Elasticity of Demand and Supply

(A) Price Elasticity

i) Elasticity of Demand: Elasticity of demand can be classified into two major divisions: one the highly elastic, unitary elastic and the 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: The laws of demand and supply are no doubt an important part of economic analysis. But the knowledge about demand and supply relations serves only a limited purpose. This is in view of the fact that both demand and supply laws are applicable to all kinds of goods. However, an actual rise or fall in the quantity demanded or supplied with a small variation in the price may considerably differ for different goods such as food, automobiles, film shows, garments, hardware materials, machines, land etc. In other words it is important to know the extent of rise or fall in the demand with a given change in the price for each individual good. This is exactly the purpose served by the concept of price elasticity of demand; this concept is advanced and subtle in nature. It was first developed by Alfred Marshall; he has defined elasticity as follows:

Elasticity of demand is the degree of responsiveness with which quantity demanded changes for a given change in price.

In other words it is a proportional change in the quantity demanded to a proportional change in price.

Price Elasticity of demand is then the ratio of the proportional change in the quantity demanded to the proportional change in price.

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.