Elasticity is the degree of
responsiveness of one variable to a change in another variable. In economics, elasticity
of demand refers to a change in quantity demanded for a good due to change in its
price. This change may be small or great. Following are the kinds of elasticity
of demand.
1. Price Elasticity of Demand2. Income Elasticity of Demand
3. Cross Elasticity of demand
1. Price Elasticity of Demand
Price elasticity of demand is
the degree of responsiveness of quantity demanded of a good or service due to
change in its price. It is commonly
known as elasticity of demand. It has the following kinds.
a. Unitary elastic demand
b. Elastic demand
c. Perfectly elastic demand
d. Inelastic demand
e. Perfectly inelastic demand
a. Unitary Elastic Demand
Unitary elastic demand refers to when
demand changes with the same proportion in response to a change in its price. For
instance, if the price of a good increases by 20% and the demand for that good
in response also decreases by 20% or if the price of a good decreases by 20%
and the demand for that good in response also increases by 20% as shown in
given below figure (1.6).
Elastic demand is the
greater change in demand in response to a small change in its price. For
example, if the price of a good increases by 30% and the demand for that good
in response decreases by 60% or if the price of a good decreases by 30% and the
demand for that good in response increases by 60% as shown in given below
figure (1.7).
c. Perfectly Elastic Demand
The demand is said to be perfectly
elastic if it increases or decreases even though the price does not change. Luxury gods are the examples of it which
demand expands or contracts even the price remains constant. The following
diagram (1.8) is representing perfectly elastic demand.
d. Inelastic Demand
Inelastic demand is the small
change in demand in response to a greater change in its price. For example, if
the price of a good increases by 20% and the demand for that good in response
decreases by 5% or if the price of a good decreases by 20% and the demand for
that good in response increases by 5% as shown in given below figure (1.9).
e. Perfectly Inelastic Demand
The demand is said to be perfectly
inelastic if it remains constant in response to changes in its price. Medicine
is the example of it which demand does not change whatever the price of it. The
given below diagram (2) is showing perfectly inelastic demand.
Measurement of Price Elasticity of Demand
Price elasticity of demand can
be measured by using the following formula:
Elasticity of demand = Percentage
of change in quantity demanded
Percentage of change in price
Percentage of change in
quantity demanded = Change in quantity demanded X
100
Original
quantity demanded
Percentage of Change in
price = Change in price X 100
Original price
Example:
Suppose, the price of a
washing machine falls from Rs. 10,000 to Rs. 9000, due to fall in price, the
quantity demanded for washing machine rises from 2000 to 4000. Now we will
measure the price elasticity of demand by using above formula.
Change in quantity
demanded = 4000 – 2000
Change in quantity
demanded = 2000
Percentage of change in
quantity demanded = 2000 X
100
4000
Percentage of change in
quantity demanded = 50%
Change in price = 10000
– 9000
Change in price =
1000
Percentage of change in
price = 1000
X
100
10000
Percentage of change in
price = 10%
Elasticity of demand = 50
10
Elasticity of demand = 5%
2. Income Elasticity of Demand
The demand for a good or
service is also affected by income of the consumer. When the income of a
consumer changes, the quantity demanded of a good he intends to buy also
changes while keeping all other things constant. Following points should be noted:
a. Income elasticity of demand
for normal goods is positive. An increase in income of the consumer will lead
to rise in demand for normal goods.
b. Income elasticity of demand
for inferior goods is negative. An increase in income of the consumer will lead
to fall in demand for inferior goods and may rise demand for luxury goods.
c. A zero income elasticity of
demand occurs when demand remains constant while there is an increment in
income of the consumer.
Income elasticity of demand
can be measured by using the following formula:
Income elasticity of
demand = Percentage of change in quantity demanded
Percentage of change in price
Example:
Suppose, income of the
consumer increases by 5% which leads to increase the quantity demanded for
vegetables by 10%. Thus, the income elasticity of demand will be:
Income elasticity of
demand = 10%
= 2%
5%
3. Cross Elasticity of Demand
When the demand of one good
changes due to change in the price of other related good is called cross
elasticity of demand. It has the following kinds.
a. Cross elasticity of substitutes: The cross elasticity of demand
for substitute goods is positive because when the price of one good increases
(say coffee), it leads to increase the demand of other related good (say tea).
b. Cross elasticity of complementary goods: The cross elasticity of demand for
complementary goods is negative because when the price of one good increases
(say tyre), it leads to decrease the demand of other related good (say tube).
Cross elasticity of demand of
two related goods can be measured by using the following formula:
Cross elasticity of
demand = Percentage of change in quantity demanded
of good X
Percentage of change in price of good Y
Example:
Suppose, the price of coffee
increases by 20% which leads to increase the quantity demanded for tea by 30%.
Thus, the cross elasticity of demand will be:
Cross elasticity of
demand = 30%
= 1.5%
20%
0 comments:
Post a Comment