(a) What is price elasticity of demand? (b) With carefully labeled diagrams, illustrate each of the following: (i) perfectly inelastic demand (ii) unitary e...

(a) Meaning of price elasticity of demand

Price elasticity of demand is the degree of responsiveness of quantity demanded to a change in the price of a commodity, other factors remaining constant. It is measured as:

\[E_d=\frac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}\]

(b) Diagrams of types of price elasticity of demand

(i) Perfectly inelastic demand: Quantity demanded remains unchanged whatever the change in price. Thus, \(E_d=0\), and the demand curve is vertical.

(ii) Unitary elastic demand: The percentage change in quantity demanded is exactly equal to the percentage change in price. Thus, \(E_d=1\). The demand curve is a rectangular hyperbola, so that total expenditure, \(P\times Q\), remains constant at every point on the curve.

(iii) Fairly elastic demand: A small percentage change in price causes a more than proportionate percentage change in quantity demanded. Thus, \(E_d>1\). The demand curve is relatively flat.

(iv) Perfectly elastic demand: At a given price, consumers will buy any quantity, but a slight increase in price reduces quantity demanded to zero. Thus, \(E_d=\infty\), and the demand curve is horizontal.