Price Elasticity of Demand

Price Elasticity is a measure of change in demand as compared to the subsequent change in price. It is a measure of proportionate change in the quantity demanded of a commodity in response to a proportionate change in price. While calculating price elasticity no other factors are considered. It can be represented in formula form.

Elasticity of demand may be of the following types:

Unitary Elastic Demand (Elasticity is equal to 1): In unitary elastic demand proportionate change in price of a commodity and the proportionate change in demand are equal.

Unitary Elastic Demand

The percentage change in demand and percentage change in price are equal in this case.

Relatively Elastic Demand (Price Elasticity is greater than 1): In relatively elastic demand percentage in demand is more than a relative percentage change in price.

The percentage change in demand is more than percentage change in price in this case.

Relatively Inelastic Demand (Price Elasticity is less than 1): In relatively inelastic demand percentage in demand is less than a relative percentage change in price.

The percentage change in demand is less than percentage change in price in this case.

Perfectly Elastic Demand ( Price Elasticity is equal to infinity) : In Perfectly Elastic demand there is increase or decrease in demand of a commodity with no change in price.

In unitary elastic demand proportionate change in price of a commodity and the proportionate change in demand are equal.

There is change in demand with no change in price in this case.

Perfectly Inelastic Demand ( Price Elasticity is equal to zero) : In Perfectly inelastic demand there is no change in demand of a commodity with increase or decrease in price of a commodity.

Perfectly Inelastic Demand

There is no change in demand with change in price in this case.

Macroeconomics vs Microeconomics

If you have just started exploring your options in economics, you might have come across the terms Macroeconomics and Microeconomics. What exactly is the difference between the two?

Let’s start with Microeconomics. Microeconomics studies the individual person, firm or industry. It deals with decisions made by these actors and the theories associated with them. It primarily deals with topics such as demand and supply, income and expenditure, consumption, etc. So, microeconomics will study things like incomes of people, what people do with this income, how they get loans, how companies want to run on profits, etc.

Macroeconomics on the other hand, studies the economy as a whole. It studies economic decisions and problems of whole countries, and entire industries. It deals with problems like Gross Domestic Product, national income, economic development and growth, trade, import-export, taxation policies, international economics, etc.

So, if you end up studying microeconomics, you will learn a lot of about people and how they make individual economic and financial decisions. You will learn about how they take out loans, or why people consume more salt than caviar, or why your local car salesman is always trying to push you into buying the bigger car.

On the other hand, if you study macroeconomics, you will study about why Australia wants to do trade with China, or why we are in so much debt, and exactly where all that money you are paying as tax goes!