Question
Distinguish between law of demand and price elasticity of demand. Identify the factors on which
price elasticity of depend. How does elasticity of demand help the economic agentsin decision making.
Answer :
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Skip in 10
The law of demand and price elasticity of demand are closely related concepts in microeconomics, but they are not identical. The law of demand explains the general relationship between the price of a commodity and its quantity demanded, whereas price elasticity of demand measures the degree or responsiveness of quantity demanded to a change in price. Both concepts are important for understanding consumer behaviour, market outcomes, pricing decisions and the allocation of resources. The law of demand states that, other things remaining constant, there is an inverse relationship between the price of a commodity and its quantity demanded. Thus, when the price of a commodity rises, its quantity demanded generally falls, and when the price falls, its quantity demanded generally rises. This relationship is represented by a downward-sloping demand curve. For example, if the price of apples decreases from ₹100 per kilogram to ₹80 per kilogram, consumers may purchase more apples, assuming their income, tastes, prices of related goods and other relevant factors remain unchanged. The law of demand is essentially a qualitative statement. It tells us the direction of change in quantity demanded resulting from a change in price. It does not tell us how much quantity demanded will change. Price elasticity of demand, on the other hand, provides a quantitative measure of this responsiveness. It measures the percentage change in quantity demanded caused by a percentage change in the price of the commodity. Price elasticity of demand can be expressed as: Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price Since price and quantity demanded generally move in opposite directions, the numerical value of price elasticity is normally negative. However, economists generally use the absolute value of elasticity for interpretation. There are several important differences between the law of demand and price elasticity of demand. First, the law of demand describes the direction of the relationship between price
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