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Types of Elasticity of Demand

This document discusses the different types of elasticity of demand. There are three main types: (1) price elasticity of demand, which measures responsiveness of quantity demanded to price changes; (2) income elasticity of demand, which measures responsiveness of quantity demanded to changes in consumer income; and (3) cross elasticity of demand, which measures responsiveness of demand for one good to price changes in related goods. Each type can be classified as elastic, inelastic, or unitary based on the percentage change in quantity demanded relative to the percentage change in the influencing factor.

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Vijeta Shukla
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871 views

Types of Elasticity of Demand

This document discusses the different types of elasticity of demand. There are three main types: (1) price elasticity of demand, which measures responsiveness of quantity demanded to price changes; (2) income elasticity of demand, which measures responsiveness of quantity demanded to changes in consumer income; and (3) cross elasticity of demand, which measures responsiveness of demand for one good to price changes in related goods. Each type can be classified as elastic, inelastic, or unitary based on the percentage change in quantity demanded relative to the percentage change in the influencing factor.

Uploaded by

Vijeta Shukla
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Name: Abhishek Rawat

Sap id: 500085479

Assignment

Types of Elasticity of Demand


Elasticity- It is central concept in economics which is applied in many situations. Basic
demand and supply analysis explain that economic variables, such as price, income and
demand are casually related. It can provide important information about strength and
weakness of such relationship. It refers to positively of economic variable such as quantity
demanded to change in another variable such as price.
Demand- It refers to the quantity of a good that consumers are willing and able to purchase
at different prices during a given period of time.
Elasticity of Demand- It refers to the responsiveness of the quantity demanded of a good to
changes in one of the variables on which demand depends. In other words, it is the percentage
change in quantity demanded divided by the percent in one of the variables on which demand
depends.
The variables on which demand can depend on are:
 Price of good.
 Prices of related goods.
 Consumer’s income.
Example: Due to government subsidy, the price of wheat falls from10 /kg to 9/kg. Due to
this, the demand increases from 500 kilograms to 520 kilograms.
(Note here, we notice that as the price decreases, the demand increases. Hence, the demand
for wheat responds to price changes)

Types of Elasticity of Demand


Based on the variable that affects the demand, the elasticity of demand is of the following
type.

It may be of three types: 


(a) Price elasticity of Demand.
(b) Income elasticity of Demand.
(c) Cross elasticity of Demand.

(a) Price elasticity of Demand- The degree of responsiveness of quantity demanded to


changes in price of commodity is known as price elasticity of Demand.

There are five degrees of price elasticity of demand.

1. Perfectly elastic demand


2. Relatively elastic demand
3. Elasticity of demand equal to utility
4. Relatively inelastic demand
5. Perfectly inelastic demand

Unitary elastic demand: If percentage change in the quantity demanded is equal to


percentage change in price of the commodity, then ED = 1 and the result is known as unitary
elastic demand.

Relatively elastic demand- If percentage change in quantity demanded is more than the
percentage change in price of the commodity then, ED > 1 and result is known as more than
unit elastic demand.

Relatively inelastic demand- If percentage change in quantity demanded is less than the
percentage change in price of the commodity, then ED < 1 and the result is known as less
than unit elastic demand.
Perfectly elastic demand- If quantity demand changes and price remains constant, then
ED=∞ and the result is known as perfectly elastic demand.

Perfectly inelastic demand- If price is changed, and quantity demanded constant, then
ED=0 and the result is known as Perfectly Inelastic demand.

(b) Income elasticity of Demand- The degree of responsiveness of demand to change


in income of consumer is known as income elasticity of demand.
Income Elasticity = Percentage Change in Quantity Demanded
Percentage Change in Income

Types of Income Elasticity of Demand


Zero income elasticity: A given increase in the consumer’s money income does not result in
any increase in the quantity demanded of a commodity (Ei = 0).

Negative income elasticity: A given increase in the consumer’s money income is followed
by an actual fall in the quantity demanded of a commodity. This happens in the case of
economically inferior goods (Ei < 0).

Unitary income elasticity- A given proportionate rise in the consumer’s money income is
accompanied by an equally proportionate rise in the quantity demanded of a commodity and
vice versa (Ei=1).
Income elasticity of demand greater than unity- For a given proportionate rise in the
consumer’s money income, there is a greater proportionate rise in the quantity demanded of a
commodity. Ei is greater than unity. This is in case of luxuries.

Income elasticity of demand less than unity- For a given proportionate rise in the
consumer’s money income, there is a smaller proportionate rise in the quantity demanded of a
commodity. The income elasticity of demand is less than one.

(c) Cross elasticity of Demand- The degree of responsiveness of demand to change in


the price of related goods (substitute goods, complementary goods) is known as cross
elasticity of demand.

Substitutes- With substitute goods such as brands of cereal, an increase in the price of one
good will lead to an increase in demand for the rival product. The cross price elasticity for
two substitutes will be positive. 
Complements- Complements are in joint demand. The stronger the relationship between two
products, the higher is the co-efficient of cross-price elasticity of demand. When there is a
strong complementary relationship, the cross elasticity will be highly negative.
An example might be games consoles and software games

Types of Cross Elasticity of Demand


Positive Cross Price Elasticity (Substitutes) - Positive Cross Price Elasticity occurs when
the price of product X increases, the demand for product Y also increases.
Negative Cross Price Elasticity (Complementary) - Negative Cross Price Elasticity occurs
when the price of product X increases, the demand for product Y decreases.

Unrelated Cross Price Elasticity- When the price of product X can increase by 100 percent,
but have no effect of demand for product Y.

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