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THEORETICAL IMPORTANCE Apart from the practical importance of the concept of elasticity of demand, the concept plays a crucial role in economic theory and is extensively used as a tool of economic analysis. We mention below some aspects of economic theory where use is made of this  concept. Price Determination. As will be clear from the discussion on product pricing […]

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Increasing Returns When an industry is subject to increasing returns, the manufacturer lowers the price to develop the market so that he may be able to produce more and take full advantage of the economies of large-scale production.Output. Elasticity of demand affects industrial  output. But in this connection we have to distinguish between elasticity of demand of an individual consumer and […]

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Taxation. The Minister of Finance can be more sure of his revenues if he taxes those commodities for which the demand is inelastic. The tax will no doubt raise the price but the demand being inelastic. people must continue to buy the same quantity of the commodity.  Tit Us. the demand will not decrease. But, on humanitarian grounds. such taxes […]

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Geometrical Method: Point Elasticity This method tells us how to measure elasticity of demand at any point on a demand curve. The demand curve in Fig. 11.12. 00 is ‘the straight line demand curve. Elasticity is represented by the fraction: distance from 0 to a point on the curve divided by the distance from the other end to that point. […]

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Proportional Method In this method, we compare the percentage change in price with the percentage change in demand. The elasticity is the ratio of the percentage change in the quantity demanded to percentage change in price charged. The formula is. Price Elasticity Suppose, the price to a particular brand of a radio set ~s from Rs. 500 to Rs. 400 […]

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Total Outlay Method According to this method, we compare the total outlay of the purchaser (or total revenue, i.e., total value of sales from the point of view of the seller) before and after the variations in price. Elasticity of demand is expressed in three ways: (I) Unity (or unitary elasticity), (2) greater than unity, and (3) less than unity. Unity. […]

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Factors Determining Price Elasticity of Demand It is not possible to classify goods according to the nature of their demand and lay down rigid rules to determine whether demand in any particular case is elastic or inelastic. We call only osculation some general rule in this connection. We know that elasticity is relative. For one person or at one place, the […]

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Relation Between Price Elasticity  come Elasticity and Substitution Elasticity We have already seen (Chapter 7) that price effect consists of two components the income effect and the substitution effect. In the same manner, the price elasticity of demand, which is the measure of price effect. depends on income elasticity of demand on the one hand and substitution elasticity on the […]

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Substitution Elasticity We may also take notice of another concept of elasticity, viz., substitution elasticity. In this connection, we make use of the concept of marginal rate of substitution already discussed in the indifference curve analysis. The elasticity of substitution shows to what extent one commodity can be substituted for another without making any change in the total satisfaction derived by the […]

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Reunion of Causticity with the law of Diminishing Utility The concept of availability of demand  connected with the law of diminishing utility.and it is negative when with an increase in income, the consumer purchases less, e.g., in the case of inferior goods. It may be carefully noted that for any individual seller or firm, the demand for the product is highly elastic even though the […]