Price Elasticity of Demand for Rice
Price elasticity of demand is a unit-free measure of the responsiveness or sensitiveness of the quantity of a good or service demanded to change in its price when all other influences on buying plans remain the same.
Elastic demand is defined as a large percentage change in quantity demanded for given percentage change in price. Inelastic demand is defined as a small percentage change in quantity demanded for given percentage change in price. Unit elastic demand is defined as given in percentage change in price, there will be an equal percentage change in quantity demanded.
Calculating Price Elasticity of Demand
The graph above shows that the price of rice has risen from P0 to P1. If the coefficient of price elasticity of demand is between 0 and 1, therefore the demand is in elastic. For example, a 10% rise in price of rice might cause the demand for rice to decrease by 5%.
If price elasticity of demand is lesser than 1, therefore the demand responds more to a change of price. Therefore, the demand for rice is elastic.
There are a few determinants of elasticity for rice. The availability of substitutes. The more substitutes a particular product has, the more elastic the demand. For example, rice can be substituted with bread. Next, level of income. People with higher incomes tend to have an inelastic demand. For example, people with high income don’t have a problem the rise of price for rice. Then, price of the product itself. The more expensive a particular product, the more elastic it is.
The price elasticity of demand is affected by the time period allowed following a price change. The longer the consumers have to respond to a price change, the more elastic the price. If the rise of price in rice is long-term, consumers should change their consumption decisions or find substitutes.
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