PRICE ELASTICITY OF DEMAND

WHAT IS THE PRICE ELASTICITY OF DEMAND

The price elasticity of dmnd, also known as the coefficient of price elasticity, may be the degree of responsiveness of the demand of a commodity to a change in the commodity.

In other words, it is of responsiveness of quantity demand small change in the price of the co-efficient the ratio of the percentage change in quantity demanded to the percentage change in Elasticity demand is expressed ma as follows:

The elasticity of Demand (ED)

=          Percentage change in demand

Percentage change in price

=       % DQd

%Dp

Where   D           =       Change

Qd          =       Quantity demanded

P             =       price

Types of price elasticity of demand

  • Elastic Demand: Demand is elastic if a small change in price leads to a greater change in the quantity of goods demanded. In this case, elasticity is greater than one or unitary, i.e. E = > 1< infinity. This type of elasticity can also be described as fairly elastic demand.
  • Inelastic demand: Demand is elastic if a larger price change leads to a slight change in the quantity of goods demanded. In this case, elasticity is less than but greater than zero, i.e. E => 0 < 1. This type of elasticity can also be described as fairly tic demand.
  • Unity or unitary elastic demand: Demand is said to be unitary when a change in price leads to an equal change in the quantity of goods demanded. In other words, a 5% change in price will lead to a 5% change in demand. In this situation, elasticity is equal to one, i.e. E = 1.
  • Perfectly elastic demand or infinitely elastic demand: Demand is said to be perfectly elastic when a change in price brings about an infinite effect on the number of goods demanded. In other words, a slight increase in price can make consumers stop purchasing the commodity while a slight decrease in price will make consumers purchase all the commodities. In this case, elasticity is equal to infinity.
  • Perfectly inelastic demand or zero elastic demand: Demand is said to be perfectly inelastic if a change in price has no effect whatsoever on the quantity of goods demanded. In other words, the same quantity of goods is demanded irrespective of changes in price. In this case, elasticity is equal to zero, i.e. E = 0

How to measure elasticity of demand

The elasticity of demand can be measured or calculated by using the coefficient of price elasticity of demand. The formula used in calculating the elasticity of demand is:-

=          Elasticity of Demand (ED)

Percentage change in price

=          %DQd
%DP

Where    D   =    change

Qd   =    Quantity demanded

P      =    Price

As explained earlier, when

  • Elasticity is equal to one, and elasticity of demand is unity.
  • Elasticity is greater than one, and the elasticity of demand is elastic.
  • Elasticity is less than one, and elasticity of demand is inelastic.

Examples 1

The price of bread in 2002 increased from 6 40 to 6 50 and the quantity bought per week by a consumer decreased from 160 loaves to 80.

  • Present the above data in a table.
  • Calculate the coefficient of price el of demand.
  • What type of elasticity is this and how did you arrive at your conclusion?

Solution

(a)       

Price (6)Quantity Demanded
40 50160 80

(b)(i) Percentage change in quantity demanded

           =          Change in Qd x          100

                       Old QD                                   1

           =          (160 – 80)        x          100

                           160                          1

           =          80        x          100

                       160                  1

           =          50%

(ii)       Percentage changes in price

           =          Change in price           x          100

                       Old in price

           =          (650 – 640)      x          100

                             640                                    1

           =          10        x          100

                       40                    1

           =          25%

Co-efficient of price elasticity of demand

           ED =   50%

                       25%     =          2

  • The coefficient of elasticity of demand is elastic. It is elastic because elasticity is greater than 1.

Example 2

Given the figures below:

Price of commodity A in January = 5.00

Price of commodity A in February = 6 7.00

Quantity of A bought in January = 20kg

Quantity of A bought in February = 16kg

(a)        Calculate:

(i)         Percentage change in the quantity bought (%)

(ii)        Percentage change in the price of A (%)

  • Co-efficient of price elasticity of demand
  • From your answer
  • Is the demand elastic or inelastic?
  • How do you know this?

Solution

Commodity A

MonthPriceQty. demanded
January6520kg
February6716kg

(a)(i)    Percentage change in quantity demanded

            =          Change Qd      x          100

                        Old Qd                                    1

            =          (20 – 16)          x          100

                        20                                1

            =          4          x          100

                        20                    1

            =          20%

(ii)        Percentage change in the price of A

            =          Change in price           x          100

                        Old price                     1

            =          (7 – 5)  x          100

                        5                      1

            =          2          x          100

                        5                      1

            =          40%

Co-efficient of price elasticity

ED       =          Percentage change in qty. demanded

                        Percentage change in price

ED       =          20%

                        40%

            =          ½ or .05

(b)(i)    Demand is inelastic

(ii)        0.5 or ½ is less than one. Hence, the coefficient of price elasticity of demand is inelastic.

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