Nature of the commodity: Generally, all commodities can be dividend into three categories i.e.

(i) Necessaries of Life. For necessaries of life the demand is inelastic because people buy the required amount of goods whatever their price. For example, necessaries such as rice, salt, cloth are purchased whether they are dear or cheap.

(ii) Conventional Necessaries. The demand for conventional necessaries is less elastic or inelastic. People are accustomed to the use of goods like intoxicants which they purchase at any price. For example, drunkards consider opium and wine almost as a necessity as food and water. Therefore, they buy the same amount even when their prices are higher and highest.

(iii) Luxury Commodities. The demand for luxury is usually elastic as people buy more of them at a lower price and less at a higher price. For example, the demand of luxuries like silk, perfumes and ornaments increases at a lower price and diminishes at a higher price. Here, we must keep in mind that luxury is a relative term, which varies from person to person, place to place and from time to time. For example, what is a luxury to a poor man is a necessity to the rich. The luxury of the past may become a necessity of today. Similarly a commodity which is a necessity to one class may be a luxury to another. Hence, the elasticity of demand in such cases should have to be carefully expressed.

2. Substitutes. Demand is elastic for those goods which have substitutes and inelastic for those goods which have no substitutes. The availability of substitutes, thus, determines the elasticity of demand. For instance, tea and coffee are substitutes. The change in the price of tea affects the demand for coffee. Hence, the demand for coffee and tea is elastic. 3. Number of Uses. Elasticity of demand for any commodity depends on its number of uses. Demand is elastic; if a commodity has more uses and inelastic if it has only one use. As coal has multiple uses, if its price falls it will be demanded more for cooking, heating,

industrial purposes etc. But if its price rises, minimum will be demanded for every purpose.

4. Postponement. Demand is more elastic for goods the use of which can be postponed. For example, if the price of silk rises, its consumption can be postponed. The demand for silk is, therefore, elastic. Demand is inelastic for those goods the use of which is urgent and, therefore, cannot be postponed. The use of medicines cannot be put off. Hence, the demand for medicines is inelastic.

5. Raw Materials and Finished Goods. The demand for raw materials is inelastic but the demand for finished goods is elastic. For instance, raw cotton has inelastic demand but cloth has elastic demand. In the same way, petrol has inelastic demand but car itself has only elastic demand.

6. Price Level. The demand is elastic for moderate prices but inelastic for lower and higher prices. The rich and the poor do not bother about the prices of the goods that they buy. For example, rich buy Benaras silk and diamonds etc. at any price. But the poor buy coarse rice, cloth etc. whatever their prices are.

7. Income Level. The demand is inelastic for higher and lower income groups and elastic for middle income groups. The rich people with their higher income do not bother about the price. They may continue to buy the same amount whatever the price. The poor people with lower incomes buy always only the minimum requirements and, therefore, they are induced neither to buy more at a lower price nor less at a higher price. The middle income group is sensitive to the change in price. Thus, they buy more at a lower price and less at higher price.

8. Habits. If consumers are habituated of some commodities, the demand for such commodities will be usually inelastic. It is because that the consumer will use them even their prices go up. For example, a smoker does not smoke less when the price of cigarette goes up.

9. Nature of Expenditure. The elasticity of demand for a commodity also depends as to how much part of the income is spent on that particular commodity. The demand for such

newspaper, boot-polish etc. On the other hand, the demand of such commodities where a significant part of income is spent, elasticity of demand is very elastic.

10. Distribution of Income. If the income is uniformly distributed in the society, a small change in price will affect the demand of the whole society and the demand will be elastic. In case of unequal distribution of income and wealth, a change in price will hardly influence the poor section of the society and the demand will be relatively inelastic. 11. Influence of Diminishing Marginal Utility. We know that utility falls when we consume more and more units but not in a uniform way. In case utility falls rapidly, it means that the consumer has no other near substitutes. As a result, demand is inelastic. Conversely, if the utility falls slowly, demand for such commodity would be elastic and raises much for a fall in price.

8.6 MEASUREMENT OF PRICE ELASTICITY OF DEMAND There are five methods to measure the price elasticity of demand. 1. Total Expenditure Method.

2. Proportionate Method. 3. Point Elasticity of Demand. 4. Arc Elasticity of Demand. 5. Revenue Method.

Total Expenditure Method

Dr. Marshall has evolved the total expenditure method to measure the price elasticity of demand. According to this method, elasticity of demand can be measured by considering the change in price and the subsequent change in the total quantity of goods purchased and the total amount of money spend on it.

Total Outlay = Price x Quantity Demanded. There are three possibilities:

(i) If with a fall in price (demand increases) the total expenditure increases or with a rise in price (demand falls) the total expenditure falls, in that case the elasticity of demand is greater than one i.e. (Ed >1.)

(ii) If with a rise or fall in the price (demand falls or rises respectively), the total expenditure remains the same, the demand will be unitary elastic i.e. (Ed = 1).

(iii) with a fall in price (Demand rises), the total expenditure also falls, and with a rise in price (Demand falls) the total expenditure also rises, the demand is said to be less elastic or elasticity of demand is less than one i.e. (Ed <1).

Table Representation: The method of total expenditure has been explained with the help of Table 3.

Table 3 Price (P) Quantity Demanded

(Q) Total Outlay Elasticity of demand (Ed) 10 9 8 7 1 2 3 4 .10 18 24 28 Ed > 1 6 5 5 6 .30 30 Ed = 1 4 3 2 1 7 8 9 10 .28 24 18 10 Ed < 1

In the above Table 3, we find three possibilities:

1. More Elastic Demand. When price is Rs. 10 the quantity demanded is 1 unit and total expenditure is 10. Now price falls from Rs. 10 to Rs. 6, the quantity demanded increases from 1 to 5 units and correspondingly the total expenditure increases from Rs. 10 to Rs. 30. Thus it is clear that with the fall in price, the total expenditure increases and vice- versa. So elasticity of demand is greater than one or Ed > 1.

2.Unitary Elastic Demand. If price is Rs. 6, demand is 5 units so the total outlay is Rs. 30. Now price falls to Rs. 5, the demand increases to 6 units but the total expenditure remains the same i.e., Rs. 30. Thus it is clear that with the rise or fall in price, the total expenditure remains the same. The elasticity of demand in this case is equal to one or Ed

3.Less Elastic Demand. If price is Rs. 5, demand is 6 and total outlay is Rs. 30. Now price falls from Rs. 5 to Re. 1. The demand increases from 6 units to 10 units and hence the total expenditure falls from Rs. 30 to Rs. 10. Thus it is clear that with the fall in price, the total expenditure also falls and vice-versa. In this case, the elasticity of demand is less

than one or Ed<l. Fig. 19

Diagrammatic Representation:

Measurement of price elasticity through total expenditure method can be shown with the help of fig. 19

In the figure 19 total expenditure has been shown on X-axis and price on Y-axis. Line TT' is the total expenditure line. When price of the commodity falls from OP to OP1 total expenditure increases from OM1 to OM2. The elasticity of demand is greater than one as is shown in TB portion of the figure. Now, suppose that the price of the commodity decreases from OP1 to OP3 the total expenditure falls from OM2 to OM. This is shown in T'C part of the figure which represents the less than unity elasticity of demand. In the same way, BC part of the figure represents the unit elasticity of demand. Thus it is clear that the changes in total expenditure due to changes in price also affect the elasticity of demand.

Proportionate Method

This method is also associated with the name of Dr. Marshall. According to this method, "price elasticity of demand is the ratio of percentage change in the amount

demanded to the percentage change in price of the commodity." It is also known as the Percentage Method, Flux Method, Ratio Method, and Arithmetic Method.