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.
Elasticity of demand mainly have three types :
- Price Elasticity.
- Income Elasticity.
- Cross Elasticity.
(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”.
The formula for measuring price elasticity of demand is :
Where, EP= Price elasticity of demand
q= Original quantity demanded
∆q = Change in quantity demanded
p= Original price
∆p = Change in price
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?
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
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.
2). Perfectly Inelastic Demand
When demand remain constant if price increases or decreases, the demand is said to be perfectly inelastic.
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.
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.
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.
(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”.
(3) Cross Elasticity of Demand:
When the demand for a commodity changes with the change in the change in price of another related goods.
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.