Price Elasticity of Demand

The law of demand expresses an inverse relation between price and quantity demanded. When price falls, demand rises and vice versa. This gives us the direction of demand due to the change in price only. But it does not give us the magnitude of change. In other words, law o demand does not explain how much rise in demand is associated with a given fall in price. For example if price falls by 5%, whether demand rises exactly by 5% more or less than that is not explained by the law of demand gives the direction of change in demand due to a given change in price, the elasticity of demand measures the magnitude.

Meaning of Price Elasticity of Demand

The term elasticity refers to easy expansion and contraction of an object. If the matter expands and contracts easily with the little use of force, we call the object elastic. If it is not, then it is less elastic or inelastic. This concept of elasticity is also applicable to demand. If demand expands and contracts easily due to the little change in price, the demand is said to be elastic. Since price is the causal variable, we can call it price elasticity of demand.

 “Price elasticity of demand may he defined as the degree of responsiveness of demand to a given change in price.”

If price changes by 30%, whether demand changes exactly by 30%, more or less than 30%, in known from the elasticity of demand. According to Marshall, “the elasticity (or responsiveness) of demand in a market 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.” It measures the ratio of the proportionate change in quantity purchased of a commodity to the proportionate change in price Mathematically elasticity of demand can be found out by using the following formula. Price elasticity of demand.

=    Proportionate Change in Quantity Demanded / Proportionate Change in Price   

=  Change in quantity demanded / Original Quantity

          Change in Price /  Original Price

Symbolically the above formula can be presented as follows:

E =ΔQ/Q  x  P/ΔP

Where E stands for price elasticity of demand

            P = Original Price

            Q = Original Quantity

            ΔP = Change in Price

           ΔQ = Change in Quantity