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Price Elasticity of
Demand
1. Perfectly Elastic:
Perfectly elastic given by
E = . Shape of demand
curve is horizontal. It
means
that
at
a
particular price, buyers
are ready to buy all
commodities. If there is
even a slight change in
the price, the quantity
demanded will be zero.
(Perfect Competitive
Market)
2. Percentage Method
Percentage Method
ey = (X/X) / (Y/Y) = (X/Y) (Y/X)
where,
X = Quantity demanded for a
Commodity X
Y = income of the consumer
Percentage Method
Suppose a consumers demand for a commodity
increases from 10 units per week to 20 units per
week when his income rises from $200 to $300.
ey = ?
The numerical value of income elasticity of demand
may be positive or negative. A positive value implies
that an increase in income is associated with an
increase in the quantity of goods purchased. For
instance, normal goods always have a positive
income elasticity of demand.
Arc Method
Say that you own a company that supplies vending
machines. Currently, your vending machines sell soft
drinks at $1.50 per bottle, and at that price, customers
purchase 2,000 bottles per week. For your community,
the weekly income is $600.
Then a major employer in the community closes, and a
number of workers lose their job. The average weekly
income in the community falls to $400 and you note
that your vending machine sales decrease to 500. You
didnt change the price of soft drinks, but your sales
decreased dramatically due to the change in income.
Arc Method
So the income elasticity of demand
for soft drinks equals
Arc Method