price of the commodity reduces the total expenditure on it.
c) A change in
the price of a commodity does not change the total expenditure on it.
Ans.
a) Price rises, total expenditure also rise then ED < 1.
b) Price rises, total expenditure
decreases, then ED > 1.
c) A change in price, total expenditure
does not change, then ED = 1
VIDEO LINK ON YouTube -
https://youtu.be/W4vdm6lPyBI
Dr. Asad Ahamd
PGT Economics
K V Mungaoli
09451927636
