Elasticity of Demand

Elasticity 

Elasticity can be defined as a measure of variable sensitivity to the change in another variable. This sensitivity is the change in price, which is related to change in other factors. From a business and economic point of view, it is a measure of how sensitive an economic factor is to another. 

For example, changes in the prices of supply or demand, or changes in demand to changes in income. Examples of elastic goods are clothing and electronics; inelastic goods include items like prescribed drugs, food. It is used to measure the change in quantity demand of goods or services when compared to the price movements of those goods and services.


What is Elasticity of Demand?

As per the elasticity of demand definition, the demand contracts or extends with rising or fall in the prices. This quality of demand is called Elasticity of Demand when the change in its virtue and the price changes (low or high). The change sensitiveness may be small or less in the elasticity of demand. 

Let us take an example to have a better understanding of the concept. If we take salt, even a big fall in demand cannot affect the fall of its appreciable extension in its demand. Similarly, if we observe a slight fall in the prices of oranges, there will be a considerable change in its demand. The elasticity of demand may be more or less, but it is always perfectly elastics or inelastic.


Types of Elasticity of Demand 

There are four types of elasticity of demand mainly as given in the following.


1) Price Elasticity of Demand 

It is defined as responsiveness and sensitivity of a particular product along with the changes in its price. It shows the relationship between price and quantity that provides a calculator of the price effect in price quantity of demand. 

The below equation calculates the price changes depending on the number of demands and the revenue received by firms before and after any changes.

E\[_{p}\] = \[\frac{\text{Proportionate change in Quantity Demanded}}{\text{Proportionate change in  Price}}\]

There are different types of price elasticity of demand i.e. 1) perfectly elastic demand, 2) perfectly inelastic demand, 3) relatively elastic demand, 4) relatively inelastic demand, and 5) unitary elastic demand.


2) Income Elasticity of Demand

Income is one of the factors that influence the demand for a product. The degrees of responsiveness of a change in demand for the product of the change in demand for the product due to change in income is known as Income elasticity of demand.

E\[_{y}\] = \[\frac{\text{Percentage Change in Demand for a product}}{\text{Percentage Change in Income}}\]

More income means more demand vice versa 


3) Cross Elasticity of Demand 

It is defined as a change in the quantity of demand for one commodity to the change in the quantity of demand to other commodities is called cross elasticity of demand. Usually, this type of demand arises with the involvement of interrelated goods such as substitutes and complementary goods. 

Cross elasticity of demand formula is as follows:

E\[_{c}\] = \[\frac{\text{Proportionate Change in Purchase of CommodityX}}{\text{Proportionate Change in the Price of CommodityY}}\]

For example, if two commodities are called substitutes, when the price of one commodity falls, the demand for another commodity decreases. If the price of one commodity rises in demand, so does the price of another commodity, such as tea and coffee.


4) Advertising Elasticity of Demand

It is defined as the responsiveness of the change in demand to the change in promotional expense is known as the advertising elasticity of demand. It can be expressed by using below the elasticity of demand formula.

E\[_{c}\] = \[\frac{\text{Proportionate Change in Demand}}{\text{Proportionate Change in Advertising Expenditure}}\]

Numerically, 

E\[_{a}\] = \[\frac{Q_{2}-Q_{1}}{\frac{Q_{2}+Q_{1}}{A_{2}-A_{1}}}\] A\[_{2}\] + A\[_{1}\]

[Where,

Q1=Original Demand

Q2= New Demand

A1= Original Advertisement Outlay

A2= New Advertisement Outlay]


Did You Know?

There are several factors that influence the law of demand. It tells about the downwards slope of the demand curve mainly it points to when the price falls the demand increases when prices increase the demand decreases. 

In comparison, other things will remain unchanged. There are mainly five effects named as the substitute effect i.e. Income effect, Utility maximizing behaviour, large number of consumers, and varied uses of products. 

For example, if the price of coal is increased, then its demand for the industries which depend on coal will increase and the demand for household purposes will decrease.


Solved Examples 


Q. What are the Two Factors that Explain the Price Elasticity of Demand? How is it Affected by the Availability of its Close Substitutes?

Ans. Many substitutes of goods demand goods that have close substitutes which are relatively elastic, usually when the price of that goods rises the consumers generally shift towards the substitutes. The proportion of income that is spent on the goods in this, then consumer spends a small portion of income mainly on inelastic goods. Therefore, goods on which the consumer spends more will have a lot of elastic demand. Goods which have less substitute like cigarettes will have a completely elastic or inelastic demand.

FAQs (Frequently Asked Questions)

1. Illustrate any Three Factors that Affect Price Elasticity of Demand for Commodities?

Ans: A number of substitutes of goods: In this, the goods which are close substitutes are relatively more elastic. As we see if the price of such goods rises, the consumers have an alternative of shifting to its substitutes. Goods which have fewer substitutes such as cigarettes have less elastic and inelastic demand. 


The proportion of income spent on goods: In this, the consumers spend their small portion of the income will have an inelastic demand. The goods on which the consumer spends have a large portion of their income tend to have more elastic demand.


Nature of the commodity: Ordinary items like salt, matchbox, etc. have less elastic demand whereas luxuries like an air conditioner, cost furniture have more elasticity of demand.

2. Explain any Two Types of Elasticity of Demand.

Ans: Income elasticity of demand: Income is one of the factors that influence the demand for a product. The degrees of responsiveness of a change in demand for the product of the change in demand for a product due to change in income is known as income of elasticity. More income means more demand and vice versa.


Cross elasticity of demand:  It is defined as a change in the quantity of demand for one commodity to the change in the quantity of demand to other commodities is called cross elasticity of demand. Usually, these types of demand arise with the involvement of interrelated goods such as substitutes and complementary goods.