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What is meant by price elasticity of demand? Explain briefly any five factors affecting elasticity of demand.

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Why is a consumer in equilibrium, only at the point of tangency of the budget line with an indifference curve?

 

Answer:

Price elasticity of demand measures the degree of responsiveness of quantity demanded of responsiveness of quantity demanded of a commodity to a change in its price. Price Elasticity of Demand for a commodity is defined as the percentage change in quantity demanded for the commodity divided by the percentage change in its price. Some of the important determinants of price elasticity of demand are as follows: (any five) (i) Nature of the Commodity Nature of the commodity is an important determinant of the price Elasticity of Demand. Necessities like food items and prestige goods have an inelastic demand, While luxuries and comforts have comparatively elastic demand. (ii) Availability of Substitutes The demand for commodities having close substitutes is very elastic because if there is an increase in the price of the commodity, their people will start using substitute commodities.            (iii) Postponement of Consumption The demand for commodities is elastic, whose consumption can be postponed for some time such as the demand of television otherwise it is inelastic as in the case if medicines.                           (iv) Different Uses of the Commodity A commodity which has several uses will have an elastic demand. On the other hand, a commodity having only one use will have inelastic demand, e.g. milk, steel, etc have elastic demand because they can be put to several uses. (v) Time Period Generally, longer the duration of period, greater will be the elasticity of demand because consumer have enough time to adjust their demand and vice-versa. (vi) Habits If consumers are habituated of some commodities, the demand for such commodities will usually be inelastic, e.g. alcohol. (vii) Proportion of Income Spent on the Goods Items such as toothpaste, needle will have an inelastic demand as consumers spend a small proportion of their income on such items. On the other hand, goods on which the consumers spend a large proportion of their income (cloth, food, etc) tend to have elastic demand.                       Or Consumer's equilibrium is a point where budget line is tangent to Indifference Curve (1C) or equilibrium is achieved where slope of Indifference Curve is equal to the slope of budget line or price line.                    Two conditions of the consumer's equilibrium are given below:             (i)         \[_{XY}=\frac{{{P}_{X}}}{{{P}_{Y}}}\]  (ii) At the point of equilibrium, Indifference Curve must be convex to the origin. It implies that at the point of equilibrium, MRS must be diminishing.                 Diagram Showing Consumer's Equilibrium In the given diagram, E is the equilibrium point at which budget line touches the higher Indifference Curvel\[l{{C}_{2}}\]. Points 'A and 'B' lie on, which offer lower \[l{{C}_{1}}\]level of satisfaction to the consumer and \[l{{C}_{3}}\]not affordable as per the income of consumer and prices of the two goods. So, the consumer is at equilibrium at point 'E' only, where the indifference curve is tanget to the budget line MM.