Price Elasticity of demand || BCom 5th September CBCS Previous Year Question Answers

What is price elasticity of demand ? Examine the role of price elasticity of demand in decision-making of a firm.


The term elasticity was developed by Alfred Marshall, and is used to measure the relationship between price and quantity demanded. The law states that the price of a commodity falls, the quantity demanded of that commodity will increase, i.e. it explains only the direction of change in demand and not the extent of change. This deciency is removed by the concept of elasticity of demand.

      Elasticity means responsiveness. Elasticity of demand refers to the responsiveness of quantity demanded of a commodity to change in its price.

These are three types of elasticity :

 1. Price elasticity 

2. Income elasticit 

3. Cross elasticity

Price elasticity of demand may be defined as the degree of responsiveness of quantity demanded of a
commodity in response to change in its price i.e. it measures how much a change in price of a good a
ffects demand for that good, all other factors remaining constant. It is calculated by dividing the proportionate change in quantity demanded by the proportionate change in price.

EP=Proportionate change in quantity demanded/ Proportionate change in price Importance of Elasticity of Demand.


1. Determination of price policy: While fixing the price of this product, a businessman has to consider the elasticity of demand for the product. He should consider whether a lowering of price will stimulate demand for his product, and if so to what extent and whether his profits will also increase a result thereof.


2.Price discrimination: Price discrimination refers to the act of selling the technically same products at different prices to different section of consumers or in different in sub-markets. The policy of price-discrimination is profitable to the monopolist when elasticity of demand for his product is different in different sub-markets. Those consumers whose demand is inelastic can be charged a higher price than those with more elastic demand.


Related Topic: Law of returns to Scale

1. Shifting of tax burden: To what extent a producer can shift the burden of indirect tax to the buyers by increasing price of his product depends upon the degree of elasticity of demand. If the demand is inelastic the larger part of the indirect tax can be shifted upon buyers by increasing price. On the other hand, if the demand is elastic than the burden of taxwill be more on the producer.


2. Taxation and subsidy policy:
The government can impose higher taxes and collect more revenue if the demand for the commodity on which a tax is to be levied is inelastic. On the other hand, in ease of a commodity with elastic demand high tax rates may fail to bring in the required revenue for the government. Govt., should provide subsidy on those goods whose demand is elastic and in the production of the commodity the law of increasing returns operates.

3. Importance in international trade:
The concept of elasticity of demand is of crucial importance in many aspects of international trade. The success of the policy of devaluation to correct the adverse balance of payment depends upon the elasticity of demand for exports and imports of the country.

4. Importance in the determination of factors prices:
Factor with an inelastic demand can always command a higher price as compared to a factor with relatively elastic demand. This helps the trade unions in knowing that where they can easily get the wage rate increased. Bargaining capacity of trade unions depend upon elasticity of demand for worker’s services.

5. Determination of sale policy for supper markets:
Super Markets is a market where in a variety of goods are sold by a single organization. These items are generally of mass consumption. Therefore, the organization is supposed to sell commodities at lower prices than charged by shopkeepers in the other bazaars. Thus, the policy adopted is to charge a slightly lower price for items whose demand is relatively elastic and the costs are covered by increased sales.



Also Read: What are Economics Scale? Discuss about internal economics and external economics.


6. Importance in the determination of factors prices:
Factor with an inelastic demand can always command a higher price as compared to a factor with relatively elastic demand. This helps the trade unions in knowing that where they can easily get the wage rate increased.
     Bargaining capacity of trade unions depend upon elasticity of demand for worker’s services.

7. Determination of sale policy for supper markets:
Super Markets is a market where in a variety of goods are sold by a single organization. These items are
generally of mass consumption. Therefore, the organization is supposed to sell commodities at lower prices than charged by shopkeepers in the other bazaars. Thus, the policy adopted is to charge a slightly lower price for items whose demand is relatively elastic and the costs are covered by increased sales.

8. Pricing of joint supply products:
The goods that are produced by a single production process are joint supply products. The cost of
production of these goods is also joint. Therefore, while determining the prices of these products their
elasticity of demand is considered.
    From the above discussion it is amply clear that price elasticity of demand is of great signifi
cance in making business decisions.




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