Economics

Elasticity of Demand : Meaning, Importance and its classification

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In this article we will study about Elasticity of demand. If you are looking for the Notes on Elasticity of demand, its menaing importance and classification then read this article.

Meaning of Elasticity of Demand:

Elasticity of Demand measures the degree change  price or other factors have a big effect on the quantity consumers want to buy. It includes change in quantity of commodity, change in price and change in consumers income.

Image result for elasticity of demand

 

Elasticity of demand mainly have three types :

  • Price Elasticity.
  • Income Elasticity.
  • Cross Elasticity.

Also Read Related : Demand is the amount of commodity for which  the consumer has willingness and ability to buy.

(1). Price Elasticity of Demand

Price elasticity of demand means  the degree of responsiveness of quantity demanded of a good to a change in its price. Some popular definitions of the price elasticity of demand are :

” Elasticity of demand measures the responsiveness  of demand to change in price.”                                                                                                                                                                               – KennetBoulding.

“The Elasticity of demand for a commodity is the rate  at which quantity bought changes as the price change.”                                                                                                                                                                                                                                                                                                            – A.K.Caironcross.

“The ratio of proportionate change in the quantity demanded of a good caused by a given proportionate change in price”.

 

Formula:

The formula for measuring price elasticity of demand is :

Price Elasticity of Demand = Percentage in Quantity Demand

                                       Percentage Change in Price

                                                                                                  

                                                                                                      Ep = Δq X P

                                                                                                               Δp    Q

Where, EP= Price elasticity of demand

q= Original quantity demanded

∆q = Change in quantity demanded

p= Original price

∆p = Change in price

Example:

Suppose that price of a commodity falls down from Rs.10 to Rs.9 per unit and due to this, quantity demanded of the commodity increased from 100 units to 120 units. What is the price elasticity of demand?

Give that,

p= initial price= Rs.10

q= initial quantity demanded= 100 units

∆p=change in price=Rs. (10-9) = Rs.1

∆q=change in quantity demanded= (120-100) units = 20 units

Now,

                                                Ep = Δ20 X 10

                                                        Δ1     100

                                                –      2                                                                                                                                                                                    1

                                                        2%

The quantity demanded increases by 2% due to fall in price by Rs.1.

                                          

Degree of Price Elasticity Of Demand :

1). Perfectly Elastic Demand

The demand is said to be perfectly elastic if the quantity demanded increases infinitely  with a small fall in price or quantity demanded falls to zero with a small rise in price.

Perfectly elastic demand graph

2). Perfectly Inelastic Demand 

When demand remain constant if price increases or decreases, the demand is said to be perfectly inelastic.

Perfectly inelastic demand

3).Relatively elastic Demand

Demand is said to be relatively elastic if the percentage change in demand is greater than the percentage change in price i.e. if there is a greater change in demand there is a small change in price. It is also called highly elastic demand or simply elastic demand.

relatively elastic demand graph

 

4). Relatively Inelastic Demand

The demand is said to be relatively inelastic if the percentage change in quantity demanded is less than the percentage change in price.

relatively inelastic demand graph

5). Unitary Elastic Demand 

If the percentage change in quantity demanded is equal to the percentage change in price that is called as unitary elastic demand. In such type of demand, 1% change in price leads to exactly 1% change in quantity demanded.

Unitary elasticity of demand graph

 

(2) Income Elasticity of Demand:

Income elasticity of demand effects the quantity demanded of a commodity , it means when there is a change in the level of income of a consumer, there is a change in the quantity demanded of a good, other factors remaining the same.

“The ratio of percentage change in the quantity of a good purchased, per unit of time to a percentage change in the income of a consumer”.

 

Formula:

The formula for measuring the income elasticity of demand is the percentage change in demand for a good divided by the percentage change in income. Putting this in symbol gives.

                             

Ey = Percentage Change in Demand

       Percentage Change in Income

Simplified formula:

Ey = Δq X P

                                                                                               Δp    Q

 Example:

 A simple example will show how income elasticity of demand can be calculated. Let us assume that the income of a person is $4000 per month and he purchases six CD’s per month. Let us assume that the monthly income of the consumer increase to $6000 and the quantity demanded of CD’s per month rises to eight. The CD’s elasticity of demand will be calculated as under:

Δq  =  8 – 6 = 2                                   

Δp = $6000 – $4000 = $2000

Original quantity demanded = 6

Original income = $4000

Ey = Δq / Δp x P / Q = 2 / 200 x 4000 / 6 = 0.66

The income elasticity is 0.66 which is less than one.

(3) Cross Elasticity of Demand:

When the demand for a commodity changes with the change in the change in price of another related goods.

“The percentage change in the demand of one good as a result of the percentage change in the price of another good”.

  

Formula:

The formula for measuring, cross, elasticity of demand is:

Exy = % Change in Quantity Demanded of Good X

          % Change in Price of Good Y

               The numerical value of cross elasticity depends on whether the two goods in question are substitutes, complements or unrelated.

 

So we have studied Elasticity of Demand : Meaning, Importance and its classification and if you have any queries please let us know in the comments section.

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