𝐂𝐨𝐧𝐜𝐞𝐩𝐭 𝐨𝐟 𝐄𝐥𝐚𝐬𝐭𝐢𝐜𝐢𝐭𝐲 𝐨𝐟 𝐃𝐞𝐦𝐚𝐧𝐝: 𝐖𝐡𝐚𝐭 𝐚𝐧𝐝 𝐖𝐡𝐲?

The law of demand explains that the quantity demanded of a commodity is affected considerably by the price of the product. But the law of demand only tells us about the direction of change in demand for a commodity in response to a change in its price. After studying the law of demand, we only know that with a price increase, consumers would buy less. But by how much would consumption fall is not answered in the law of demand. It means, the law of demand simply states that change in price and change in quantity demanded move in the opposite direction. Thus, it makes a qualitative statement only. It does not tell us about the magnitude of change in quantity demanded in response to a change in price.

Elasticity is a quantification of how buyers and sellers react to changes in market circumstances. When we have to study how some events or incidents or policies affect a market, we have to discuss not only the direction of the effect but also their magnitude as well. Thus elasticity explains both direction and magnitude of changes in market conditions as a result of the change in different associated determinants or events or incidents. In the same fashion, the elasticity of demand can explain both the direction and magnitude of change in demand and its determinants.

In economics, the demand elasticity (elasticity of demand) refers to how responsive the demand for a good as to changes in determinants of demand, such as prices, consumer income, prices of related goods, advertisements, and so on.

Demand elasticity is computed as the percentage or the proportionate change in the quantity demanded divided by a percentage or proportionate change in another economic variable (determinants of demand). The top/ higher coefficient of demand elasticity of an economic variable indicates that buyers are more reactive to changes in this variable.

𝑀𝑎𝑡ℎ𝑒𝑚𝑎𝑡𝑖𝑐𝑎𝑙𝑙𝑦,

𝐸𝑑= 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑/ 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑛𝑡𝑠 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (𝑂𝑤𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦, 𝑚𝑜𝑛𝑒𝑦 𝑖𝑛𝑐𝑜𝑚𝑒, 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑔𝑜𝑜𝑑)

𝐸𝑑 =%𝑑𝑄𝑑/%𝑑𝑃𝑥, 𝑀, 𝑃𝑦

Where,

Ed=Elasticity of demand; Px= Own price of the commodity; M= Money income of the consumer; Py= Price of related goods

Therefore, the elasticity of demand is a measure of how sensitive the quantity demanded of a commodity is to change in any of the factors influencing demand like its price, price of other goods, change in consumer’s money income, advertisement expenditure, and so on.

There are numerous categories of elasticity of demand based on the category or types of economic variables affecting or determining the demand. 𝘔𝘢𝘪𝘯𝘭𝘺 𝘸𝘦 𝘩𝘢𝘷𝘦 𝘧𝘰𝘶𝘳 𝘵𝘺𝘱𝘦𝘴 𝘰𝘧 𝘦𝘭𝘢𝘴𝘵𝘪𝘤𝘪𝘵𝘺 𝘰𝘧 𝘥𝘦𝘮𝘢𝘯𝘥, 𝘯𝘢𝘮𝘦𝘭𝘺, 𝘗𝘳𝘪𝘤𝘦 𝘦𝘭𝘢𝘴𝘵𝘪𝘤𝘪𝘵𝘺 𝘰𝘧 𝘥𝘦𝘮𝘢𝘯𝘥, 𝘊𝘳𝘰𝘴𝘴 𝘦𝘭𝘢𝘴𝘵𝘪𝘤𝘪𝘵𝘺 𝘰𝘧 𝘥𝘦𝘮𝘢𝘯𝘥, 𝘐𝘯𝘤𝘰𝘮𝘦 𝘦𝘭𝘢𝘴𝘵𝘪𝘤𝘪𝘵𝘺 𝘰𝘧 𝘥𝘦𝘮𝘢𝘯𝘥, 𝘢𝘯𝘥 𝘢𝘥𝘷𝘦𝘳𝘵𝘪𝘴𝘦𝘮𝘦𝘯𝘵 𝘦𝘭𝘢𝘴𝘵𝘪𝘤𝘪𝘵𝘺 𝘰𝘧 𝘥𝘦𝘮𝘢𝘯𝘥.

 

Credit: enotesworld.com