Theory Of Consumer Behaviour

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Elasticity Of Demand

 Elasticity of Demand: Price elasticity of demand is the responsiveness of demand to change in price. It is generally classified into five categories:

  1. Perfectly inelastic demand(ED = 0).
  2. Less than unit elastic demand (ED < 1).
  3. Unit elastic demand (Ed = 1).
  4. More than unit elastic demand (ED > 1).
  5. Perfectly elastic demand (ED = Infinity).

    The figure shows comparison of demand curves with different degrees of elasticities.

Methods of Measuring Elasticity of Demand:

  1. Percentage Method: Under this method, we can calculate elasticity of demand by applying following formula:
         Ed space equals space fraction numerator percent sign space Change space in space demand over denominator percent sign space Change space in space price end fraction
  2. Geometric Method: Geometric method is used When elasticity is to be measured at different points on the straight-line demand curve.
         

Elasticity Along A Linear Demand Curve



From the figure, it is clear that the elasticity of demand is different at different points on a linear demand curve varying from 0 to infinity.

Elasticity And Expenditure

Relationship between Elasticity of demand & Total expenditure:

  1. If expenditure & price is positively related, Ed < 1.
  2. If expenditure & price is negatively related, Ed > 1.
  3. If expenditure does not change with change in price, Ed = 1.

Factors Determining Price Elasticity Of Demand For A Good

Factors affecting/determining the price elasticity of demand for a good:

  1. Availability of close substitute goods.
  2. Various uses of a commodity.
  3. Share in total expenditure.
  4. Level of prices.
  5. Level of income.
  6. Tastes, Preferences and habits.
  7. Nature of goods.
  8. Miscellaneous.