The ‘Law Of Demand’ states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.
Demand elasticity is a measure of how much the quantity demanded will change if another factor changes.
Changes in Demand
Change in demand is a term used in economics to describe that there has been a change, or shift in, a market’s total demand. This is represented graphically in a price vs. quantity plane, and is a result of more/less entrants into the market, and the changing of consumer preferences. The shift can either be parallel or nonparallel.
Extension of Demand
Other things remaining constant, when more quantity is demanded at a lower price, it is called extension of demand.
| Px | Dx | |
| 15 | 100 | Original |
| 8 | 150 | Extension |
Contraction of Demand
Other things remaining constant, when less quantity is demanded at a higher price, it is called contraction of demand.
| Px | Dx | |
| 10 | 100 | Original |
| 12 | 50 | Contraction |
Concept of Elasticity
Law of demand explains the inverse relationship between price and demand of a commodity but it does not explain to the extent to which demand of a commodity changes due to change in price.
A measure of a variable’s sensitivity to a change in another variable is elasticity. In economics, elasticity refers the degree to which individuals change their demand in response to price or income changes.
Elasticity of Demand
Elasticity of Demand is the degree of responsiveness of change in demand of a commodity due to change in its prices.
Importance of Elasticity of Demand
· Importance to producer − A producer has to consider elasticity of demand before fixing the price of a commodity.
· Importance to government − If elasticity of demand of a product is low then government will impose heavy taxes on the production of that commodity and vice – versa.
· Importance in foreign market − If elasticity of demand of a produce is low in the international market then exporter can charge higher price and earn more profit.
Methods to Calculate Elasticity of Demand
Price Elasticity of demand
The price elasticity of demand is the percentage change in the quantity demanded of a good or a service, given a percentage change in its price.
Total Expenditure Method
In this, the elasticity of demand is measured with the help of total expenditure incurred by customer on purchase of a commodity.
Total Expenditure = Price per unit × Quantity Demanded
Proportionate Method or % Method
This method is an improvement over the total expenditure method in which simply the directions of elasticity could be known, i.e. more than 1, less than 1 and equal to 1. The two formulas used are −
