MEANI NG

Elasticity of demand refers to the degree of responsiveness of

quantity demanded of a commodity to a change in any of its
determinants, viz., price of the commodity, price of the other
commodities and income of the consumers. It is a measure of
how sensitive the quantity demanded of a commodity is to
change in any of the factors influencing demand.
TYPES OF ELASTI CI TY OF DEMAND

There are many different types of elasticity of demand as they
are types of economic variables determining demand.
However, there are three main types of elasticity of demand:

1) Price elasticity of demand

2) Cross elasticity of demand

3) Income elasticity of demand

PRICE ELASTICITY OF DEMAND

The price elasticity of demand is a measure of how much the quantity
demanded changes when the price changes. Price elasticity of demand
may be defined as the degree of responsiveness of quantity
demanded of a commodity in response to change in its price. By
degree here we mean the rate of change. Therefore, more precisely, price
elasticity of demand refers to the ratio of percentage change in the
quantity demanded of a commodity to a given percentage change in its
price.
Thus,

Where e
p
denotes price elasticity of demand.

CLASSIFICATION OF PRICE ELASTICITY

There are five different kinds of price elasticity of demand:
1) Perfectly inelastic demand

2) Perfectly elastic demand

3) Unitary elastic demand

4) Elastic demand

5) Inelastic demand
1) Perfectly inelastic demand when quantity demanded of a
commodity does not respond to change in its price, then the elasticity of
demand is zero.
The quantity demanded remains the same, irrespective of any rise
or fall in the price of the commodity. No matter what the price, the same quantity
is demanded. It is a case of perfectly inelastic demand. A demand curve of zero
elasticity is known as perfectly or completely inelastic demand curve.
Cases of perfectly inelastic demand are very rare even in the cases of basic
necessities of life like food because even demand for basic necessities changes
because of change in price.
2) Perfectly elastic demand when consumers are prepared to purchase all
that they can get at a particular price but nothing at all at a slightly higher price,
then the price elasticity of demand for a commodity is said to be infinite.
In this case, a very small fall in price causes the demand to
increase to infinity(). A demand curve of infinite elasticity is known as perfectly or
completely elastic demand curve. In this case, demand curve is perfectly elastic.
Cases of perfectly elastic demand is extreme rare.

3) Unitary elastic demand when a given percentage change price of
commodity causes an equivalent percentage change in the quantity demanded, then
the elasticity of demand is said to be unity (or one). For example, if a fall in the price
of a commodity by 10% causes an increase in the amount purchased by 10%, the
elasticity of demand is equal to one.














4) Elastic Demand when the percentage change in quantity demanded of a
commodity exceeds the percentage change in its price, the elasticity of demand is
greater than unity. Demand is said to be relatively elastic here. For example, if a
fall in the price of a commodity by 10% causes an increase in amount demanded
by 15%, the demand is said to be elastic.
5) Inelastic demand Demand is inelastic when the
percentage change in the quantity demanded of a commodity
is less than the percentage change in its price.
The elasticity of demand here is less than unity. We
say that demand for that good is relatively inelastic. For
instance, if a fall in price of a commodity by 10% leads to an
increase in quantity demanded by 8%, the demand is
inelastic.
MEASUREMENT OF ELASTICITY OF DEMAND
Elasticity of demand for different goods is different. It is important to measure
elasticity of demand in order to compare elasticity of demand for different goods.
The measurement of elasticity of demand can be looked to from two view points:-

1) Point elasticity

2) Arc elasticity

1) Point elasticity when price elasticity of demand is measured at a point on a
demand curve, it is called point elasticity.
2) Arc elasticity when elasticity of demand is measured over a finite range or
arc of demand curve, it is called price elasticity of demand.
METHODS OF MEASUREMENT OF ELASICITY OF DEMAND

There are three methods of measurement of price elasticity of demand:-

1) Percentage or proportionate method

2) Total expenditure method

3) Point or geometric method

1) Percentage or proportionate method In this method, price elasticity of
demand is measured by the ratio of percentage change in quantity demanded to
percentage change in price of the commodity.
2) Total expenditure method According to expenditure method, elasticity of
demand can be measured by considering the change in total expenditure as a result
of change in the price of the commodity
By using this method, we can categorise three types of elasticities:

1) Elastic demand

2) Inelastic demand

3) Unitary elastic
1) Elastic demand when a fall in the price of the commodity results in an
increase in total expenditure and a rise in the price leads to decrease in total
expenditure, elasticity of demand will be greater than one.
2) Inelastic demand when a fall in price of a commodity reduces total
expenditure and a rise in price increases it, price elasticity of demand will be
less than one.
3) Unitary elastic when total expenditure does not change with change
in price of the commodity, the elasticity of demand is equal to unity.
INCOME ELASTICITY OF DEMAND

income elasticity of demand measures the degree of responsiveness of
quantity demanded of a commodity to changes in income of the consumers.
More precisely, income elasticity of demand may be defined as the ratio of
proportionate change in income of the consumers.

Income elasticity of demand can be measured with the help of
following formula:

classification of income elasticity of demand

Income elasticity of demand can be of three types:

1) Positive income elasticity

2) Negative income elasticity

3) Zero income elasticity
1) Positive income elasticity income elasticity of demand is said to be
positive when with increase in income of the consumers, the amount
purchased of a commodity increases and vice-versa. For most of the
commodities income elasticity of demand is positive because an
increase in income leads to an increase in quantity demanded.
We can classify income elasticity into three categories:
1) Income elastic if the percentage change in quantity demanded of
a commodity is greater than the percentage change in income, e
y
will
exceed unity. The demand for the commodity is said to be income
elastic.
2) Income inelastic if the percentage change in quantity demanded
is smaller than the percentage change in income, e
y
will be less than
unity. The demand for the commodity is said to be income inelastic.
3) Unit income elasticity if the percentage in the quantity demanded
is equal to percentage change in the income, e
y
will be equal to unity.

2) Negative income elasticity income elasticity of demand is said to be
negative when increase in income of the consumers leads to fall in the
amount purchased of a commodity and vice-versa.

3) Zero income elasticity income elasticity of demand may be zero in
some exceptional in some cases. Zero income elasticity of demand for a
good implies that a rise in income leaves quantity demanded unchanged.
For instance, income elasticity of demand for salt may be zero because an
increase in income beyond a certain level may not bring about a change in
demand for inexpensive goods of necessities like salt.
Cross elasticity of demand
The degree of responsiveness of quantity demanded of one
commodity to change in the price of another commodity is called cross-
elasticity of demand. More precisely, cross-elasticity of demand is defined
as the percentage change in quantity demanded of a commodity with
respect to the change in the price of its related commodity.

Cross elasticity of demand can be measured with the help of the
following formula:
TYPES OF CROSS ELASTICITY OF DEMAND
Cross elasticity of demand is of three types as below:
1) Positive cross elasticity cross elasticity of demand is said to be
positive, when increase in price of the commodity (Y) leads to an increase
in the demand for the other commodity (X). When two goods are
substitutes for each other, cross elasticity will be positive because increase
in price of one increases the demand for the other. For example, tea and
coffee are substitutes.
2) Negative cross elasticity cross elasticity of demand is said to be
negative when increase in price of Y leads to a fall in the demand for X.
Complementary goods have negative cross elasticity.
3) Zero cross elasticity cross elasticity of demand is said to be zero
when a change in the price of one commodity (Y) does not affect the
demand for another commodity (X).
FACTORS AFFECTING ELASTICITY OF DEMAND
There are many factors that determine the elasticity of demand. The main
factors are:
1) Availability of substitutes The most important determinant of the
price elasticity of demand is the number and kind of substitutes available
for a commodity. If a commodity has many close substitutes, its demand
is likely to be elastic. Even a small fall in the price will induce more
people to buy this commodity rather than its substitutes
2) Nature of the commodity Another determinant of elasticity of
demand is the nature of the commodity, i.e., whether the commodity is a
necessity or a luxury or a comfort. Demand for necessity like food is
generally inelastic as it is essential for life. On the other hand, luxury
and comforts are not essential for life and their consumption can be
postponed, thus, their demand is generally elastic. Hence, the demand
for necessities is inelastic and the demand for luxuries and comforts is
elastic.
3) Habits of the consumer Price elasticity of demand depends also
upon whether or not the consumers are habitual of using a commodity. If
consumers are habitual of consuming some commodities, they will continue
to consume them even at higher prices.

4) Postponement of consumption Elasticity of demand depends on
the possibility of postponement of consumption as well. The consumption
of clothing may be postponed and, therefore, a rise in its price may lead to
a large fall in its demand. Hence, the demand for clothing may be elastic.
But the consumption of food items can not be postponed, therefore, their
demand is inelastic.

5) The number of uses of a commodity Elasticity of demand depends
also upon the number of uses of a commodity can be put to. The greater is
the number of uses to which a commodity can be put to, the greater will be
its price elasticity of demand. If the price of the commodity is very high,
consumer will purchase this commodity for the most important use only
and ,hence, the demand will be small.
Importance of elasticity of demand
The importance of concept of elasticity of demand are as follows:

1) Business decision The concept of elasticity of demand plays an
important role in taking various decisions regarding prices and output. For
instance, in deciding whether to increase the price or not, the firm should
have an idea about price elasticity of demand for the products and its
substitutes and its complements.

2) Importance to monopolist A monopolist normally pursues the policy
of price discrimination, i.e., charging different prices from different
consumers. An idea of price elasticity of demand for his product by
different consumers would be of great use to him. He would charge
higher price from those consumers who have inelastic demand and lower
prices from those consumers who elastic demand for the goods sold by
the monopolist.

3) Importance in the international trade The concept of elasticity of
demand is also important in the field of international trade. It is of great
importance in determining the terms of trade (the rate at which the exports
and imports are exchanged) and consequently gains from international
trade, in determining the impacts of export and import and thereby on the
balance of payment.


4) Incidence of taxation Incidence of taxes refers to the persons who
ultimately bear the burden of taxes, i.e., the person who ultimately pay the
taxes. Whether the incidence of taxes is on the buyers or the sellers
depends on the elasticity of demand. Higher is the elasticity of demand,
more is the incidence of taxes on sellers. On the other hand, more inelastic
is the demand, more is the burden on the buyers of the commodities.