Economics

Elasticity of demand, Types, Price, Income and Cross, Curve, Examples and Graph

Elasticity of demand

Meaning

The proportionate change in the quantity of demand as a result of proportionate change in its price is studied or known as “Elasticity of Demand”. It expresses the price and quantity in mathematical form and measures the rate of change.

The Law of demand shows the inverse relationship between price and quantity demand but it does not clarify that how much change is there in demanded quantity due to change in price. The Law of demand is a qualitative statement while the elasticity of demand is a quantitative statement.

is as follows

As the relationship between Price and demand is inverse, its value is always negative. But, in practice, the negative sign is not used for demand and price elasticities.

Nature or kind of Elasticity of Demand

  1. Price Elasticity of Demand: The change in the quantity of demand due to change in the prices are considered within the price elasticity of demand. In other words, the measurement of proportionate change in the quantity due to change in its price, is known as price elasticity of demand. It is calculated as,
Price of Elasticity Demand

2. Income Elasticity of Demand:– By, income elasticity of demand, we mean the measurement of the volume of change in his demanded quantity, due to a certain change in his income. In other words, on other things being same, the proportionate (%) change in the demanded quantity of a consumer, due to proportionate (%) change in his income is known as income elasticity of demand.

Income of Elasticity Demand

It is expressed by “ey”. If its value works out to be positive (+), the goods are superior, whereas if this value works out to be negative (-), the goods are inferior.

Eg.,:- Income of a consumer increases from 5000 to 7000, and the demand for commodities increases from 50 units to 60 units. Calculate income elasticity of demand.

In this eg., the value of EY is (-)1 and hence the goods are inferior goods.

 

  1. Cross Elasticity of Demand: The demand of any commodity is also affected by the changes in the prices of the related commodities. Cross elasticity of demand expresses the changes in demand of a particular commodity due to change in the prices of the related commodities. Hence the proportionate change in the demand of any commodity due to a change in the price of the related commodity is known as cross elasticity of demand.

It may be expressed by ec or exy. If the value of ec is in (+) the goods are substitute goods and if the value is (-), the goods are complementary goods.

Cross Elasticity of Demand

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