class 12 economics notes price elasticity of demand

Price elasticity of Demand..........short and easy notes for board exam.

1. What do you mean by price elasticity of demand?
> It is the ratio of percentage change in quantity demand of a commodity to percentage change in price.

Elasticity of demand (E.D) = % change in demand / % change in price

                                   

But elasticity of demand is negative because there is inverse relationship between the demand of goods and its price.

2. Write the degrees of elasticity of demand.

> there are five degree of elasticity of demand;

• Relatively elastic demand - Small changes in price, greater change in demand, this situation is called relatively elastic demand.

• Unit elastic demand - change in demand equal to change in price, it is called unit elastic demand.

                                   

• Relative inelastic demand - greater change in price, small change in demand, this situation is called relatively inelastic demand.

• Perfectly inelastic demand - change in price of goods produce no change in demand, this situation is called perfectly inelastic demand.
  

• Perfectly elastic demand -  when negligible or no change in price, infinite change in demand, this situation is called perfectly elastic demand.

3. Write the method of measuring elasticity of demand.

> There are three method to measure elasticity of demand;

• Percentage or proportionate method - this method was propounded by professor Flux. According to this method, for calculating the elasticity of demand, proportionate or percentage change in demand is divided by proportionate or percentage change in price.

         (E.D) = % change in demand / % change in price   

         or, 

       

• Geometric method or point method - under this method, following formula are used to calculate the elasticity of demand.

         E.D = lower segment / upper assessment

         or,  E.D = RB / RA

• Total expenditure method - this method was propounded by professor Marshall. Under this method, following formula are use to calculate the elasticity of demand.

         Total expenditure = commodity price * Commodity demand
         or, P.Q 

          Only three degrees of elasticity of demand can be calculated by this method;

1. Unit elasticity of demand - when total expenditure remains constant due to increase or decrease in price.
2. Greater than unit elasticity - when total expenditure increases due to decrease in price, total expenditure decreases due to increase in price.
3. Less than unit elasticity - when total expenditure decrease due to decrease in price, or total expenditure increases due to increase in price.

4. Write the importance of elasticity of demand.

> following are the importance of elasticity of demand;

• It is useful in theory of value.
• All factors of production price determined by this theory.
• It is very useful to fixing the price of goods and services by monopolist.
• Useful in the theory of distribution.
• Useful in international trade.
• Useful in fixing the fare and freight.

POINTS;

1. Elasticity of demand is a quantitative statement.
2. Elasticity of demand = percentage change in demand / percentage change in price.
3. Price elasticity of demand for Giffin goods is positive.
4. Elasticity of demand of necessary goods is less than 1.
5. Elasticity of demand of luxury Goods is greater than 1.
6. Percentage method is preponderate by professor Flux.
7. Total expenditure method is prepared by professor Marshall.
8. There are five degrees of elasticity of demand.
9. Perfectly elastic demand curve is parallel to X axis.

 BONUS POINT;

THE END