• Category
  • >Financial Analytics

Elasticity of Demand and its Types

  • Ritesh Pathak
  • Jan 16, 2021
Elasticity of Demand and its Types title banner

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: 

 

  1. Price of the commodity

  2. Price of related commodities 

  3. 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. 

 

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 there is a hike of $0.5 in the price of a cup of coffee, there are very high chances of a steep decline in the quantity demanded. 

 

  • 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.


Demand curves for perfectly elastic, perfectly inelastic, and unitary elastic demand.

Demand Curves


 

 

1. Perfectly Elastic Demand

 

When there is a sharp rise or fall due to a change in the price of the commodity, it is said to be perfectly elastic demand. 

 

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 will represent a higher elastic demand. Thus, the slope of the demand curve for a perfectly elastic demand is horizontal.

 

 

2. 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 a perfectly inelastic demand is a vertical line i.e. the slope of the curve is zero. 


 

 

3. 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. The numerical value of relatively elastic demand ranges between one to 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. 


The image shows the demand curves for relatively elastic demand and relatively inelastic demand.

Demand Curves


4. 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 goes down by 10%, the proportionate change in its demand will not go beyond 9.9..%, if it reaches 10% then it would be called unitary elastic demand. 

 

The numerical value of relatively inelastic demand always comes out as less than 1 and the demand curve is rapidly sloping for such type of demand. 

 

Recommended Read: Microeconomics vs Macroeconomics

 

 

5. 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. 


 

 

Conclusion

 

We can conclude the blog by stating the fact that the demand for a commodity is affected by several factors and the three main types of elasticity of demand explains the effect of those factors. 

 

To explain the extent of the effect of the economic variables on the quantity demanded, we have 5 other types of elasticity of demand which are perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, and unitary elastic.  

Latest Comments

  • paulrobert7022

    Sep 26, 2022

    I needed assistance on how to fix my credit and perhaps purchase a small condo/townhouse. I had a credit score of 517 across board, 4 hard inquiries (11-6-2019) 3 open accounts (car note, $35,000) and student loans (187,000-greatest mistake of my financial life); 3 negative marks, totaling $7,000-thought of asking for a pay to delete before learned about PINNACLE CREDIT SPECIALIST on MyFico blog. It still seems like a dream but I now have a FICO score of 811 and all hard inquiries, student loan, open accounts erased from my report and every debt now appears as paid on time. I sincerely appreciate the service I got from PINNACLE CREDIT SPECIALIST I encourage everyone who has credit issues to quickly contact them on: pinnaclecreditspecialist@gmail.com / +1 (585) 466 4373.

  • ddralahjiherbalhome

    Sep 27, 2022

    I am here to give thanks to Dr alahji for saving my relationship. I have been dating a guy for four years now, he's 39 and am 32. My boyfriend has always been so caring and loving, he has introduced me to all his family members and friends as his fiance after we got engaged a few months ago. We had already fixed our wedding date until my dreams turned to a nightmare all of a sudden. Just few weeks to our wedding my fiance changed, to the extent he said he wasn't interested in the relationship anymore simply because he was tired of me, I knew this was as a result of his ex girlfriend who has been begging him to come back all this while but he said he wasn't going to fall for her trap, but when he said it was over I knew she was the cause. All night and day I cried my heart out begging my fiance to come back because we had already fixed our wedding but he refused until i heard of Dr alahji the spell caster , i contacted him and he told me what to do, that he will cast some spells and my fiance will come back in 3 days after the spell. Few days later after the spell, as promised by Dr alahji my fiancee was at my place begging me on his kneels to forgive him saying he was sorry and do not know what came over him. All thanks to Dr alahji for saving my relationship , we got married a few days ago. If you are in need of a spell caster for any kind of spell work, contact the powerful spiritual man Dr alahji on Whatsapp : +2348140876149 or Email:ddralahjiherbalhome@gmail.com

  • Natasha Thompson

    Sep 29, 2022

    My name is Natasha Thompson from the USA/Texas.. Am so overwhelmed with gratitude to let the world know how Dr Kachi, the great spell caster changed my life for good. It all started when I lost my job and I was down financially and emotionally because I couldn’t be able provide for my two kids and staying home all day Jobless it’s not easy until I was checking on the internet when I saw a series of testimonies hearing people winning the Powerball lottery, I didn’t believed, but being poor no job you have no option. I gave it a try and I contacted Dr Kachi who told me what i have to do before I can become a big lottery winner and I accepted. He made special prayers for me in his temple and gave me the required numbers to play the lottery game and when I used the numbers to play it, I won a massive $344.6 million Powerball jackpot. I was so happy and I choose to review my winning in any platform, I would love other people to seek help from Dr Kachi through WhatsApp/number and Call: +1 (209) 893-8075 or email drkachispellcast@gmail.com by his website: https://drkachispellcast.wixsite.com/my-site

  • Natasha Thompson

    Sep 29, 2022

    My name is Natasha Thompson from the USA/Texas.. Am so overwhelmed with gratitude to let the world know how Dr Kachi, the great spell caster changed my life for good. It all started when I lost my job and I was down financially and emotionally because I couldn’t be able provide for my two kids and staying home all day Jobless it’s not easy until I was checking on the internet when I saw a series of testimonies hearing people winning the Powerball lottery, I didn’t believed, but being poor no job you have no option. I gave it a try and I contacted Dr Kachi who told me what i have to do before I can become a big lottery winner and I accepted. He made special prayers for me in his temple and gave me the required numbers to play the lottery game and when I used the numbers to play it, I won a massive $344.6 million Powerball jackpot. I was so happy and I choose to review my winning in any platform, I would love other people to seek help from Dr Kachi through WhatsApp/number and Call: +1 (209) 893-8075 or email drkachispellcast@gmail.com by his website: https://drkachispellcast.wixsite.com/my-site

  • richardjulian401

    Sep 29, 2022

    I wanted an approval for a car but I had a fico score of 492 Equifax, 546 TransUnion, 559 Experian. The only reason my Equifax is so low is because of the PPP loan being on it and exactly my fears the dealership singled it out and refused to approve my request. The dealer rather advises me to work with PINNACLE CREDIT SPECIALIST if I desire to fix my credit report. I immediately contacted via email: pinnaclecreditspecialist@gmail.com and explained all my challenges, he assured to raise my score and clear the loans including the credit card debts which he did perfectly in less than 4 days, which is an amazing job to me and I confirmed it when I returned to the same place I was denied earlier and after the dealer pulled my report I was approved of a car with a very low interest rate. All thanks to PINNACLE CREDIT SPECIALIST. I now have an excellent credit score of 801 Equifax, 809 TransUnion, 811 Experian and a clean credit report. You can contact them via email or reach them phone +1 (585) 466 4373 for quick and reliable credit fix, Chex system and DUI2020. Cheers and don’t forget to let them know I referred you.

  • Juliana Davis

    Oct 01, 2022

    i want to share to the whole world how Dr Kachi the Great of all the Spell Caster, that helped me reunite my marriage back, my Ex Husband broke up with me 3months ago, I have been trying to get him back ever since then, i was worried and so confused because i love him so much. I was really going too much depressed, he left me with my kids and just ignored me constantly. I have begged him for forgiveness through text messages for him to come back home and the kids crying and miss their dad but he wont reply, I wanted him back desperately. we were in a very good couple and yet he just ignores me and get on with his life just like that, so i was looking for help after reading a post of Dr Kachi on the internet when i saw a lady name SHARRON testified that Dr Kachi cast a Pure love spell to stop divorce. and i also met with other, it was about how he brought back her Ex lover in less than 24 hours at the end of her testimony she dropped his email, I contacted Dr Kachi via email and explained my problem to Dr Kachi and he told me what went wrong with my husband and how it happen, that he will restored my marriage back, and to my greatest surprise my Ex husband came back to me, and he apologized for his mistake, and for the pain he caused me and my children. Then from that day our marriage is now stronger than how it was before, Dr Kachi you're a real spell caster, you can also get your Ex back and live with him happily: Contact Email drkachispellcast@gmail.com his Number CALL/ WHATSAPP: +1 (209) 893-8075 Visit his Website: https://drkachispellcast.wixsite.com/my-site

  • evelynryan2022

    Oct 02, 2022

    GET RICH WITH BLANK ATM CARD ... Whatsapp: +18033921735 I want to testify about Dark Web blank atm cards which can withdraw money from any atm machines around the world. I was very poor before and have no job. I saw so many testimony about how Dark Web Cyber hackers send them the atm blank card and use it to collect money in any atm machine and become rich.{DARKWEBONLINEHACKERS@GMAIL.COM} I email them also and they sent me the blank atm card. I have use it to get 500,000 dollars. withdraw the maximum of 5,000 USD daily. Dark Web is giving out the card just to help the poor. Hack and take money directly from any atm machine vault with the use of atm programmed card which runs in automatic mode. You can also contact them for the service below * Western Union/MoneyGram Transfer * Bank Transfer * PayPal / Skrill Transfer * Crypto Mining * CashApp Transfer * Bitcoin Loans * Recover Stolen/Missing Crypto/Funds/Assets Email: darkwebonlinehackers@gmail.com Text & Call or WhatsApp: +18033921735 WEBSITE: https://darkwebonlinehackers.com

  • evelynryan2022

    Oct 02, 2022

    GET RICH WITH BLANK ATM CARD ... Whatsapp: +18033921735 I want to testify about Dark Web blank atm cards which can withdraw money from any atm machines around the world. I was very poor before and have no job. I saw so many testimony about how Dark Web Cyber hackers send them the atm blank card and use it to collect money in any atm machine and become rich.{DARKWEBONLINEHACKERS@GMAIL.COM} I email them also and they sent me the blank atm card. I have use it to get 500,000 dollars. withdraw the maximum of 5,000 USD daily. Dark Web is giving out the card just to help the poor. Hack and take money directly from any atm machine vault with the use of atm programmed card which runs in automatic mode. You can also contact them for the service below * Western Union/MoneyGram Transfer * Bank Transfer * PayPal / Skrill Transfer * Crypto Mining * CashApp Transfer * Bitcoin Loans * Recover Stolen/Missing Crypto/Funds/Assets Email: darkwebonlinehackers@gmail.com Text & Call or WhatsApp: +18033921735 WEBSITE: https://darkwebonlinehackers.com

  • Robert Morrison

    Oct 05, 2022

    READ MY REVIEW HOW I WIN $158m CONTACT DR KACHI NOW FOR YOUR OWN LOTTERY WINNING NUMBERS. I was a gas station truck driver and I always playing the SUPER LOTTO GAME, I’m here to express my gratitude for the wonderful thing that Dr Kachi did for me, Have anybody hear of the professional great spell caster who help people to win Lottery and clear all your debt and buy yourself a home and also have a comfortable life living. Dr Kachi Lottery spell casting is wonders and work very fast. He helped me with lucky numbers to win a big money that changed my life and my family. Recently i won, ONE HUNDRED AND FIFTY EIGHT MILLIONS DOLLARS, A Super Lotto ticket I bought in Oxnard Liquor Store, I am so grateful to meet Dr Kachi on internet for helping me to win the lottery and if you also need his help, email him at: drkachispellcast@gmail.com and he will also help you as well to win and make you happy like me today. His WhatsApp number: +1 (209) 893-8075  visit his Website, https://drkachispellcast.wixsite.com/my-site

  • Juliana Davis

    Oct 06, 2022

    i want to share to the whole world how Dr Kachi the Great of all the Spell Caster, that helped me reunite my marriage back, my Ex Husband broke up with me 3months ago, I have been trying to get him back ever since then, i was worried and so confused because i love him so much. I was really going too much depressed, he left me with my kids and just ignored me constantly. I have begged him for forgiveness through text messages for him to come back home and the kids crying and miss their dad but he wont reply, I wanted him back desperately. we were in a very good couple and yet he just ignores me and get on with his life just like that, so i was looking for help after reading a post of Dr Kachi on the internet when i saw a lady name SHARRON testified that Dr Kachi cast a Pure love spell to stop divorce. and i also met with other, it was about how he brought back her Ex lover in less than 24 hours at the end of her testimony she dropped his email, I contacted Dr Kachi via email and explained my problem to Dr Kachi and he told me what went wrong with my husband and how it happen, that he will restored my marriage back, and to my greatest surprise my Ex husband came back to me, and he apologized for his mistake, and for the pain he caused me and my children. Then from that day our marriage is now stronger than how it was before, Dr Kachi you're a real spell caster, you can also get your Ex back and live with him happily: Contact Email drkachispellcast@gmail.com his Number CALL/ WHATSAPP: +1 (209) 893-8075 Visit his Website: https://drkachispellcast.wixsite.com/my-site