Price Elasticity of Demand and Supply

Price Elasticity of Demand

Price elasticity of demand can be defined a measure of the sensitivity of quantity demanded to changes in price. It is a measure of how consumers react to a change in price. Demand can be relatively elastic or inelastic. A price fall usually results in an increase in the quantity demanded by consumers and price rise has the opposite effect. But degree of it is different for different goods, for some goods demand will fall more with price rise and for some it will fall less.

When the price elasticity of demand for a good is elastic, the percentage change in quantity demanded is greater than that in price. While when the price elasticity of demand for a good is inelastic, the percentage change in quantity demanded is smaller than that in price. For example people who smoke, for them demand for cigarettes is inelastic because they are quite habitual to smoking and they will be willing to pay more price for cigarettes because of their habit.

Knowledge of price elasticity is important for a company because for a company whose products demand is inelastic can easily raise the price without much drop in demand and hence can increase the total revenue of the company.

Price elasticity of supply

Price elasticity of supply can be defined as measure of the sensitivity of the quantity supplied of product to a change in price of product. In other words Elasticity of supply is measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price. Higher elasticity indicates that supply of good is sensitive to the change in prices and lower elasticity means supply of goods is relatively inelastic to the change in prices.

For example the objects of art are relatively inelastic because any rise in prices does not affect their supply due to obvious reasons; while products which are of daily use like soaps, food items etc are elastic because producers can easily increase their supply if price rises.

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