Sunday, October 24, 2010

Elasticity of demand | price elasticity

Elasticity of demand is a practical model. Elasticity is a measure of the reaction of one variable to change in other. Demand for a good depends upon its price, income of the consumer and price of related goods. Elasticity of demand, therefore specify how much quantity demanded of a good will change the change in its price or income of the consumer or price of related goods

Law of demand tells us about the trend of change in demand for a good as a result of change in its price. Thus, the law is a mere qualitative statement. It simply states that when price falls demand expands and when price rises demand contracts. But it does not explain how much the demand will change. The concept that explains the proportional change in the amount demanded of a good as a result of change in its price is called the concept of elasticity of demand.

Thus, elasticity of demand refers to the percentage change in the quantity demanded of a commodity as a result of a given percentage change in its price. Elasticity of demand is a quantitative statement. Supposing the price of apples rises by 20 percent as a result of which ram’s demand for apples contracts by 50 percent and that of Mohan’s contract by 10 percent, then it will be said that ram’s demand for apples is more elastic and Mohan’s demand is less elastic.

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