Question

What do you understand by price elasticity of demand? With the help of diagrams explain the conditions when:
i. $E_p>1$
ii. $E_p<1$
iii. $E_p=1$

Answer 1

Price elasticity of demand is the responsiveness of change in quantity demanded in response to a given percentage change in the price of the commodity. It can be expressed as follows:
$E_p=\frac{Percentagechangeinquantitydemandofacommodity}{Percentagechangeinthepriceofthecommodity}$
(i) Relatively Elastic Demand- When the percentage change in demand is greater than the percentage change in price, elasticity of demand is said to be relatively elastic. For example, if the price of a commodity falls by 10% but its demand rises by 20% demand of the commodity will be said to be relatively elastic. The numerical value of price elasticity will be greater than one $(e_p>1)$.
In the above diagram, DD is an elastic demand curve as it is very clear that the change in demand ($O{Q}_1$) is much more than the change in price ($P{P}_1$).
(ii): Relatively Inelastic Demand- when the percentage change in demand is lesser than the percentage change in price, the demand is said to be relatively inelastic. For example, a fall in price by 10% may lead to a rise in demand by only 5%. The numerical value of price elasticity here will be less than unity ($e_p<1$).
(iii): Unitary Elastic Demand: In this situation percentage change in demand is equal to percentage change in price. For instance, if price of milk rises by 20% and consequently its demand also falls by 20% price elasticity of demand will be unitary elastic. Generally, demand for comforts, such as sofa-set, desert-cooler, scooter etc is unit elastic.
Elasticity of demand will be unitary when the demand curve takes the shape of a rectangular hyperbola as is shown in the alongside diagram.