Please refer to Economics Price Elasticity of Demand Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams
Price Elasticity of Demand Class 12 Economics Notes and Questions
The below Class 12 Price Elasticity of Demand notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.
Question. Define Price Elasticity of Demand.
Ans. It is the degree of responsiveness in the quantity demanded due to change in price of product.
Ed = (−) % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 / % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
= (−) [(𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 / 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑) 𝑋 100 / (𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 / 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒) 𝑋 100]
= (−) (ΔQ/𝑄) / (ΔP/𝑃)
= (−) (𝛥𝑄/𝛥𝑃) 𝑋 𝑃/𝑄
Types of Price Elasticity of Demand
1) Perfectly Inelastic Demand (Ed=0)
When quantity demanded of a product does not change as a result of change in price of the product, it is called Perfectly Inelastic Demand.
2) Relatively Inelastic Demand (Ed<1)
When proportionate change in quantity demanded is less than proportionate change in price of the product, then it is called relatively inelastic demand. It is also called Less than Unit Elastic Demand.
3) Unit Elastic Demand (Ed=1)
When proportionate change in quantity demanded is equal to the proportionate change in price of the product, then it is called Unit Elastic Demand.
4) Relatively Elastic Demand (Ed>1)
When proportionate change in quantity demanded is more than the proportionate change in price of the product, then it is called relatively elastic demand. It is called Relatively Elastic Demand.
5) Perfectly Elastic Demand (Ed=∞)
When demand of a product either increases or decreases upto any extent without any change in price of the product, it is called Perfectly Elastic Demand.
Expenditure Method (Total Outlay Method)
Question. Explain expenditure method to calculate elasticity of demand.
Ans. Expenditure method is used to calculate Elasticity of Demand by observing the relationship between price of the product and total expenditure of consumer on that product.
Total expenditure is the multiple of price and quantity demanded. When price of a product changes, the following 3 possibilities may arise: –
I. When decrease in price of a product results decrease in total expenditure of consumer on that product or vice versa, then Ed<1 (Relatively Inelastic Demand)
II. When decrease in price of a product results decrease in total expenditure of a consumer on that product or vice versa, then Ed>1 (Relatively Elastic Demand)
III. When decrease or increase in the price of product results no change in total expenditure of consumer on that product, then Ed=1 (Unit Elastic Demand)
Geometric Method (Point Method)
Question. Explain geometric method to calculate elasticity of demand.
Ans. Geometric method is used to calculate elasticity of demand at a particular point on straight line demand curve. It includes following steps: –
1. Draw a straight-line demand curve AB which touch y-axis at point A and x-axis at point B.
2. Take a mid-point of the demand curve, i.e. point C which divide it into two equal parts (AC=BC).
3. Take another point D in the upper portion AC and point E in the lower portion BC.
Elasticity of demand at any point is estimated by dividing lower portion demand curve by the upper portion of demand curve.
Ed = 𝑳𝒐𝒘𝒆𝒓 𝑺𝒆𝒈𝒎𝒆𝒏𝒕 / 𝑼𝒑𝒑𝒆𝒓 𝑺𝒆𝒈𝒎𝒆𝒏𝒕
Question. Explain the factors affects elasticity of demand.
What are the determinants of Elasticity of Demand?
Ans. 1) Nature of Product: Necessary goods like salt, medicines, etc. have inelastic demand because consumer does not change their consumption irrespective to the change in their prices but luxury goods have highly elastic demand because consumer can easily reduce their consumption if they appear to be costly.
2) Availability of Substitutes: If there is no close substitute available in the market of a particular product, then demand will be inelastic like demand of salt but those products which have many close substitutes in the market, will have highly elastic demand like Tata salt.
3) Habits of Consumer: If a consumer is habitual for the consumption of a product, then demand will be inelastic because change in price will not affect its consumption. Example: Demand of cigarette for a chain smoker.
4) Income of Consumer: Degree of elasticity of demand is inversely related to income level of consumer. Thus, elasticity of demand will be low for high income group people and it will be high for low income group people.
5) Share in total expenditure: Elasticity of demand will be low for those products where very small part of income is spent on consumption because increase or decrease in their price will have very small impact on consumer’s budget.
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