Elasticity of Demand Essay Example | Topics and Well Written Essays - 2500 words

Elasticity of Demand - Essay Example When one of these two changes, the other also tends to change. This tendency is very well described by what is popularly known as Law of Demand. The law of Demand is a general law which need not be applicable in all situations. In certain situations this law seems to be unrealistic. The Law of Demand states that when the price increases, the quantity demanded decreases and vice versa, other things remaining the same. The phrase 'other things remain the same' is an important one that it portrays the exceptions of Law of Demand. The Law of Demand, therefore postulates the direction of change in one variable (price or quantity) due to the change in other variable. The law is silent about the magnitude of change. That means, it does not talk anything about the degree by which demand changes as a result of a change in price. Here lies the importance of Elasticity of Demand. This concept tells us the extent to which demand increases or decreases owing to a decrease or increase in price. Th erefore, Law of Demand is a qualitative measurement whereas Elasticity of Demand is a quantitative measurement. As stated earlier, elasticity is a measure of responsiveness of quantity demanded for a change in price. ... Mathematically, it may be computed as: (Moffatt Mike: Elasticity of Demand) To calculate percentage change in quantity and percentage change in price, the following formulae can be sued: % change in quantity = Quantity (new) - Quantity (old) / Quantity (old) (Moffatt Mike: Elasticity of Demand) % change in Price = Price (new) - Price (old) / Price (old) (Moffatt Mike: Elasticity of Demand) Price Elasticity of Demand The Price Elasticity of Demand is the measure of responsiveness of quantity demand of a product as a result of change in its own price. This is also known as Own Price Elasticity of Demand. This theory measures the rate of response of quantity demanded due to change in price. Price Elasticity is a common phenomenon because price and demand are the two closely related variables. In other words, price is the most important determinant of demand. Price of a product and its demand are negatively correlated, which means when price increases, demand decreases and vice versa. Mathematically, price elasticity of demand can be expressed as below: Price Elasticity of Demand = (% Change in quantity demanded)/ (% change in price) (Moffatt Mike: Price Elasticity of Demand) % Change in quantity demanded = Quantity (new) - Quantity (old) / Quantity (old) (Moffatt Mike: Price Elasticity of Demand) % change in price = Price (new) - Price (old) / Price (old) (Moffatt Mike: Price Elasticity of Demand) Significance of Price Elasticity The calculation of price elasticity alone is not sufficient to an economist for decision making. It is a means to an end. Thus, interpretation is more important than computation. The purpose of calculating elasticity is for analyzing how sensitive is the demand for the product due to a