ELASTICITY OF DEMAND & ITS TYPES-BUSINESS ECONOMICS/BBA/MBA

ELASTICITY OF DEMAND:: BUSINESS ECONOMICS 

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.

Let’s look at some examples:

 The price of an apple falls from Rs. 50 to Rs. 20 per unit. As a result, the demand increases from 10 to 15 units.

Types of Elasticity of Demand

Based on the variable that affects the demand, the elasticity of demand is of the following types.

Price Elasticity:

The price elasticity of demand is the degree of responsiveness  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 or constant. It is measured as a percentage change in the quantity demanded divided by the percentage change in price.

Ep=      Percentage Change in Quantity demanded

Percentage change 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.

 EI=                                         Percentage Change in Quantity demanded

Percentage 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.

 EC=      Percentage Change in Quantity demanded (X)

            Percentage change in Price (Y)

TYPES /DEGREES OF ELASTICITY OF DEMAND

Perfectly Elastic Demand (E=∞):

A very small change in price would result in huge or infinite change in the quantity demanded of the product. Hence the sellers would not change in price and this case rarely found in practice.

Perfectly Inelastic Demand (E=0):

Despite an increase or decrease in its prices of a commodity, there won’t be any change in the quantity demanded. If a price of product increases by 50%, even then, if there is no change in the quantity demanded, it is said to be perfectly inelastlic demand.

Unitary Elastic Demand (E=1):

Price elasticity of demand is in unity when the change in demand is proportionate to the change in the price. 

Elastic Demand (E>1):

If the percentage in change in quantity demanded is greater than the percentage change in price, it said to be Elastic demand.

Inelastic Demand(E<1):

If the percentage in change in quantity demanded is less than the percentage change in price, it said to be inelastic demand.