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Quantity demanded
Figure 6
In the figure,
AB is the demand curve and at any point on this, the elasticity of demand
can be measured. At points R1, R and R2 the values
of elasticity are:
At the mid point R on the demand curve, the value of
elasticity is unit or equal to one. But above point R such as at R1,
the value of elasticity is more than one and demand is highly elastic.
On the other hand at a lower point such as R2 demand becomes
inelastic as the value of elasticity is less than one. In general as we
move in the direction of the Y axis, demand becomes more and more elastic.
But as we move in the direction of the X axis, demand becomes less and
less elastic. In other words at every higher price demand is relatively
more elastic and at every lower price demand is relatively less elastic.
This also explains that elasticity of demand differs not only from commodity
to commodity but also for the same commodity at varying prices.
b) Two extreme cases: Besides the three explained
above, two more extreme values of price elasticity of demand can be included
in the analysis. These are:
(i) Perfectly Price Elastic: At this extreme,
for any small decrease in price, the increase in the quantity demanded
is infinitely large. In such a case, demanders demand all the can. Here
the demand is said to be perfectly price elastic (e = that is infinity).
This is represented graphically as a horizontal demand curve (D1
in the figure above).
(ii) Perfectly Price Inelastic: At this extreme,
for any change in price there is no change in the quantity demanded. Therefore
the demand is completely unresponsive to any change in price. In this
case the demand is said to be perfectly price inelastic (e = 0). This
is represented graphically by a vertical demand curve (D2 in
the figure above).
ii) Elasticity of Supply: Like demand, elasticity
of supply can also be classified into two major divisions: one the highly
elastic, unitary elastic and highly inelastic type and two, the extreme
cases of the perfectly elastic and the perfectly inelastic type.
a) Highly elastic, unitary elastic and highly inelastic:
Elasticity of supply can similarly be defined and computed at varying
prices and quantities supplied.
Elasticity of supply is the degree of responsiveness
with which quantity supplied changes with a given change in the price.
This can be expressed with a similar formula:
An important difference between the price elasticity
of demand and that of supply is that the latter is positive in
value (as against the negative value in case of elasticity of demand).
This is obvious from the fact that supply is a direct function
of price: and both quantity and price change in the same direction.
This will be clear from the following example. The values of ‘q’ and ‘P’
have been selected from the supply schedule given above.
The elasticity of supply also shows variations in its
value for different commodities. Accordingly supply elasticity for different
goods can be unit, (es = 1) more than one
(es > 1) or less than one (es
< 1). The goods can then be categorized as relatively elastic or inelastic
in supply. Elasticity of supply is also of considerable practical importance
in its policy applications.
b) Two extreme cases: Besides the three explained
above, two extreme values of price elasticity of supply can be included
in the analysis:
i) Perfectly Price Elastic: At this extreme
for any small decrease in price, the quantity supplied is infinitely large.
In such a case, suppliers supply all they can. Here the supply is said
to be perfectly price elastic (e = that is infinity). This is represented
graphically by a horizontal supply curve (S1 in the figure
below).
ii) Perfectly Price Inelastic: At this
extreme for any change in price there is no change in the quantity supplied.
Therefore the supply is completely indifferent to any change in price
(e = 0). Here the supply is said to be perfectly price inelastic. This
is represented graphically by a vertical supply curve (S2 in
the figure below).
Figure 8
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