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  Elasticity in microeconomic theory and Types of price elasticity of demand

Price elasticity of demand:

The Price elasticity of demand can be stated as the responsiveness or sensitivity of the quantity demanded to the price modifications.

Most of the goods have a downward-sloping demand curve and thus encompass a negative price elasticity of demand. Though there can be exception to this and the demand curve of goods can encompass a positive price elasticity of the demand.

Demand for the goods for which a modification in price causes a more than the proportionate change in the quantity demanded are stated to elastic, in cases where the modification in prices causes precisely proportionate change in the quantity demanded the demand is stated to be unit elastic and lastly the demand is stated to be inelastic whenever a change in the price causes a less than proportionate modification in the quantity demanded:

  • Demand is stated to be ‘elastic’ if the (own price) elasticity of demand is more negative than -1.
  • Demand is stated to encompass ‘unit elasticity’ if the (own price) elasticity of demand is -1.
  • Demand is stated to be ‘inelastic’ if the (own price) elasticity of demand is less negative than -1.

Types of price elasticity of demand:

The elasticity of demand modifies all along the length of the demand curve. Since we move all along the demand curve from left to right, the percentage modification in the quantity demanded (computed as change in the quantity divided by original quantity) drops and the percentage modification in price (computed as the percentage modification in price divided by the original price) increases. Thus elasticity reduces as we move from left to right.

The figure illustrated above exhibits how elasticity changes all along the straight-line demand curve. We can deduce the given from the figure shown below:

1948_price elasticity of demand.jpg

Elasticity drops as we move from left to right that is, elasticity reduces as the price drops and the quantity demanded rises.

At the mid-point of demand curve, the demand is unit elastic.

The demand is elastic over the mid-point.

The demand is in-elastic beneath the mid-point.

Demand is perfectly elastic when the quantity demanded is zero.

Demand is perfectly inelastic when the price is zero.

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