Womack Report

Starting the recap today.When price increases, demand increases. The relationship between price change and demand change is not universally predictable. A doubling in price does not necessarily halve demand, for instance.

Elasticity of demand is a commodity’s sensitivity to a change in price. Elasticity is classified into five types:

1. Perfectly Elastic demand. For a commodity with perfectly elastic demand, any change in price causes quantity demanded to become undefined. If graphed as a demand curve, the commodity’s curve would be parallel to the quantity-demanded axis. E = undefined or infinite.
2. Perfectly Inelastic demand. For a commodity with perfectly inelastic demand, a change in price will not change the quantity demanded at all. If graphed, the commodity’s demand curve would be parallel to the price axis. E = 0.
3. Unit Elastic demand. For a commodity with unit elastic demand, any change in price will be matched by a proportional change in quantity demanded. A graph of this demand curve would be a rectangular hyperbola. E = 1
4. Relatively Elastic demand. Also referred to as more elastic, highly elastic, or simply elastic. For a commodity with relatively elastic demand, a change in price will be accompanied by a larger change in quantity demanded. The graph of this demand curve will be a shallow slope downward from left to right. E > 1
5. Relatively Inelastic demand. Also less elastic, or simply inelastic. For a commodity with relatively inelastic demand, a change in price will be accompanied by a smaller change in demand. The graph of this demand curve will be a steep slope downward from left to right. E < 1.

Elasticity of demand is equal to the proportionate change in quantity demanded divided by the proportionate change in price. Ed = ( (Q – Q1) / Q) / ( (P – P1) / P), where Ed is elasticity of demand, Q is the quantity demanded at the original price, Q1 is the quantity demanded at the new price, P is the original price of the commodity, and P1 is the new price of the commodity.

Elasticity of Demand can be classified several ways.

1. Price Elasticity of Demand  — Change in price affects quantity demanded
2. Income Elasticity of Demand — Change in income of consumer affects quantity demanded
3. Cross Elasticity of Demand — Change in the price of one good affects the quantity demanded of another good.

Measurement of Elasticity of Demand

1. Proportionate Method
2. Percentage Method
3. Linear Method
4. Arc Method (or, Mid-Point Method)