Definition: The Price Elasticity of Demand is commonly known as the elasticity of demand which refers to the degree of responsiveness of demand to the change in the price of the commodity.
i. Perfectly Elastic Demand (E_p = \(\infty \)):
The demand is said to be perfectly elastic when a slight change in the price of a commodity causes an infinite. change in its quantity demanded. Such as, even a small rise in the price of a commodity can result in greater fall in demand even to zero. In some cases a little fall in the price can result in the increase in demand to infinity. In perfectly elastic demand the demand curve is a horizontal straight line parallel to x axis.

ii. Perfectly Inelastic Demand (E_p = 0)
When there is no change in the product due to the change in the price, then the demand is said to be perfectly inelastic. Here, the demand curve is a vertical straight line which shows that the demand remains unchanged irrespective of change in the price., i.e. quantity OQ remains unchanged at different prices, P₁P ₂, and P₃.

iii. Relatively Elastic Demand: (E_p > 1)
The demand is relatively elastic when the proportionate change in the demand for a commodity is greater than the proportionate change in Its price. Here, the demand curve is gradually sloping which shows that a proportionate change in quantity from 5 to 10 is greater than the proportionate change in the price from 11 to 10. Change in demand is: 10-5/5 x 100 = 100%
Change in price =10%. Hence, it is more elastic demand.

Relatively Inelastic Demand: (E_p < 1)
When the proportionate change in the demand for a product is less than the proportionate change in the price, the demand is said to be relatively inelastic. It is also called as the elasticity less than unity. Here the demand curve is steeply sloping, which shows that the change in the quantity from OQ₀ to OQ₁ is relatively smaller than the change in the price from OP₁ to OP_2.

v. Unitary Elastic Demand (E_p = 1):
The demand is unitary elastic when the proportionate change in the price of a product results in the same propionate change in the quantity demand here the shape of the demand curve is a rectangular hyperbola, which shows that area under the curve is equal to one. Here OP₀R ₀Q ₀= OP ₁R ₁Q ₁.
 

Introduction:
(i) The law of demand explains the direction of change in demand due to change in price.
(ii) Elasticity of demand explains the rate of change in quantity demanded due to a given change in price.
Definition:
Elasticity of demand describes the degree of responsiveness of the quantity demand for a commodity to a change in its price - Stonier and Hague.
Types:

There are four methods of measuring price elasticity of demand.
Percentage Method:
It is known as ratio method.
\(\mathrm{e_p}=\frac{\Delta \mathrm{Q}}{\Delta \mathrm{P}} \times \frac{\mathrm{P}}{\mathrm{Q}} \text { or } \frac{\% \Delta \mathrm{Q}}{\% \Delta \mathrm{P}} \text { where } \frac{\% \Delta \mathrm{Q}}{\% \Delta \mathrm{P}}=\frac{\text { Percentage change in demand }}{\text { Percentage change in price }}\)
Total Outlay Method:
Marshall suggested that this is the simplest way to decide whether demand is elastic or inelastic.
Total Revenue (Outlay) = Price x Quantity sold

Point (or) Geometrical Method:
The point elasticity in a straight line or linear demand curve is the ratio of the segments of the line to the right and to the left of the particular point.
\(Point\ elasticity=\frac{Lower\ segment\ of\ the\ demand\ curve\ below\ the\ given\ point}{Upper\ segment\ of\ the\ demand\ curve\ above\ the\ given\ point}\)

Introduction:
(i) The law of diminishing marginal utility was extended and is called Law of Equi marginal utility
(ii) Law of substitution or Law of consumer's Equilibrium or Gossen's II law or law of maximum satisfaction.
Definition:
Marshall, "If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. For, if it had a greater marginal utility in one use than another, he would gain by taking away some of it from the second use and applying it to first.
Assumption
(i) Consumer is rational and wants maximum satisfaction.
(ii) Utility is measurable in cardinal numbers.
(iii) Marginal utility of money is constant.
(iv) Income of the consumer is given.
(v) There is perfect competition.
(vi) Price is given.
(vii) Law of diminishing marginal utility operates
Explanation:
(i) The consumer has Rs. 11.
(ii) He wants to spend it on apple ( Rs 1 each) and orange (Rs. 1 each)
(iii) He will be in equilibrium only when he gets maximum satisfaction ie.
\(\mathrm{K}=\frac{\text { Marginal utility of apple }}{\text { Price of apple }}=\frac{\text { Marginal utility of orange }}{\text { Price of orange }}\)
If is \(\frac{\mathrm{MU_A}}{\mathrm{P_A}}\) less than \(\frac{\mathrm{MU_O}}{\mathrm{P_O}}\) he would transfer money from apple to orange till it is equal.
He should buy 6 units of apple & 5 units of oranges. He gets (92 + 58) = 150 units satisfaction.
\(\frac{\mathrm{MU_A}}{\mathrm{P_A}}=\frac{\mathrm{MU_O}}{\mathrm{P_O}}=\frac{4}{1}=\frac{4}{1}\)

Apple				orange
Units of Commodities	Total Utility	marginal Utility	Total Utility	marginal Utility
1	25	25	30	30
2	45	20	41	11
3	63	18	49	8
4	78	15	54	5
5	88	10	58	4
6	92	4	61	3

Explanation:
(i) X axis shows amount of money spent
(ii) Y axis shows marginal utility of apple and orange.
(iii) If consumer spends Rs.6 on apple and Rs.5 on orange MU will be equal.
(iv) ie. AA₁ = BB₁ = 4 = 4. So he gets maximum utility.
Criticisms:
(i) Utility cannot be measured.
(ii) No consumer compares the utility and disutility from each unit of the commodity while buying it.
(iii) This law cannot be applied to durable goods.
Conclusion:
(i) The law of equi marginal utility is an improvement over the law of diminishing marginal utility because it can be used for many commodities consumed at the same time.

Introduction:
(i) H.H Gossen first formulated this law.
(ii) So Jevons called it "Gossen's First law of consumption"
(iii) Marshall perfected it on the basis of cardinal analysis.
(iv) It is based on the satiable character of human wants.
Definition
Marshall states the law as "the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has".
Assumptions
(i) Utility can be measured - 1,2,3.
(ii) Marginal utility of money is constant.
(iii) The consumer is rational. He wants maximum satisfaction.
(iv) The units consumed must be reasonable in size.
(v) The commodity must be homogeneous.
(vi) The consumption must be continuous.
(vii) There is no change in taste, habit, preferences, fashion, income & character of the consumer.
Illustration:
(i) Suppose a consumer wants to consume 7 apples one after another.
(ii) The utility from the first apple is 20.
(iii) The utility from the 2^nd apple is less than the first (15), the utility from the 3^rd apple is less than the 2^nd (10) and so on.
(iv) Finally the utility from the 5th apple becomes zero and the utility from the 6th apple is -5.

Number of Apples	Total utility	Marginal Utility
1	20	20
2	35	15(35 - 20)
3	45	10(45 - 35)
4	50	5 (50 - 45)
5	50	0 (50 - 50)
6	45	-5 (45- 50)
7	35	-10 (35-45)

Explanation:
(i) TU goes on increasing but at a diminishing rate.
(ii) MU goes on diminishing
(iii) When MU is zero TU is maximum.
(iv) When MU becomes negative, TU diminishes.
Criticism:
(i) Utility is subjective so cannot be measured numerically.
(ii) The assumptions are unrealistic.
(iii) The law is not used for indivisible commodities.
Exceptions:
(i) Hobbies
(ii) Drunkards
(iii) Readings
(iv) Misers
(v) Music
(vi) Poetry
Importance:
(i) It is a fundamental law of consumption.
(ii) It is the basis for the law of demand, elasticity of demand, consumer's surplus.
(iii) Finance Minister uses it for progressive taxation.
(iv) Redistribution of income is justified.
(v) Adam Smith uses it for his "diamond water paradox".
Conclusion:
The law of diminishing marginal utility is of great use in our daily life.

Introduction:
(i) The law of demand was first stated by Augustin Cournot.
(ii) It was refined by Alfred Marshall.
Definition:
Marshall - "The quantity demanded increases with a fall in price and diminishes with a rise in price".
Samuelson - "People will buy more at lower price and buy less at higher prices, other things remaining the same".
Assumptions:-
(i) The income of the consumer remains constant.
(ii) The taste, habit and preference of the consumer remain the same.
(iii) Price of other related goods is constant.
(iv) No substitute for the commodity.
(v) The demand for that commodity is continuous
(vi) No change in the quality of the commodity.
If there is a change in one of these above assumptions the law will not operate.
Demand schedule
Price Quantity demanded 5 1 4 2 3 3 2 4 1 5 Demand curve

Explanation:
(i) X axis represents quantity demanded
(ii) Y axis represents the price.
(iii) DD is the demand curve.
It slopes downward from left to right - when price falls, demand expands and vice versa.
Market demand:
The market demand curve shows the addition of the demand curve of the buyers A, B and C at the same price.

Like the individual demand curve, the market demand curve is at a price, at a place and at a time. It has a negative slope.
Determinants of demand:
1. Change in taste and fashion
2. Change in weather
3. Change in expectations
4. Change in savings
5. Taxation and subsidy
6. State of trade activity
7. Advertisement
8. Change in income
9. Change in population
Exceptions:
Giffen Paradox (inferior good)
(i) When the price of an inferior good falls, the poor will buy less. (eg.) ragi.
Veblen or Demonstration effect
(i) Rich people buy some goods because it gives social prestige (eg.) diamond.
Ignorance
(i) Some consumers think that the product is superior if the price is high. So they buy more at a higher price.
Speculative effect
(i) When the price increases they buy more of it because of the expectation that the price will increase still further. (eg.) stock market.
Fear of shortage:
(i) During emergency or war, people expect shortage of a commodity and so buy more.
Conclusion: Thus the law of demand explains the inverse relationship between price and quantity demanded.