The Law of Demand explains the direction of change in demand due to change in the price. It fails to explain the rate of change in demand due to a given change in price. Elasticity of demand explains the rate of a change in quantity demanded due to a
given change in price.
“Elasticity of demand is, therefore,a technical term used by the Economists to describe the degree of responsiveness of the Quantity demand for a commodity to a change in its price”.
– Stonier And Hague
Elastic demand or More Elastic demand:
Demand for a commodity is said to be
“Elastic” when the quantity demanded
increases by a large amount due to a little
fall in the price and decreases by a large amount due a little rise in the price. To be
more scientific, Elastic demand is called as “More Elastic Demand”.
Types of Elasticity of Demand:
Price Elasticity of Demand:
Price elasticity of demand is commonly
known as elasticity of demand. This is
because price is the most influential factor affecting demand. “Elasticity of demand measures the responsiveness of the quantity demanded to changes in the price”.
1. Price Elasticity of Demand: The price elasticity of demand,commonly known as the elasticity of demand refers to the responsiveness and sensitiveness of demand for a product to the changes in its price.
In other words, the price elasticity of
demand is equal to
E=Proportionate change in Quantity Demanded
Proportionate chang in price
where, ΔQ = Q1 –Q0, ΔP = P1 – P0, Q1
= New quantity, Q0 = Original quantity, P1 = New price, P0 = Original price.
2. Income Elasticity of Demand: The
income is also a factor that influences
the demand for a product. Hence,
the degree of responsiveness of a
change in demand for a product due
to the change in the income is known
as income elasticity of demand. The
formula to compute the income
elasticity of demand is:
Proportionate change in Income
For most of the goods, the income
elasticity of demand is greater than one indicating that with the change in income the demand will also change and that too in the same direction, i.e. more income means
more demand and vice-versa.
3. Cross Elasticity of Demand: The cross elasticity of demand refers to the percentage change in quantity demanded for one commodity as a result of a small change in the price of another commodity. This type
of elasticity usually arises in the case of the interrelated goods such as substitutes and complementary goods. The cross elasticity of demand for goods X and Y can be expressed as:
Ec =Proportion chane in demand
of Commodity X
Proportion chaneg in PRICE of Commodity
4. Advertising Elasticity of Demand: The
responsiveness of the change in DEMAND due to the change in advertising or
other promotional expenses, is known
as advertising elasticity of demand. It
can be expressed as:
Ea= Proportionate change in Demand
Proportionate change in Advertising Expenditure