Theory Of Consumer Behaviour

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 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:
        
2. Geometric Method: Geometric method is used When elasticity is to be measured at different points on the straight-line 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.

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 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.