Elasticity of demand refers to the change in demand of a product or service
in response to the change in other variables or factors such as price of the
product, income of the people, availability of substitutes etc. It measures
the percentage change in the demand of a certain commodity to the percentage
change in economic factors (price, income etc.).
Types Of Elasticity Of Demand
Although there are several types of elasticity of demand, price elasticity,
income elasticity and cross elasticity of demand are the major ones.
1. Price Elasticity Of Demand
Price elasticity of demand shows how the demand of the commodity changes or
affected if its price changes. It is a percentage change in the demand to
the percentage change in the price.
Price Elasticity Of Demand = % change in demand/% change in price
Types Of Price Elasticity Of Demand
Price elasticity of demand can be classified as following types:
i) Perfectly Elastic Demand
If a small or negligible change in price causes infinite change in the
demand of a commodity, it is called perfectly elastic demand. It is a
situation when demand may be dropped to zero if there is a small fall in the
price of the item.
ii) Perfectly Inelastic Demand
Perfectly inelastic demand occurs when fall or rise in price causes no
change in the demand of the product or service. Generally, life saving
medicines, milk, salt etc. are some examples of this type of demand.
iii) Unitary Elastic Demand
Unitary elastic demand refers to the equal change ( suppose, X % change in
price leads to X % change in the demand of the commodity) in demand and the
price of the goods. It means percentage change in price is equal to the
percentage change in demand. It is unrealistic and hypothetical assumption
because it does not happen in the real life.
iv) Relatively Elastic Demand
Relatively elastic demand occurs if the % change in demand exceeds the %
change in the price of the commodity. If 5% rise in price results in 10%
fall in demand, it is known as relatively elastic demand.
v) Relatively Inelastic Demand
It is just opposite of relatively elastic demand. Relatively inelastic
demand occurs when more % change is price causes less % change in the
quantity of demand.
2. Income Elasticity Of Demand
Income elasticity of demand refers to the responsiveness of demand of a
specific product to the changes in the income of the buyer. It measures the
% change in demand to the % change in the income level.
Income Elasticity = % change in the demand/% change in the income
Types Of Income Elasticity Of Demand
Income elasticity of demand can be classified as following types:
i) High Income Elasticity Of Demand
High or more than unitary income elasticity of demand occurs when
percentage change in the demand of an item increases more than the
percentage change in the income of the customer.
ii) Unitary Income Elasticity Of Demand
It is also called income elasticity equal to unity. It occurs when the
income of the customer and demand for the commodity rises in the same
proportion. It means 10% increase in income leads to 10% increase in
demand.
iii) Low Income Elasticity Of Demand
It is called income elasticity less than unity. low income elasticity
occurs if the demand is less than the percentage change in the income.
iv) Zero Income Elasticity Of Demand
Zero income elasticity occurs if the demand of the commodity does not
change even if the income of consumers rises.
v) Negative Income Elasticity Of Demand
Income elasticity of demand becomes negative when the demand of product or
service declines with the rise in income. Customers start buying high
quality products when income rises. So, negative income elasticity applies
for inferior products or services.
3. Cross Elasticity Of Demand
Cross elasticity of demand applies especially in complementary or
substitute goods. It measures the change in the demand of one commodity in
response to the change in the price of another commodity. For example,
Increase in the price of tea may lead to increase in the demand of coffee
and vice versa.
Also Read
Types Of Cross Elasticity Of Demand
Cross elasticity of demand can be classified as follows:
i) Positive Cross Elasticity
Positive cross elasticity is a condition when rise in the price of one
product causes increase in the demand of another product. Generally, this
elasticity applies in the case of substitute products.
ii) Negative Cross Elasticity
Negative cross elasticity of demand occurs if rise in the price of one
product causes decrease in the demand of another product. This type of
elasticity of demand applies in complementary products.
