Elasticity

of
Demand
Meaning

Elasticity of demand is the responsiveness of the

quantity demanded of a commodity 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 percentage change in
one of the variables on which demand depends.
The variables on which demand can depend on are:

 Price of the commodity

 Prices of related commodities
 Consumer’s income, etc.
Price elasticity of demand

It is a measurement of the degree of change in

demand in response to a change in own price of
the commodity. It is assumed that the
consumer’s income, tastes, and prices of all
other goods are constant.
Degrees of Elasticity of Demand

(i) Ed = ∞ Perfectly Elastic

Change in Demand and Price remains same
(ii) Ed = 0 Perfectly Inelastic
Change in Price and Demand remains same
(iii) Ed = 1 Unitary Elastic
Change in Demand = Change in Price
(iv) Ed > 1 Elastic
Change in Demand > Change in Price
(v) Ed < 1 Inelastic
Change in Demand < Change in Price
 Factors affecting
Price elasticity of demand

(i) Nature of a commodity

(ii) Availability of Substitute goods
(iii) Multiple uses
(iv) Postponement of uses
(v) Income level of a consumer
(vi) Habit of Consumers
(vii) Proportion of a income spent on a good
Price of other goods

It is the ratio of proportionate change in the

quantity demanded of Y to a given
proportionate change in the price of the
related commodity X.
It is a measure of relative change in the
quantity demanded of a commodity due to a
change in the price of its substitute /
complementary.
Types of Cross Elasticity of Demand:

1. Positive:

When goods are substitute of each other then

cross elasticity of demand is positive. In other
words, when an increase in the price of Y leads to
an increase in the demand of X. For instance, with
the increase in price of tea, demand of coffee will
increase.

2. Negative:
In case of complementary goods, cross elasticity of
demand is negative. A proportionate increase in
price of one commodity leads to a proportionate fall
in the demand of another commodity because both
are demanded jointly.
3. Zero:

Cross elasticity of demand is zero when two goods

are not related to each other. For instance,
increase in price of car does not effect the demand
of cloth. Thus, cross elasticity of demand is zero.
 Income elasticity of demand

It measures the responsiveness of demand for a

particular good to changes in consumer income.
The higher the income elasticity of demand in
absolute terms for a particular good, the bigger
consumers' response in their purchasing habits—if
their real income changes.
 Types of Income Elasticity of Demand
There are five types of income elasticity of demand:

1. High: A rise in income comes with bigger

increases in the quantity demanded.

2. Unitary: The rise in income is proportionate to

the increase in the quantity demanded.

3. Low: A jump in income is less than

proportionate than the increase in the quantity
demanded.

4. Zero: The quantity bought/demanded is the

same even if income changes.

5. Negative: An increase in income comes with a

decrease in the quantity demanded.
 Types of goods and how calculations can
determine the type of goods you sell.

Inferior goods:

Inferior goods have a negative calculation for

income elasticity on demand, leading to a drop in
demand when income increases. Some examples
of these goods include coffee and store-brand
products like cereal or paper towels. People with
higher incomes tend to purchase name-brand
products because they're willing to pay more for
what they perceive as a quality product.
Normal goods:

A normal good is the result of a positive calculation

because the increase in income matches the
demand for the product. They can be referred to as
necessity goods if they fall between 0 and 1 in the
calculation because people buy these products
despite their income levels like water or electricity.

Luxury goods:

A luxury good has an income elasticity of demand

over one. However, buying habits remain sensitive
for buyers of luxury goods due to these costs being
non-essential. Therefore, changes to economic
activity change determine if a consumer buys a
boat, a sports car or another luxury good.