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## Elasticity of Demand and its Types

Elasticity of demand is the percentage change in quantity demanded divided by the percentage change in another economic variable. Find out its types.

Category>Financial Analytics

## Elasticity of Demand and its Types

Ritesh PathakJan 16, 2021

**Elasticity**is a concept in economics that talks about the effect of change in one economic variable on the other.

**Elasticity of Demand**, on the other hand, specifically measures the effect of change in an economic variable on the quantity demanded of a product. There are several factors that affect the quantity demanded for a product such as the income levels of people, price of the product, price of other products in the segment, and various others.

Let’s begin our blog with a definition of Elasticity of Demand and then we will explore the different types of Elasticity of Demand.

**Also, read our blog on 4 types of Elasticity in economics**

**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**.

The demand for a commodity is affected by different economic variables:

Price of the commodity

Price of related commodities

Income level of consumers

We will read about these in detail, later in the blog.

**“The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price”.**

– Alfred Marshall, British Economist

**3 Types of Elasticity of Demand**

On the basis of different factors affecting the quantity demanded for a product, elasticity of demand is categorized into mainly three categories:** Price Elasticity of Demand (PED), Cross Elasticity of Demand (XED), and Income Elasticity of Demand (YED)**.

Let us look at them in detail and their examples.

**1. Price Elasticity of Demand (PED)**

Any change in the price of a commodity, whether it’s a decrease or increase, affects the quantity demanded for a product. For example, when there is a rise in the prices of ceiling fans, the quantity demanded goes down.

This measure of responsiveness of quantity demanded when there is a change in price is termed as the Price Elasticity of Demand (PED).

The mathematical formula given to calculate the Price Elasticity of Demand is:

**PED =**% Change in Quantity Demanded % / Change in Price

The result obtained from this formula determines the intensity of the effect of price change on the quantity demanded for a commodity.

**2. Income Elasticity of Demand (YED)**

The income levels of consumers play an important role in the quantity demanded for a product. This can be understood by looking at the difference in goods sold in the rural markets versus the goods sold in metro cities.

The Income Elasticity of Demand, also represented by YED, refers to the sensitivity of quantity demanded for a certain good to a change in real income (the income earned by an individual after accounting for inflation) of the consumers who buy this good, keeping all other things constant.

**Speaking of inflation, you can also take a look at our blog on what is inflation.**

The formula given to calculate the Income Elasticity of Demand is given as:

**YED =**% Change in Quantity Demanded% / Change in Income

The result obtained from this formula helps to determine whether a good is a necessity good or a luxury good.

**3. Cross Elasticity of Demand (XED)**

In a market where there is an oligopoly, multiple players compete. Thus, the quantity demanded for a product does not only depend on itself but rather, there is an effect even when prices of other goods change.

Cross Elasticity of Demand, also represented as XED, is an economic concept that measures the sensitiveness of quantity demanded of one good (X) when there is a change in the price of another good (Y), and that’s why it is also referred to as Cross-Price Elasticity of Demand.

The formula given to calculate the Cross Elasticity of Demand is given as:

**XED =**(% Change in Quantity Demanded for one good (X)%) / (Change in Price of another Good (Y))

The result obtained for a substitute good would always come out to be positive as whenever there is a rise in the price of a good, the demand for its substitute rises. Whereas, the result will be negative for a complementary good.

These three types of Elasticity of Demand measure the sensitivity of quantity demanded to a change in the price of the good, income of consumers buying the good, and the price of another good.

Apart from these three types, we have some other types of Elasticity of Demand which we would look at now.

**Also, take a sneak peek at our blog on 5 key elements of financial analysis**

**5 other types of Elasticity of Demand**

The effect of change in economic variables is not always the same on the quantity demanded for a product.

स्रोत : **www.analyticssteps.com**

## How to Measure the Elasticity of Demand ? (Top 5 Methods)

The following points highlight the top five methods used for measuring the elasticity of demand. The methods are: 1. Price Elasticity of Demand 2. Income Elasticity of Demand 3.

## How to Measure the Elasticity of Demand ? (Top 5 Methods)

Article Shared by ADVERTISEMENTS:

The following points highlight the top five methods used for measuring the elasticity of demand. The methods are: 1. Price Elasticity of Demand 2. Income Elasticity of Demand 3. Cross Elasticity of Demand 4. Advertisement or Promotional Elasticity of Sales 5. Elasticity of Price Expectations.

**Method # 1. Price Elasticity of Demand****: **

Price elasticity of demand is a measure of the responsiveness of demand to changes in the commodity’s own price. It is the ratio of the relative change in a dependent variable (quantity demanded) to the relative change in an independent variable (Price). In other words, price elasticity is the ratio of a relative change in quantity demanded to a relative change in price. Let ‘e’ stand for elasticity.

**Then:**

Also, elasticity is the percentage change in quantity demanded divided by the percentage in price.

**Symbolically, we may rewrite the formula:**

If percentages are known, the numerical value of elasticity can be calculated. The coefficient of elasticity of demand is a pure number i.e. it stands by itself, being independent of units of measurement. The coefficient of price elasticity of demand can be calculated with the help of the following formula.

Where,

Q is quantity, P is price, ΔQ/Q relative change in the quantity demanded and ΔP/P Relative change in price.

It should be noted that a minus sign (-) is generally inserted in the formula before the fraction with a view to making the coefficient of elasticity a non-negative value.

The price elasticity can be measured between two finite points on a demand curve (called arc elasticity) or on a point (called point elasticity).

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**Arc Elasticity:**

Any two points on a demand curve make an arc. In the words of Baumol, “Arc elasticity is a measure of the average responsiveness to price changes exhibited by a demand curve over some finite stretch of the curve”. The measure of elasticity of demand between any two finite points on a demand curve is known as arc elasticity.

**The elasticity coefficient can be calculated with the help of the following formula:**

For example, in Fig. 1.1 two finite points R and S are taken to measure the arc elasticity. First we move to measure elasticity for a fall in the price of the commodity from Rs. 40 to 20. ΔP is 40 – 20 = 20. This decrease in price causes an increase in demand from 40 units to 70 so that ΔQ is 40 – 70 = – 30.

**These values can be put in the formula so that:**

This implies that a one percent fall in price of commodity X causes a 1.5 per cent increase in demand for it.

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In the measurement, interpretation and use of arc elasticity, the business executives need take adequate care as the elasticity coefficient may differ depending upon the direction of movement. In this case we have measured the elasticity coefficient while moving down from point R to S.

The coefficient will be different while moving upward from point S to R (increase in price from Rs. 20 to 40 and quantity demanded is reduced from 70 to 40 units giving an elasticity coefficient of – 0.42 implying that one per cent increase in price will reduce the quantity by 0.42 percent. Thus the elasticity depends on the direction of change in price. Therefore, measuring elasticity through arc method, the direction of price change should be kept in mind.

The way out of this difficulty is to take an average of prices and quantities and thus to measure elasticity at the midpoint of the arc.

**The formula then becomes:**

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Although the ½ cancels out in the formula, it is put there to stress the fact that by using the average values of the quantities and prices, the elasticity coefficient is the same whether price goes up or goes down.

**Point Elasticity on a Linear Demand Curve**

**:**

Point elasticity is the ratio of an infinitesimally small relative change in quantity to an infinitesimally small change in price. If a price range is made as small as possible, that is, shrunk to a point- then the relative changes must be made as small as possible- infinitesimally small.

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Point elasticity is the ratio of an infinitesimally small relative change in quantity to an infinitesimally small change in price. Point elasticity of demand is defined as the -proportionate change in the quantity demanded resulting from a very small proportionate change in price. Fig. 1.2 shows how to find the elasticity at a point on a demand curve.

Let us take a point such as R on the demand curve DD. For measuring elasticity at a point the following formula may be used.

Point elasticity is the product of price-quantity ratio (P/Q) at a particular point (R) on the demand curve (DD) and the reciprocal of the slope of the demand line. The slope of the demand slope is defined by RQ/QD. The reciprocal of the slope of the demand line is QD/RQ.

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At point R, price P = RQ and Q = OQ

If we substitute these values in equation 1.8, what we get is

स्रोत : **www.economicsdiscussion.net**

## Elasticity vs. Inelasticity of Demand: What's the Difference?

Elasticity and Inelasticity of demand are the degrees to which demand changes in response to price changes, income levels, and substitution.

ECONOMICS GUIDE TO MICROECONOMICS

## Elasticity vs. Inelasticity of Demand: What's the Difference?

By MARY HALL Updated June 30, 2022

Reviewed by MICHAEL J BOYLE

Fact checked by PETE RATHBURN

## Elasticity vs. Inelasticity: An Overview

The elasticity of demand refers to the degree to which demand responds to a change in an economic factor.

Price is the most common economic factor used when determining elasticity. Other factors include income level and substitute availability.

Elasticity** **measures how demand shifts when economic factors change. When demand remains constant regardless of price changes, it is called inelasticity.

### KEY TAKEAWAYS

The elasticity of demand refers to the change in demand when there is a change in another economic factor, such as price or income.

Demand is considered inelastic if demand for a good or service remains unchanged even when the price changes,

Elastic goods include luxury items and certain food and beverages as changes in their prices affect demand.

Inelastic goods may include items such as tobacco and prescription drugs as demand often remains constant despite price changes.

### What Is Elasticity?

## Elasticity of Demand

The elasticity of demand, or demand elasticity, measures how demand responds to a change in price or income. It is commonly referred to as price elasticity of demand because the price of a good or service is the most common economic factor used to measure it.

An elastic good is defined as one where a change in price leads to a significant shift in demand and where substitutes are available for an item, the more elastic the good will be.

The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

If the quotient is greater than or equal to one, the demand is considered to be elastic. If the value is less than one, demand is considered inelastic.

Arc Price Elasticity of Demand formula.

Investopedia

Common examples of products with high elasticity are luxury items and consumer discretionary items, such as a brand of cereal or candy bars. Food products are easily substituted and brand names are easily replaced by lower-priced items.

A change in the price of a luxury car can cause a change in the quantity demanded, and the extent of the price change will determine whether or not the demand for the good changes and if so, by how much.

Other factors influence the demand elasticity of goods and services such as income level and available substitutes. During a period of job loss, people may save their money rather than upgrading their smartphones or buying designer purses, leading to a significant change in the consumption of luxury goods.

Available substitutes for a good or service makes an item more sensitive to price changes. If the price of Android phones increases by 10%, this could move demand from Android to iPhones.

## Inelasticity of Demand

Inelasticity of demand is evident when demand for a good or service is static when its price or other factor changes,

Inelastic products are usually necessities without acceptable substitutes. The most common goods with inelastic demand are utilities, prescription drugs, and tobacco products. Businesses offering such products maintain greater flexibility with prices because demand remains constant even if prices increase or decrease.

The most common goods with inelastic demand are utilities, prescription drugs, and tobacco products. In general, necessities and medical treatments tend to be inelastic, while luxury goods tend to be most elastic.

## Cross Elasticity of Demand

The cross elasticity of demand measures the responsiveness in quantity demanded of one good when the price of another changes. Cross elasticity of demand can refer to substitute goods or complementary goods. When the price of one good increases, the demand for a substitute good will increase as consumers seek a substitute for the more expensive item. Conversely, when the price of a good rises, any items closely associated with it and necessary for its consumption will also decrease.

## Advertising Elasticity of Demand

The advertising elasticity of demand (AED) is a measure of a market's sensitivity to increases or decreases in advertising saturation. The elasticity of an advertising campaign is measured by its ability to generate new sales.

Positive advertising elasticity means that an uptick in advertising leads to an increase in demand for the goods or services advertised. A good advertising campaign will lead to a positive shift in demand for a good.

## What Are the 4 Types of Elasticity?

The four main types of elasticity of demand are price elasticity of demand, cross elasticity of demand, income elasticity of demand, and advertising elasticity of demand. They are based on price changes of the product, price changes of a related good, income changes, and changes in promotional expenses, respectively.

## How Is Elasticity Measured?

Elasticity is measured by the ratio of two percentages, measured by calculating the ratio of the change in the quantity demanded to the change in the price.

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