The Types of Elasticity of Demand

Types of Price Elas­tic­ity of Demand#

There are five types of price elas­tic­ity of demand:

Fac­tors Affect­ing Price Elas­tic­ity of Demand#

The fac­tors that affect the price elas­tic­ity of demand and deter­mine which type of elas­tic­ity the prod­uct would have, include:

• The need of the prod­uct
• Sub­sti­tutes avail­able
• Increase or decrease in the con­sumer’s income
• The time period over which the elas­tic­ity is being mea­sured
• The per­isha­bil­ity of the prod­uct
• Addic­tion of con­sumers

Income Elas­tic­ity of Demand#

Income elas­tic­ity of demand (YED) mea­sures the change in demand when the cus­tomer's income changes. The price of the prod­uct and every other fac­tor are held con­stant; only income changes.

The income elas­tic­ity of demand for­mula is as fol­lows:

Income elas­tic­ity of demand = % change in quan­tity demanded / % change in income.

For most goods, demand rises when income rises, because cus­tomers can afford more.

Types of Income Elas­tic­ity of Demand#

There are three types of income elas­tic­ity of demand:

Fac­tors Affect­ing Income Elas­tic­ity of Demand#

The income elas­tic­ity of demand is affected by three fac­tors:

• the over­all income of con­sumers in the coun­try
• the type of prod­uct, for exam­ple whether it is an infe­rior good or a lux­ury
• the con­sump­tion habits of the cus­tomer

Cross Elas­tic­ity of Demand#

Cross elas­tic­ity of demand (XED) involves two related goods. The per­cent­age change in the quan­tity demanded of the first good is mea­sured against the per­cent­age change in the price of the sec­ond good. For instance, when mea­sur­ing the cross elas­tic­ity between good A and B, the change in the quan­tity demanded of good A would be mea­sured against the change in the price of Good B.

The cross price elas­tic­ity of demand is mea­sured using the for­mula:

Cross price elas­tic­ity = % change in quan­tity demanded of good A / % change in price of good B

Types of Cross Elas­tic­ity of Demand#

The cross elas­tic­ity of demand can also be cat­e­go­rized under the fol­low­ing three types:

Fac­tors Affect­ing Cross Elas­tic­ity of Demand#

The cross elas­tic­ity of demand is affected by the nature of the two goods, i.e., whether they are close sub­sti­tutes, com­ple­ments or unre­lated to one another.

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.

The demand for a prod­uct can be elas­tic, inelas­tic, or uni­tary, depend­ing on the rate of change in the demand with respect to the change in the price of a prod­uct.

On the basis of the amount of fluc­tu­a­tion shown in the quan­tity demanded of a good, it is termed as ‘elas­tic’, ‘inelas­tic’, and ‘uni­tary’.

An elas­tic demand is one that shows a larger fluc­tu­a­tion in the quan­tity demanded of a prod­uct, in response to even a lit­tle change in another eco­nomic vari­able. For exam­ple, if a par­tic­u­lar café raises the price of its cof­fee a lit­tle while oth­ers nearby do not, it may lose many of its cus­tomers.

An inelas­tic demand is one that shows a very lit­tle fluc­tu­a­tion in the quan­tity demanded with respect to a change in another eco­nomic vari­able. An exam­ple of this can be petrol or diesel.

Uni­tary elas­tic­ity is one in which the fluc­tu­a­tion in one vari­able and quan­tity demanded is equal.

We can fur­ther clas­sify these elas­tic and inelas­tic types of demand into five cat­e­gories.

Per­fectly Elas­tic Demand#

Demand is per­fectly elas­tic when the slight­est change in price causes an unlim­ited change in the quan­tity demanded.

In per­fectly elas­tic demand, even a small rise in price can result in a fall in demand of the good to zero, whereas a small decline in the price can increase the demand to infin­ity.

How­ever, per­fectly elas­tic demand is a total the­o­ret­i­cal con­cept and doesn’t find a real appli­ca­tion, unless the mar­ket is per­fectly com­pet­i­tive and the prod­uct is homoge­nous.

The degree of elas­tic­ity of demand helps to define the slope and shape of the demand curve. There­fore, we can deter­mine the elas­tic­ity of demand by look­ing at the slope of the demand curve.

A flat­ter curve shows more elas­tic demand. So the demand curve for per­fectly elas­tic demand is a hor­i­zon­tal line.

Per­fectly Inelas­tic Demand#

A per­fectly inelas­tic demand is the one in which there is no change mea­sured against a price change.

Like per­fectly elas­tic demand, the con­cept of per­fectly inelas­tic is also a the­o­ret­i­cal con­cept and doesn’t find a prac­ti­cal appli­ca­tion. How­ever, the demand for neces­sity goods can be the clos­est exam­ple of per­fectly inelas­tic demand.

The numer­i­cal value obtained from the PED for­mula comes out as zero for a per­fectly inelas­tic demand.

The demand curve for per­fectly inelas­tic demand is a ver­ti­cal line par­al­lel to the price axis.

Rel­a­tively Elas­tic Demand#

Rel­a­tively elas­tic demand refers to the demand when the pro­por­tion­ate change in the demand is greater than the pro­por­tion­ate change in the price of the good. Its numer­i­cal value lies between one and infin­ity.

In rel­a­tively elas­tic demand, if the price of a good increases by 25% then the demand for the prod­uct will nec­es­sar­ily fall by more than 25%.

Unlike the afore­men­tioned types of demand, rel­a­tively elas­tic demand has a prac­ti­cal appli­ca­tion as many goods respond in the same man­ner when there is a price change.

The demand curve of rel­a­tively elas­tic demand is grad­u­ally slop­ing.

Rel­a­tively Inelas­tic Demand#

In a rel­a­tively inelas­tic demand, the pro­por­tion­ate change in the quan­tity demanded for a prod­uct is always less than the pro­por­tion­ate change in the price.

For exam­ple, if the price of a good falls by 10%, the quan­tity demanded rises by less than 10%. If it rose by exactly 10%, demand would be uni­tary elas­tic.

The numer­i­cal value of rel­a­tively inelas­tic demand always comes out as less than 1 and the demand curve is steep.

Uni­tary Elas­tic Demand#

When the pro­por­tion­ate change in the quan­tity demanded for a prod­uct is equal to the pro­por­tion­ate change in the price of the com­mod­ity, it is said to be uni­tary elas­tic demand.

The numer­i­cal value for uni­tary elas­tic demand is equal to 1. The demand curve for uni­tary elas­tic demand is rep­re­sented as a rec­tan­gu­lar hyper­bola.

Related read­ing#

• Elas­tic­ity of Demand
• What Man­age­r­ial Eco­nom­ics Is
• The Nature of Man­age­r­ial Eco­nom­ics