Category
>Financial Analytics

Elasticity of Demand and its Types

Ritesh Pathak
Jan 16, 2021
Updated on: Nov 21, 2023

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:

Price of the commodity
Price of related commodities
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

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.

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

Linda Anthony

Dec 07, 2023

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 Online 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 Email: info@darkwebonlinehackers.com Telegram or WhatsApp: +18033921735 Website: https://darkwebonlinehackers.com 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 Online 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 Email: info@darkwebonlinehackers.com Telegram or WhatsApp: +18033921735 Website: https://darkwebonlinehackers.com

Linda Anthony

Dec 07, 2023

Linda Anthony

Dec 07, 2023

Linda Anthony

Dec 07, 2023

Linda Anthony

Dec 07, 2023

Linda Anthony

Dec 07, 2023

chaseparton44031e71f9dc7904a2d

Dec 07, 2023

Telegram is a wild place and full of scammers, i was a victim of cryptocurrency scammers and lost a considerable amount of bitcoins. There was someone who was meant to manage my account, but neither do i know the person was an impostor. I got scammed of cumulatively $43,000 and more, and I was so hopeless, worried and believed that my stolen bitcoins were forever gone. I became very concerned, that's when I found out about Elite Web Recovery. I had also read some evaluations of their service and how useful they had been for many individuals who had lost their money. I contacted them right away to ask for their help and intervention. Though I was having a doubt when the team informed me that they could retrieve back my stolen bitcoins, but i must confess that it was the best decision that I made because my stolen Bitcoin was successfully returned to me, Something I thought would never happen. So for those who are victims, don't let those unfortunate scammers get away with your hard-earned money. You can rely on the expertise of elitewebrecovery@cash4u.com to get back whatever you may have lost due to fake investment trading.

walternatale

Dec 07, 2023

Muyern Trust Hacker leaves no room for compromise when handling client funds and assets. They employ strict protocols and industry best practices to safeguard your recovered bitcoins. Knowing that your hard-earned digital assets are safe gives you peace of mind. Recovering lost Bitcoins is a strong suit for Muyern Trust Hacker, as seen by their track record. Providing comfort at trying times, their staff has effectively assisted many clients regain access to their priceless digital assets. This is no typical tech company, Muyern Trust Hacker. Professionals with a thorough awareness of the difficulties in recovering misplaced cryptocurrency make up their team of Bitcoin recovery wizards. They make sure you get the best possible care and attention while adding a little magic to the healing process. The fundamental component of Bitcoin and other cryptocurrencies is blockchain technology. These specialists are very knowledgeable in digital wallets, blockchain technologies, and cryptography. Their proficiency allows them to decipher the intricacies of the blockchain and execute accurate recovery procedures gracefully. There are variations in Bitcoin recovery instances, which Muyern Trust Hacker is aware of. Because of this, they begin by performing a comprehensive first evaluation of your circumstances. They spend time getting to know you, hearing about your experiences, and learning about the specifics of your Bitcoin theft. They offer expert counsel and advice on the best course of action through a bespoke consultation. Muyern Trust Hacker is responsible for carrying out the customized recovery plans for your situation. Their proficiency in blockchain technology and cryptocurrencies equips them with the knowledge and abilities needed to handle the intricacies of the recuperation procedure. You may be confident that they will put in endless effort to increase the likelihood that you will be able to retrieve your bitcoins. To reach Muyern Trust Hacker for assistance on their website: https://muyerntrusthack.solutions/ or Whats App +.1.8.6.3.6.0.6.8.3.4.7.

edwardphyllis7407c3db58396a43a7

Dec 08, 2023

The increasing popularity of Bitcoin has resulted in a spike in digital currency theft in the recent past. Hackers prey on unwary people and organizations to steal their precious Bitcoin holdings. Tracking and tracing stolen assets is difficult due to the anonymity of Bitcoin transactions and the intricacy of blockchain technology. However, amid this growing threat, Wizard Web Recovery, a specialist team of experts, has become a dominant force in recovering Bitcoin that has been stolen. Whoever said money doesn't grow on trees didn't anticipate the rise of cryptocurrencies like Bitcoin. With its skyrocketing popularity and value, it's no surprise that hackers and thieves have set their sights on this digital gold, Stolen Bitcoin transactions have become a growing concern, leaving victims in a panic and perpetrators gleefully counting their loot. Bitcoin may be the coolest kid on the blockchain, but it's not as transparent as it seems. Bitcoin transactions are anonymous, making it challenging to trace stolen funds back to their nefarious origins. It's like following a masked bandit through a crowded carnival – you have no idea who they are. To complicate matters, Bitcoin transactions are irreversible. Once the funds are gone, they're gone, and you can kiss them goodbye like a bad blind date. As a result of its rise in recognition, Bitcoin is completely changing how people view and handle money. But, since Bitcoin is becoming more and more well-known, fraud and theft using this cryptocurrency have increased due to the attention that hackers have drawn to it. The necessity of having efficient ways to follow and identify transactions involving stolen Bitcoin has grown. Oh, Bitcoin, the digital gold of the internet. It's all fun and virtual riches until someone swipes your hard-earned crypto. Bitcoin theft is on the rise, and it's becoming a real headache for cryptocurrency enthusiasts. Hurry now and contact Wizard Web Recovery to help get back your lost bitcoin via email: wizardwebrecovery(@)programmer. net or Go to www.wizardwebrecovery.net for more information.

henryfaubert025b425ba4553884a1e

Dec 08, 2023

RECOVER UR DIGITAL ASSETS TODAY WITH KNIGHTHOODBOT RECOVERY CORP RECOVER YOUR LOST/STOLEN DIGITAL ASSETS I was unfortunately deceived by a crypto mining scam that nearly caused me financial ruin. Thankfully, I discovered the services of K N I G H T H O O D B O T RECOVERY CORP before the situation worsened. The scammers operated a group where they provided updates on trading and trading signals. However, to gain access to this premium group, one had to subscribe with a payment of “1000 Euros.” Inside the group, the admin would post information about tokens that would soon be listed on Binance exchange and other top exchanges. They claimed that buying these tokens before the listing and selling them later would result in substantial profits. As a first timer in the world of crypto, I reached out to the group admin for guidance. They instructed me to transfer Ethereum to a cold wallet and purchase the tokens through UNISWAP. Following their instructions, I bought a total of 32 Ethereum, equivalent to $65,328, worth of the token. However, when I attempted to sell the tokens or withdraw my funds back to USD, I encountered difficulties. Realising that the situation was beyond my capabilities, I sought the assistance of the Recovery Experts. We communicated further on Telegram with the username K N IG H T H OO D B O T 9 and continued via email at “K N IG H T H O O D B O T AT G MAIL DOT COM ,I shared the contract and other relevant information I had about the scam tokens. At present, the token’s value continues to rise, but I suspect that the team behind it is artificially inflating the market value to entice people to invest without receiving the promised returns. I strongly recommend reaching out to this Recovery team as soon as possible to address your situation.

Elasticity of Demand and its Types

Elasticity of Demand

3 Types of Elasticity of Demand

1. Price Elasticity of Demand (PED)

2. Income Elasticity of Demand (YED)

3. Cross Elasticity of Demand (XED)

5 other types of Elasticity of Demand

1. Perfectly Elastic Demand

2. Perfectly Inelastic Demand

3. Relatively Elastic Demand

4. Relatively Inelastic Demand

5. Unitary Elastic Demand

Conclusion

Share Blog :

Trending blogs

Latest Comments

Linda Anthony

Linda Anthony

Linda Anthony

Linda Anthony

Linda Anthony

Linda Anthony

chaseparton44031e71f9dc7904a2d

walternatale

edwardphyllis7407c3db58396a43a7

henryfaubert025b425ba4553884a1e