Price Elasticity Of Demand Analysis

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2.1 Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price Measurement of Price Elasticity of Demand

There are three methods for measuring elasticity of demand.

Outlay method

Point method

Arc Method

Total Outlay Method

Total outlay method, also known as total expenditure method of measuring price elasticity of demand was developed by Professor Alfred Marshall. According

These are

1. Consumer Income: The income of the consumer also affects the elasticity of demand. For high-income groups, the demand is said to be less elastic as the rise or fall in the price will not have much effect on the demand for a product. Whereas, in case of the low-income groups, the demand is said to be elastic and rise and fall in the price have a significant effect on the quantity demanded. Such as when the price falls the demand increases and vice-versa.

2. Existence of Substitutes: The substitutes are the goods which can be used in place of one another. The goods which have close substitutes are said to have elastic demand. Such as, tea and coffee are close substitutes and if the price of tea increases, then people will switch to the coffee and demand for the tea will decrease significantly. Whereas, if there are no close substitutes for a product, then its demand is said to be inelastic. Such as salt and sugar do not have their close substitutes and hence lower is their price

It has been observed that many oligopolistic industries exhibit an appreciable degree of price rigidity or stability. In other words, in many oligopolistic industries prices remain sticky or inflexible, that is, there is no tendency on the part of the oligopolies to change the price even if the economic conditions undergo a change.

Many explanations have been given of this price rigidity under oligopoly and most popular explanation is the so-called kinked demand curve hypothesis. The kinked demand curve hypothesis was put forward independently by Paul M. Sweezy, an American economist, and by Hall and Hitch, Oxford economists.

It is for explaining price and output under oligopoly with product differentiation, that econo¬mists often use the kinked demand curve hypothesis. This is because when under oligopoly prod¬ucts are differentiated, it is unlikely that when a firm raises its price, all customers would leave it because some customers are intimately attached to it due to product differentiation.

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BASIS FOR COMPARISON MONOPOLY MONOPOLISTIC