So, elasticity of demand is different for different goods. Complementarity between Goods: Complementarity between goods or joint demand for goods also affects the price elasticity of demand. For example: when the price falls by 10% and the demand rises by less than 10% say 5% , then it is the case of inelastic demand. The quantity demanded depends on several factors. Thus, it is also known as infinite elasticity.
Thus it is also called zero elasticity. In the given figure, price and quantity demanded are measured along the Y-axis and X-axis respectively. Relatively inelastic demand has a practical application as demand for many of products respond in the same manner with respect to change in their prices. The demand for common salt is inelastic also because people spend a very little part of their income on it and even if its price rises it makes only negligible difference in their budget allocation for the salt. Perfectly Elastic Demand : When a small change in price of a product causes a major change in its demand, it is said to be perfectly elastic demand. But, given sufficient time, people will make adjustments and use coal or cooking gas instead of the fuel oil whose price has risen. Perfectly Inelastic Demand : A perfectly inelastic demand is one when there is no change produced in the demand of a product with change in its price.
Perfectly inelastic demand is a theoretical concept and cannot be applied in a practical situation. It can also be interpreted from Figure-2 that at price P consumers are ready to buy as much quantity of the product as they want. It happens because such a commodity becomes a necessity for the consumer and he continues to purchase it even if its price rises. A commodity for a person may be a necessity, a comfort or a luxury. Elasticity of Demand When we calculate the elasticity of demand, we are measuring the relative change in the total amount of goods or services that are demanded by the market or by an individual.
It is the proportional change of the value in one variable relative to the proportional change in the value of another variable. In the given figure, price and quantity demanded are measured along the Y-axis and X-axis respectively. The greater the possibility of substitution, the greater the price elasticity of demand for it. . It can be a day, a week, a month, a year or a period of several years. It shows that negligible change in price causes infinite fall or rise in quantity demanded. Likewise, when price increases, the demand decreases in the same proportion.
Time and Elasticity: The element of time also influences the elasticity of demand for a commodity. We can calculate the elasticity of demand according to each one of these inputs. Thus, the cross elasticity of complements in production goods is positive. It is the availability of close substitutes that makes the consumers sensitive to the changes in the price of Campa Cola and this makes the demand for Campa Cola elastic. Income elasticity of demand The income elasticity of demand is the proportional change in the quantity demanded, relative to the proportional change in the income. Thus, availability of close substitutes makes the demand sensitive to change in the prices. Now, if the price of lubricating oil goes up, it will mean a very small increase in the total cost of running the automobile, since the use of oil is much less as compared to other things such as petrol.
Level of price: Level of price also affects the price elasticity of demand. Price elasticity of demand The price elasticity of demand is the proportional change in the quantity demanded, relative to the proportional change in the price of the good. Relatively elastic demand has a practical application as demand for many of products respond in the same manner with respect to change in their prices. Though, perfectly elastic demand is a theoretical concept and cannot be applied in the real situation. The three factors mentioned above may reinforce each other in determining the elasticity of demand for a commodity or they may operate against each other.
Likewise, demand decrease more with small increase in price. It happens because rich people are not influenced much by changes in the price of goods. For example, if the price of a product increases by 30% and the demand for the product decreases only by 10%, then the demand would be called relatively inelastic. We thus see that demand is generally more elastic in the long run than in the short run. Likewise, demand for common salt is inelastic because good substitutes for common salt are not available. Therefore, the demand is unitary elastic. It is also called highly elastic demand or simply elastic demand.
Flatter the slope of the demand curve, higher the elasticity of demand. The elasticity of demand for a commodity will be the net result of all the forces working on it. The numerical value of relatively elastic demand ranges between one to infinity. When the prices fall, then it is used for satisfying even less urgent needs and demand rises. The greater the proportion of income spent on a commodity, the greater will be generally its elasticity of demand, and vice versa. On the other hand, if the price of Campa Cola falls, many consumers will change from other cold drinks to Campa Cola. It also does not have practical importance as it is rarely found in real life.