Price Elasticity

In this article, we will have an understanding of the concept of price elasticity and its type. This topic is very important for the SSC exam as well as for other competitive exams. The topic not only comprehends the understanding with respect to price and demand but plays an important role in boosting your marks and especially a major role in SSC CGL exam and Banking exams of all levels.

Price Elasticity  :

It tells how much more or less demand changes when the price changes, keeping other variables constant. It is typically measured as a ratio. It is the percentage change in quantity demanded divided by the percentage change in price.

Formulae –   The Elasticity of Demand =  (Percentage Change in Demand)  /  (Percentage change in price)

Three Types  of Price Elasticity :

Unitary Elastic :

When demand changes by the same percentage as the price, it is said to be unitary elastic. A typical example of unitary elastic demand is electronic products. As in a unitary elastic demand product, the change in quantity demanded equals the change in price, the price elasticity coefficient will always be 1.

Elastic  :

When demand changes by a greater percentage than price, it is said to be elastic. Elastic goods include certain food and beverages, luxury goods, etc. as small changes in prices greatly affect demand.

For example, if the price of commodity increases by 20 percent and the quantity demanded of those goods decreases by 40 percent, then it is said to be elastic demand for that good. The quantity demanded has increased substantially relative to the change in price. In such a case, consumers are considered responsive and sensitive to changes in the price of that commodity.

Inelastic  :

When there is a small percentage change in demand with a change in price, it is said to be inelastic. Inelastic goods can include prescription drugs, and daily essentials because demand often remains constant despite changes in price.

For example, if the price of a commodity increase by 20 percent and the quantity demanded decreases by only 10 percent, it is said to be inelastic demand. The stretch of quantity demanded is much smaller relative to the change in price. In this case, consumers are not considered very responsive or sensitive to changes in the price of that commodity.

In business and economics, the elasticity of a product is a vital aspect to determine future policies. It is mainly used to measure the change in consumer demand as a result of a change in the price of a good or service.

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