Question

What are the types of Elasticity of Demand.

Answer 1

Types of Elasticity of Demand:-

Following are three types of elasticity of demand.

1. Price Elasticity of Demand:-

Dr Marshall has defined price elasticity of demand as below:-

"Price elasticity of demand is a ratio of proportionate changes in the quantity demanded of a commodity to a given proportionate change in its price."

Thus, pride elasticity is responsiveness of change in demand due to a change in price only. Other factors such as income, population, tastes, habits, fashions, prices of substitute and complementary goods are assumed to be constant. Therefore, price elasticity of demand is written as:

`E_p="Proportinate Change in Quantity Demanded"/"Proportionate Change in Price"`

Numerically,

`E_p=(DeltaQ)/(DeltaP)xxP/Q`

ΔQ =  Change in quantity demanded. It is measured as the difference between new quantity demanded (Say Q1) and old quantity demanded (Q)

Thus ΔQ = Q1 - Q

ΔP =  Change in price. It is measured as the difference between new price (P1) and old price (P)

Thus ΔP = P1 - P

Price elasticity of demand may have five values infinite, zero, unit, greater than one and less than one.

2. Income Elasticity of Demand:-

Income elasticity of demand may be defined as the degree of responsiveness of quantity demanded to change in incomer only. Other factors including price remain unchanged. It is Written as

`E_"y"="Percentage Change in Demand"/"Percentage Change in Income"`

Numerically,

`E_"y"=(Deltaq)/(Deltap)xxP/Q`

(Q = Quantity demanded, Y = Income, Δ = delta stands for a change)

Income elasticity of demand is positive, when demand increases with increasing income. Income elasticity of demand is negative when, quantity demanded decreases with increase in income. In case of normal goods income elasticity of demand is of inferior goods, income, elasticity of demand is negative Income elastioity of demand can be zero, one, greater than one, and less than one.

3. Cross Elasticity of Demand:-

Cross elasticity of demand is found in case of substitute goods as well as complimentary goods and non-related goods. In the case of substitute goods change in the price of one good, affects the demand for another good. For example, if the price of tea rises, the demand for coffee will rise. So, cross elasticity of demand refers to change in quantity demanded of one commodity, due to change in the price of another commodity.

Ec = ΔA/ΔB (Here A is original commodity and B is price of another related substitute commodity)