Answer the following question in detail (any two): Explain the concept of price elasticity of demand and explain the types of price elasticity of demand.

Answer:

Concept: Price elasticity of demand is the degree of responsiveness of the quantity demanded of a commodity to a change in its price, other factors remaining constant. According to Marshall, elasticity of demand is great or small according as the amount demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price.

\(E_d = \dfrac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}} = \dfrac{\Delta Q}{\Delta P}\times\dfrac{P}{Q}\)

The coefficient is negative because price and quantity demanded move in opposite directions; the minus sign is usually ignored.

Types of price elasticity of demand:

1. Perfectly elastic demand (\(E_d = \infty\)): A very small change (or no change) in price causes an infinite change in quantity demanded. The demand curve is a horizontal line parallel to the X-axis. It is imaginary.
2. Perfectly inelastic demand (\(E_d = 0\)): Quantity demanded does not change at all whatever the change in price. The demand curve is a vertical line parallel to the Y-axis, e.g. demand for salt or life-saving drugs in an emergency (approximately).
3. Unitary elastic demand (\(E_d = 1\)): A given percentage change in price causes an equal percentage change in quantity demanded. The demand curve is a rectangular hyperbola.
4. Relatively elastic demand (\(E_d \gt 1\)): A given percentage change in price causes a more than proportionate change in quantity demanded, e.g. luxury goods. The demand curve is flatter.
5. Relatively inelastic demand (\(E_d \lt 1\)): A given percentage change in price causes a less than proportionate change in quantity demanded, e.g. necessities such as food grains. The demand curve is steeper.

[Diagrams: for each type, price on the Y-axis and quantity demanded on the X-axis: a horizontal curve (perfectly elastic), a vertical curve (perfectly inelastic), a rectangular hyperbola (unitary), a flat downward curve (relatively elastic) and a steep downward curve (relatively inelastic).]

Example: If the price of a good falls from ₹ 10 to ₹ 8 (−20%) and quantity demanded rises from 100 to 140 units (+40%), \(E_d = \dfrac{40}{20} = 2 \gt 1\), so demand is relatively elastic.