Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity demanded of a product in response to a change in any of the market variables, like price, income etc. It measures the shift in demand when other economic factors change.
In other words, the elasticity of demand is the percentage change in quantity demanded divided by the percentage change in another economic variable.
The demand for a commodity is affected by different economic variables:
Price of the commodity
Price of related commodities
Income level of consumers
We will read about these in detail, later in the blog.
How to solve the numerical on the price elasticity of demand?
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#1 Price elasticity of demand ( 1 and 3 Markers )
#2 Price elasticity of demand ( 4 Markers )
#3 Price elasticity of demand ( 6 Markers )
#4 Income - Elasticity
#5 Cross - Elasticity ( Related Elasticity )
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#Rule 1: Make a demand schedule like the one shown below. Its a must, as soon as you read a numerical, start placing the values given in the question in the demand table. Why? It avoids confusion and provides clarity on what needs to be calculated.
Demand Schedule
#Rule 2: Focus on the law of demand statement. It states that there exists an inverse relationship between price and quantity demanded, keeping other things constant. So, if the price is decreasing, then the quantity demanded will increase and if the price is increasing, then the quantity demanded will decrease. I prefer drawing an arrow near the demand schedule to avoid confusion. For example, if the price increases, then the quantity demanded will fall. As shown below:
Arrows indicate the relation
#Rule 3: Apply the Ped formula. If in the question price or quantity demanded is mentioned in percentage terms, then apply the percentage method formula of price elasticity of demand. If it’s given like in absolute numbers, then apply proportionate change method formula. Refer below formula list for your convenience:
Price Elasticity of Demand Formulas
#Rule 4: Price elasticity of demand as a final answer will be units free, that is, Ped is an absolute or pure number, and it is not written with kg, Rupees, etc. The minus sign of Ped reflects a negative relationship between price and quantity demanded.
Practice Numerical on Price Elasticity of Demand
Question 1. If the price of a commodity rises by 40% and accordingly, its demand falls by 80%. What is Ped?
Solution. Here everything is mentioned in percentage terms, so apply the percentage change method of Ped:
Price Elasticity of demand = Percentage change in quantity demanded/ percentage change in price.
Ped = 80%/ 40%
Ped = (-) 2
The minus sign of Ped reflects a negative relationship between price and quantity demanded. And Ped is a pure number, no unit is mentioned.
Question 2. If price of a commodity rises from Rs 8 to Rs 10 per unit and its demand falls by 50%. What is the price elasticity of demand?
Solution. Try making a demand schedule like this:
Price Quantity Demande
8 50% fall in demand
10 –
You can observe that the law of demand is still applicable, as the price increases, the quantity demanded decreases.
Apply percentage method of the price elasticity of demand and try solving this, as shown below:
Test Yourself
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