Economy, asked by raju421656, 9 months ago

What is elasticity of Demand​

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Answered by savt26
0

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.

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