Demand and Elasticity of Demand
Definition of Law of Demand:
“Demand is the relationship between price of a good
and its demand. The law explains that when the price of a good increases, the
quantity of its demand will decrease and on the other hand if price decreases,
its quantity demanded will increase with no change in other goods"
Definition of Price Elasticity of Demand:
1.
" Elasticity of Demand is the relationship between price of a good and its
demand. When price of good changes, demand for that good also changes. The proportional relationship between these two
changes is known as elasticity of demand".
2. "Change in demand for a good, due to change in price
of that good is known as price elasticity of demand"
Elasticity of demand can be
measured by the following methods.
- Total Outlay Method
- Percentage Method
- Arc Elasticity Method
- Point Elasticity Method
Total Outlay Method / Marshall Method
This method was introduced
by Marshall. The method explains that:
When the price of a good
changes, the demand for that good will also change. After these two changes, we
have to observe the changes in total expenditures of the consumer. Suppose that
the price of the decreases. As the result of fall in price, if the total
expenditures of the consumer remain the same and there is no change in the total
expenditure on that good, the elasticity of demand will be unitary that is E = 1
If the total expenditures
of the consumer on that good increases, the elasticity of demand will be greater
than unit that is E > 1
On the other hand, if the
total expenditures of the consumer on that good decreases, the elasticity of demand
will be less than unit that is E < 1
Explanation of the Table:
The table explains that
when the price of a good is Rs.10, the demand for the good is 5 units. At this
stage, the total expenditures of the consumer are Rs.50 but we see that when the
price decreases and demand increases, the total expenditures of the consumer also
decline which indicates that the price elasticity of that good is less than
unit.
The table explains that
when the price of a good is Rs.10, the demand for the good is 5 units. At this
stage, the total expenditures of the consumer are Rs.50 but we see that when the
price decreases and demand increases, the total expenditures of the consumer
remain the same which indicates that the price elasticity of that good is equal
to unit.
The table explains that when the price of a good is Rs.10, the demand for the good is 5 units. At this stage, the total expenditures of the consumer are Rs.50 but we see that when the price decreases and demand increases, the total expenditures of the consumer rise which indicates that the price elasticity of that good is greater than unit.
Explanation of the Graph:
The graph explains that the
change in demand (reflects in red coloured box) due to the change in price (reflected
in blue coloured box) is smaller one which indicates that the price elasticity
of that good is less than unit.
The graph explains that the
change in demand (reflects in red coloured box) due to the change in price (reflected
in blue coloured box) is equal which indicates that the price elasticity of that
good is less than unit.
The graph explains that the
change in demand (reflects in red coloured box) due to the change in price (reflected
in blue coloured box) is greater one which indicates that the price elasticity
of that good is greater than unit.
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