The law of demand explains that demand will change due to a change in the price of the commodity. But it does not explain the rate at which demand changes to a change in price. The concept of elasticity of demand measures the rate of change in demand.
The concept of elasticity of demand was introduced by Alfred Marshall. According to him 'the elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price'.
There are three types of elasticity of demand;
1. Price elasticity of demand;
2. Income elasticity of demand; and
Cross-elasticity of demand
'The degree of responsiveness of quantity demanded to a change in price is called price elasticity of demand'
Price elasticity of demand = Percentage change in quantity demanded Percentage change in price
Important methods for calculating price elasticity of demand are
Point method or slope method
Total outlay method
This is measured as the relative change in demand divided by relative change in price (or) percentage change in demand divided by percentage change in price.
For example, the price of rice rises by 10% and the demand for rice falls by 15%
Then ep = 15 = 1.5 10
This means that the demand for rice is elastic.
If the demand falls to 5% for a 10% rise in price, then ep = 5/10 = 0.5. This means that the demand for rice is inelastic. Thus there are five measures of elasticity.
1. Elastic demand, if the value of elasticity is greater than 1
2. Inelastic demand, if the value of elasticity is less than 1
3. Unitary elastic demand, if the value of elasticity is equal to 1.
4. Perfectly inelastic demand, if the value of elasticity is zero.
5. Perfectly elastic demand, if the value of elasticity is infinity.