Concept of Elasticity
INTRODUCTION The Law of Demand states that “Other things remaining the same the demand for a commodity increases when its price falls and it decreases when its price increases.”Thus according to the law of demand there is an inverse relationship between price and quantity demanded, other things remaining the same. These other things which are assumed to be constant are taste or preference of the consumer, income of the consumer, prices of related goods etc .If these factors undergo a change, then the inverse relationship may not hold good. However we also observe that for commodities like salt or rice we do not notice much of a change in demand whereas in case of goods like Air conditioners, Cars etc even with a small change there is substantial increase in demand. The Law of demand while stating the relationship between demand and price mentions only the direction of change in demand but does not mention anything about the magnitude of the change which is very essential in decision making process for the producer and Government.
For example: "If I lower the price of my product, will the sale increase?" "If I raise the price, will it affect my profit?" “If sales tax rate is increased will it have an effect on the revenue collection?"are questions that need to be answered.