Topic: “Elasticity of Demand and Managerial Decision Making”

The demand of a commodity depends on the size of the total market or industry demand for the commodity which in turn is the sum of demands for the commodity of the individual consumers in the market.
The demand for a commodity arises from the consumers’ willingness and ability to purchase the commodity. Consumer Demand Theory postulates that the quantity demanded of a commodity is a function of the price of the commodity, the consumers’ income, the price of the complementary and substitute commodities and the taste of the consumer.
It is also expressed as:
Qdx=f(Px, I, Py, T)
Where
Qdx = Quantity demanded of the commodity X by an individual per time period
Px = Price per unity of commodity Y
I = Consumer income
Py = Price of substitute or complementary commodity
T = Consumer taste

When the firm increases the price of a commodity, sales generally decline. A manager expects an inverse relationship between the quantity demanded of a commodity and its price. On the other hand, when a consumer’s income rises, he/ she usually purchases more of most commodities, known as normal goods. There are some goods and services, however, which the consumer purchases less as income increases, which are termed as inferior goods.
The inverse relationship between the price and the quantity demanded of the commodity per time period is the individual’s demand schedule for the commodity, and the plot of data gives the corresponding individual’s demand curve. The inverse relationship between the price of the commodity and the quantity demanded per time period is referred to as law of demand.
The responsiveness in the quantity demanded of a commodity to a change in its price could be measured by the inverse of the slope of the demand curve.
The price elasticity of a demand (Ep) is given by the