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in prices. TYPES OF ELASTICITY OF DEMAND 1) PRICE ELASTICITY OF DEMAND 2) INCOME ELASTICITY OF DEMAND 3) CROSS ELASTICITY OF DEMAND 1) PRICE ELASTICITY OF DEMAND-Price elasticity of demand is the ratio of the percentage change in the quantity demanded of a commodity to a percentage change in its prices. DIFFERENT METHODS OF PRICE ELASTICITY OF DEMAND A) PERFECTLY ELASTIC DEMAND-Perfectly elastic demand is one in which a little change in price will cause an infinite change in demand B) PERFECTLY INELASTIC DEMAND-Perfectly inelastic demand is one in which a change in price produce no change in demand C) UNITARY ELASTIC DEMAND-Unitary elastic demand is one in which a change in price produces an equal change in demand 2) INCOME ELASTICITY OF DEMAND-Income elasticity of demand refers to the percentage change in quantity demanded due to percentage change in income. 3)CROSS ELASTICITY OF DEMAND-Cross elasticity of demand measures the change in quantity demanded of a particular commodity due to change in the price of another commodity. In other words, it refers to the change in quantity of commodity Y demanded as a result of change in the prices of comm
The elasticity here is called cross electricity of demand. The three main types of elasticity of demand are now discussed in brief.
Formula:
The formula for measuring price elasticity of demand is: Price Elasticity of Demand = Percentage in Quantity Demand Percentage Change in Price Ed = q X P p Q
Example:
Let us suppose that price of a good falls from $10 per unit to $9 per unit in a day. The decline in price causes the quantity of the good demanded to increase from 125 units to 150 units per day. The price elasticity using the simplified formula will be: Ed = q X P Q
Ed = 25 / 1 x 10 / 125 = 2 The elasticity coefficient is greater than one. Therefore the demand for the good is elastic.
Types:
The concept of price elasticity of demand can be used to divide the goods in to three groups.
(i) Elastic. When the percent change in quantity of a good is greater than the percent change in its price, the demand is said to be elastic. When elasticity of demand is greater than one, a fall in price increases the total revenue (expenditure) and a rise in price lowers the total revenue (expenditure). (ii) Unitary Elasticity. When the percentage change in the quantity of a good demanded equals percentage in its price, the price elasticity of demand is said to have unitary elasticity. When elasticity of demand is equal to one or unitary, a rise or fall in price leaves total revenue unchanged. (iii) Inelastic. When the percent change in quantity of a good demanded is less than the percentage change in its price, the demand is called inelastic. When elasticity of demand is inelastic or less than one, a fall in price decreases total revenue and a rise in its price increases total revenue.
Formula:
The formula for measuring the income elasticity of demand is the percentage change in demand for a good divided by the percentage change in income. Putting this in symbol gives.
Example:
A simple example will show how income elasticity of demand can be calculated. Let us assume that the income of a person is $4000 per month and he purchases six CD's per month. Let us assume that the monthly income of the consumer increase to $6000 and the quantity demanded of CD's per month rises to eight. The elasticity of demand for CD's will be calculated as under: q = 8 - 6 = 2 p = $6000 - $4000 = $2000 Original quantity demanded = 6
Original income = $4000 Ey = q / p x P / Q = 2 / 200 x 4000 / 6 = 0.66 The income elasticity is 0.66 which is less than one.
Types:
When the income of a person increases, his demand for goods also changes depending upon whether the good is a normal good or an inferior good. For normal goods, the value of elasticity is greater than zero but less than one. Goods with an income elasticity of less than 1 are called inferior goods. For example, people buy more food as their income rises but the % increase in its demand is less than the % increase in income.
Formula:
The formula for measuring, cross, elasticity of demand is: Exy = % Change in Quantity Demanded of Good X % Change in Price of Good Y The numerical value of cross elasticity depends on whether the two goods in question are substitutes, complements or unrelated.
(iii) Unrelated Goods. The two goods which a re unrelated to each other, say apples and pens, if the price of apple rises in the market, it is unlikely to result in a change in quantity demanded of pens. The elasticity is zero of unrelated goods.