Page 116 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-6: Theory of Demand and Elasticity of Demand

or income of consumer or price of other goods, how much Notes
changes occur in quantity of demand of that commodity. Elasticity of Demand Means
As per Dooley, “The elasticity of demand measures the Elasticity of demand, demands a numerical
responsiveness of the quantity demanded of a comodity determination of the percentage change in
to change in its price, price of other goods and changes in quantity demanded, and the result is the
consumer’s income.” So elasticity of demand are of three ratio of the percentage change.
types—1. Price Elasticity of Demand, 2. Income Elasticity
of Demand and 3. Cross Elasticity of Demand.

6.9 Price Elasticity of Demand

The elasticity of demand measures the responsiveness of the quantity demanded of a commodity
to change in its price, Ceteris Paribus. It is equal to the ratio of the percentage change in quantity
demanded to a percentage change in its price. This measures that how much changes in its
quantity demanded to change in its price. Elasticity of demand represents a ratio at which demand
is contracted to increase in price and extended to decrease in price. There is found an inverse
relation between quantity demanded and its price. So Elasticity of demand is represented by
negative sign. According to Lipsey, “Because of the negative slope of the demand curve, the price
and the quantity will always change in opposite directions. One change will be positive and the
other will be negative, making the measured elasticity of demand negative.” But according to
tradition, negative sign has been left and price elasticity of demand is represented with numbers.
For example, 15 % increase is responded in quantity demanded to 10% decrease in price of ice
cream, and then elasticity of demand will be as follows:
(–)15%

E = _______ = 1.5

d (–)10%
Negative Sign is too leaved because any Ambiguity do not arise. To say, this can be surprising that
elasticity coefficient of (–) 4 will be more than –2, can be safe to this possible surprising. If we said only
that multiplier of 4 represents more elasticity than multiplier of 2, so negative sign is generally not used
before the value of elasticity of demand.

Percentage Change in Quantity Demanded
E = (–) _______________________________________

d Percentage Change in Price

Let’s assume that demand extends to 20% as a result of 10% decrease in price. Then elasticity of demand
will be
(–)20%
E = _______ = 2

d (–)10%

It means that if quantity of demand changes with 2% due to the 1% change in price.
Elasticity of Demand may be defined as the percentage change in the quantity demanded divided by the
percentage change in the price.
—Marshall
Price elasticity of demand measures the responsiveness of the quantity demanded of a goods to the
change in the price.
—Boulding

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