Alfred Marshall was the first economist to give a clear formulation of price elasticity. It is the ratio of proportionate changes in the quantity demand of a commodity to a given proportionate change on its price. It is the ratio of a relative change in quantity to a relative change in price. A small fall in the price of a commodity may lead to a considerable increase in the quantity demanded but sometimes even a considerable fall in price may not lead to any increase in demand. The responsiveness of demand to small change in price differs from product to product. There are five different relationships possible between a change in price and a change in quantity demanded. These five different degrees of demand are-
- Elasticity in unity. The change in demanded is exactly equal to change in price, say be 10 percent in both cases.
- Elasticity more than unity. The change in demand is more than change in price; say 15% and 10% respectively. Then
Ep = =15%/10%
= 1.5 (more than Unity))
- Perfectly elastic. The change in demand is something positive even though the change in price is zero. This happens when the demand for the commodity becomes infinity at a particular price. Suppose the demand changes by 10% but the change in price is zero. Then
Ep = =10%/0% = (Infinity)
- Elasticity less than unity. The change in demand is less than change in price. Suppose demand changes by 5% to a 10% change in the price, then,
Ep = =5%/10%
= 0.1 (Less than one)
If the co-efficient of elasticity is less than one, the demand for the product is said to be in elastic.
- Elasticity is Zero. In case there is no change in demand whatever be the change in price, we will have an absolutely inelastic demand. Suppose, the change in price is by 10% but the change in demand is zero, then
Ep = =0%/10% = 0
Below we represent the elasticity of demand diagrammatically.
The general rule is that steeper the curve, the less elastic is the demand. This must be clearly understood that slope of the curve an indication of elasticity only in general them. It cannot indicate elasticity at a point.
In all the diagrams gives below DD’ is the demand curve. OX measures the quantity demanded and OY measures price per unit of the commodity.
In Fig. (a) demand curve is vertical straight line. It shows zero elasticity. It implies that is no change in demand when
Price changes. Fig. (b) shows infinite elasticity of demand because the demand curve is a horizontal line. It means that with a little fall in price there is an infinitely large extension in demand. These two types of elasticity of demand are only theoretical. In actual life there is no such commodity, which has, perfectly in elastic demand or infinite elasticity of demand. Fig. (d) shows unity elasticity demand because the change in demand is proportionate to the change in price. Fig. (e) Shows less elastic demand. It means demand changes very little with a great change in price. Fig. (c) Illustrates highly elastic demand, which means that with little change in price, the demand changes greatly. All these kinds of price elasticity of demand can be put in single diagram. This is shown below: