VALUER WORLD

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CONCEPT OF ELASTICITY OF DEMAND

Elasticity is an economic measure of how sensitive an economic factor is to another, for example, changes in supply or demand to the change in price, or changes in demand to changes in income.

Elasticity of Demand

Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity demanded of a product in response to a change in any of the market variables, like price, income etc. It measures the shift in demand when other economic factors change.  In other words, the elasticity of demand is the percentage change in quantity demanded divided by the percentage change in another economic variable. “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.

Types of Elasticity

Elasticity of Demand

The quantity demanded of a good or service depends on multiple factors, such as price, income, and preference. Whenever there is a change in these variables, it causes a change in the quantity demanded of the good or service.

Price elasticity of demand is an economic measure of the sensitivity of demand relative to a change in price. The measure of the change in the quantity demanded due to the change in the price of a good or service is known as price elasticity of demand.

Income Elasticity

Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income. With income elasticity of demand, you can tell if a particular good represents a necessity or a luxury.

Cross Elasticity

The cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good change. Also called cross-price elasticity of demand, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of the other good.

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