What is elasticity of Demand
Answers
Answer:
A change in the price of a commodity affects its demand. We can find the elasticity of demand, or the degree of responsiveness of demand by comparing the percentage price changes with the quantities demanded. In this article, we will look at the concept of elasticity of demand and take a quick look at its various types.
Browse more Topics under Theory Of Demand
Meaning And Determinants Of Demand
Law Of Demand And Elasticity Of Demand
Exceptions to the Law of Demand
Movement along the Demand Curve and Shift of the Demand Curve
Price Elasticity of Demand
Income Elasticity of Demand
Cross Elasticity of Demand
Demand Forecasting
Methods of Demand Forecasting
Elasticity of Demand
To begin with, let’s look at the definition of the elasticity of demand: “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 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.
elasticity of demand
Let’s look at some examples:
The price of a radio falls from Rs. 500 to Rs. 400 per unit. As a result, the demand increases from 100 to 150 units.
Due to government subsidy, the price of wheat falls from Rs. 10/kg to Rs. 9/kg. Due to this, the demand increases from 500 kilograms to 520 kilograms.
In both cases above, you can notice that as the price decreases, the demand increases. Hence, the demand for radios and wheat responds to price changes.
Types of Elasticity of Demand
Based on the variable that affects the demand, the elasticity of demand is of the following types. One point to note is that unless otherwise mentioned, whenever the elasticity of demand is mentioned, it implies price elasticity.
Price Elasticity
The price elasticity of demand is the response of the quantity demanded to change in the price of a commodity. It is assumed that the consumer’s income, tastes, and prices of all other goods are steady. It is measured as a percentage change in the quantity demanded divided by the percentage change in price. Therefore,
$$\text{Price Elasticity} = E_p = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$$
Or,
Ep=Change in Quantity×100Original QuantityChange in Price×100Original Price
=Change in QuantityOriginal Quantity×Original PriceChange in Price
Income Elasticity
The income elasticity of demand is the degree of responsiveness of the quantity demanded to a change in the consumer’s income. Symbolically,
EI=Percentage change in quantity demandedPercentage change in income
Cross Elasticity
The cross elasticity of demand of a commodity X for another commodity Y, is the change in demand of commodity X due to a change in the price of commodity Y. Symbolically,
Ec=ΔqxΔpy×pyqx
Where,
Ec
is the cross elasticity,
Δqx
is the original demand of commodity X,
Δqx
is the change in demand of X,
Δpy
is the original price of commodity Y, and
Δpy
is the change in price of Y.