Q.If the price of a commodity rises by 10% and its quantity demanded falls from 40 units to 30 units, calculate coefficient of price elasticity of demand. Comment on the nature of price elasticity of demand.

Price Elasticity of Demand: From the Market to Your Pocket

Think about the last time the price of something you buy regularly went up. Maybe it was petrol, or onions, or your favourite snack. Did you stop buying it altogether? Did you buy a little less? Or did you grumble and keep buying the same amount?

That difference in your behaviour is exactly what Price Elasticity of Demand (PED) measures. It answers one simple question: When the price changes, how much does the quantity demanded change?

The Intuition First

Some goods are necessities — things you cannot easily do without. If the price of life-saving insulin rises, a diabetic patient will still buy almost the same amount. Their demand is insensitive to price.

Other goods are luxuries or have close substitutes. If the price of a particular brand of packaged juice doubles, you can easily switch to another brand, or drink water instead. Your demand is sensitive to price.

PED is just a number that captures this sensitivity. It tells sellers and policymakers: "If you change the price by 1%, by what percentage will the quantity demanded change?"

The Precise Definition (NCERT Standard)

The NCERT textbook defines Price Elasticity of Demand as:

Or, more formally:

Where:

• $E_d$ = Price elasticity of demand (a pure number, no units)
• $Q$ = Original quantity demanded
• $\Delta Q$ = Change in quantity demanded ($Q_{new} - Q_{old}$)
• $P$ = Original price
• $\Delta P$ = Change in price ($P_{new} - P_{old}$)

The Five Types of Elasticity

The value of $E_d$ tells you the nature of the good:

| Value of $|E_d|$ | Term | What it means | Real-world example |

|---|---|---|---|---|

| $|E_d| = 0$ | Perfectly inelastic | Quantity demanded does not change at all when price changes | Life-saving drugs, salt (in very small quantities) |

| $0 < |E_d| < 1$ | Inelastic demand | Quantity changes by a smaller percentage than price | Petrol, electricity, basic food items |

| $|E_d| = 1$ | Unitary elastic | Quantity changes by exactly the same percentage as price | A theoretical midpoint; rare in real life |

| $1 < |E_d| < \infty$ | Elastic demand | Quantity changes by a larger percentage than price | Luxury cars, branded clothes, restaurant meals |

| $|E_d| = \infty$ | Perfectly elastic | Consumers will buy any amount at a given price, but nothing at a higher price | A farmer selling wheat in a perfectly competitive market |

Why Does This Matter? (The "So What?")

For a business: Elasticity determines what happens to total revenue when you change price.

The Everyday Intuition: Why Did My Chai Cost More Last Month?

Think about the chai-wala near your school. One month, a sudden cold wave hits your city. Everyone wants hot chai. The chai-wala can only make so many cups per hour. What happens? He might raise the price from ₹10 to ₹12. You grumble, but you still buy it because you're cold. That's demand shifting — more people wanting chai at every price.

Now imagine a different scenario: a truckers' strike makes milk and sugar expensive to transport. The chai-wala now has to pay more for his ingredients. He can't afford to sell chai at ₹10 anymore. He raises the price to ₹12 just to cover his costs. That's supply shifting — the cost of making chai has changed.

These two stories feel similar — price goes up in both — but the reason is completely different. And that difference is the entire point of this concept.

The Precise Meaning: What "Shift" Actually Means

In economics, demand and supply are not single numbers. They are schedules — a whole list showing how much buyers want (or sellers offer) at every possible price. We draw them as curves on a graph: price on the vertical axis, quantity on the horizontal.

A shift means the entire curve moves — left or right. This is different from a movement along the curve, which happens when only the price changes.

Demand Shift

The demand curve shows: "At price ₹P, buyers want quantity Q." If something other than price changes how much people want, the whole curve shifts.

Rightward shift (increase in demand): At every price, buyers want more than before.

Leftward shift (decrease in demand): At every price, buyers want less.

What causes a demand shift? NCERT Class 12 (Introductory Microeconomics, Chapter 5) lists these factors:

• Change in income: For normal goods, higher income → more demand at every price. For inferior goods (like cheap noodles), higher income → less demand.
• Change in tastes/preferences: A health report praising green tea shifts its demand curve right.
• Change in price of related goods:
  • Substitutes (tea and coffee): If coffee becomes expensive, tea demand shifts right.
  • Complements (petrol and cars): If petrol becomes expensive, car demand shifts left.
• Expectations about future prices: If you think chai will cost ₹15 next week, you buy more today — demand shifts right now.
• Number of buyers: More population → more demand at every price.

Supply Shift

The supply curve shows: "At price ₹P, sellers offer quantity Q." If something other than price changes their willingness or ability to sell, the whole curve shifts.

Rightward shift (increase in supply): At every price, sellers offer more.

Leftward shift (decrease in supply): At every price, sellers offer less.

NCERT lists these causes:

• Change in input prices: Cheaper raw materials → supply shifts right. Costlier inputs → supply shifts left.
• Change in technology: Better machines → produce more at same cost → supply shifts right.
• Change in price of other goods (for multi-product firms): If a farmer can grow wheat or rice, and wheat price rises, they shift land to wheat — rice supply shifts left.
• Expectations: If sellers expect higher prices next month, they may hold back stock today — supply shifts left.
• Number of sellers: More firms enter the market → supply shifts right.
• Taxes and subsidies: A tax on production shifts supply left (costs rise). A subsidy shifts supply right (costs fall).

Why It Matters: The New Equilibrium

The market price is determined where demand and supply curves intersect. That intersection is called equilibrium. When a curve shifts, the equilibrium changes.

Here is what happens in words (and you should draw this):

Case 1: Demand shifts right (increase in demand)

• At the old price, there is now excess demand — buyers want more than sellers offer.
• Sellers raise price. As price rises, some buyers drop out, and sellers produce more.
• New equilibrium: Higher price, higher quantity. …