Price Elasticity of Demand – Indian Economy Notes

The price elasticity of demand is a measurement of how a product's consumption changes in response to price changes. Price elasticity is a term used by economists to describe how supply and demand for a product fluctuate as its price varies. The UPSC Indian Economic Syllabus includes the Capital Goods which is described in this article.

Price Elasticity of Demand Formula

• The percentage change in the quantity demanded of a good or service by the percentage change in the price is known as price elasticity of demand. To put it another way, the price elasticity of demand is the rate at which demand rises or falls in response to a change in price.
• A product's demand might be either elastic or inelastic. It is said to be elastic when the change in demand is proportionately larger than the change in price. It is considered to be inelastic when the change in demand is less than the change in price.
• The price elasticity of demand is measured by the slope of the demand curve. There is a quick change in demand as the demand curve steepens, indicating elasticity. A flatter curve, on the other hand, indicates inelastic demand since demand changes slowly.
• The price elasticity of demand is represented mathematically as follows:

Price Elasticity of Demand (PED) = % change in quantity demanded / % change in price

• Price elasticity of demand, or PED, is always negative. To put it another way, it indicates that the price and demand have an inverse relationship.
• A PED value less than one indicates generally inelastic demand, whereas a number greater than one indicates highly elastic demand.

Example of Price Elasticity of Demand

• As a general rule, a product is said to be elastic if the amount required or purchased fluctuates more than the price changes. (For example, if the price increases by 5%, while demand decreases by -10%).
• The product is said to have unit (or unitary) price elasticity if the change in quantity purchased is the same as the price change (for example, 10% /10% = 1).
• Finally, the product is said to be inelastic if the quantity purchased changes less than the price (for example, -5 per cent demanded for a +10 per cent price shift).
• Consider the following scenario to determine demand elasticity: Assume that the price of apples decreases by 6%, from $1.99 per bushel to $1.87 per bushel. As a result, grocery shoppers have increased their apple purchases by 20%. As a result, the elasticity of apples is 0.20/0.06 = 3.33. Apples have a high degree of elasticity in demand.

Conclusion

The price elasticity of demand measures how a change in the price of a product affects the demand for that product. This will in understanding the behaviour of goods in the economy and what a demand and supply mismatch can result into.

MCQs

Question: The elasticity of demand for a product will not be higher when:

(a) it is considered a necessity by its buyers

(b) it has several uses.

(c) more substitutes for the product are available

(d) it is an expensive commodity

Question: The demand for a product would be more inelastic:

(a) the greater is the time under consideration

(b) the less expensive is the product

(c) the greater is the number of substitutes available

(d) all the above