Elasticity of demand

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Elasticity of demand

Definition

The elasticity of demand can be defined as the percentage change in quantity demanded in response to the percentage change in various determinants like the price of the commodity, the income of the consumer and the price of related(substitute and complementary goods.

It explains the percentage change in quantity demanded of a commodity in response to its various determinants like price, income, etc.

You may also like to read: Law of demand and supply Review of demand and supply curves

What are the types of elasticity of demand?

Here, we discuss 3 types

  1. Price elasticity of demand and its type
  2. Income elasticity of demand and its type
  3. Cross elasticity of demand and its type

1. Price elasticity of demand

Other things remaining the same The percentage change in quantity demanded a commodity in response to the percentage change in price.

It can be measured by dividing the percentage change in demand by the percentage change in price

Price elasticity of demand formula

Price elasticity of demand formula

Types of price elasticity of demand (ep)

  1. Perfectly elastic demand (ep=)
  2. Perfectly inelastic demand (ep=0)
  3. Relatively elastic or elasticity greater than 1 (ep>1)
  4. Relatively inelastic or less than 1 (ep<1)
  5. Unitary elastic or elasticity equal to 1 (ep=1) 

A. Perfectly elastic demand (ep=∞)

If the quantity demanded to a commodity is changed (infinitely change) change in response to the very small or negligible change in price.

In the above figure the price is unchanged or (op) but there is a huge change in demand (OQ1),(OQ2),(OQ3)…… therefore it is a perfect elasticity demand and the demand curve is the horizon.

B.Perfectly inelastic demand (ep=0)

In this type, there is no change in quantity demanded (for a commodity) after the change in the price. it can be presented as the following figure:

C. Relatively elastic or elasticity is greater than one (ep>1)

If the percentage change in quantity they demanded a commodity is greater then the percentage change in price. it should be relatively elastic.

D. Relatively inelastic or elasticity less than one(Ep<1)

If the percentage change in quantity demand for a commodity is less then the percentage change in price, it is called relatively inelastic or elasticity less then 1.

E. Unitary elastic or elasticity equal to 1 (ep=1)

If the percentage change in quantity demanded a commodity is equal to the percentage change in price is known as unitary elastic.

2. Income elasticity of demand and its type

The percentage change in quantity demanded a commodity in response to the percentage change in the income of a consumer Other things remaining the same. It is called the income (EOF)

It is measured by dividing the percentage change in demand by the percentage change in income.

formula of Income elasticity of demand

Types of income elasticity of demand

1.positive income elasticity (ey>0)
i. Positive income elasticity greater than unity (ey>1)
ii. Positive income elasticity less than unity (ey>1)
iii. Positive income elasticity equals to unity (ey=1)

2. Zero income elasticity (ey=0)

3.Negative income elasticity (ey<0)

1. Positive income elasticity(ey>0)
If a demand for a commodity and income of the consumer changed in the same direction it is called positive income elasticity.

i.e the demand increased with increased income and vice-versa. the commodity having positive income elasticity is called normal goads. There are three types of positive income elasticity.

i.Positive income elasticity greater than unity (ey>1):
when the percentage increased in demand for a commodity greaten than the percentage increase in income and vice-versa.the income elasticity is greater than one.
In the figure, income is increased by 5% and demand is increased by 15% therefore (ey>1).

ii.Positive income elasticity less than unity (ey<1)
when the percentage increased in demand for a commodity less than percentage increased in income and vice-versa.

The income elasticity less than one.
In figure when income is increased by 15% and demand is increased by 5%.there fore ey is less than one.

iii.positive income elasticity equals to unity ey=1
when the percentage increased in demand for a commodity equal to percentage increased in income and vice-versa.

2. Zero income elasticity (ey=0)
If a demand for a commodity doesn’t change other change in income of the consumer the income elasticity (ey=0)

3. Negative income elasticity:
If the demand for a commodity increased with a decrease in income and vice-versa. It is a negative income elasticity. the commodity is having a negative income elasticity called inferior goods.

 

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