Elasticity of Demand

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What is Elasticity of Demand?

In economics, the elasticity of demand is a degree of change in the quantity demanded of a product in response to its determinants, such as the price of the product, price of substitutes, and income of consumers.

In economics, elasticity can be defined as the responsiveness of a variable (demand or supply) with respect to its various determinants.

Read: Price Elasticity of Demand


Elasticity of Demand Definition

The concept of elasticity was first introduced by Dr. Alfred Marshall, who is regarded as the major contributor of the theory of demand, in his book “Principles of Economics.”

According to him, “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.”

Elasticity of demand may be defined as the ratio of percentage change in demand to the percentage change in the price

Lipsey

The elasticity of demand is the proportionate change of amount purchased in response to a small change in price, divided by the proportionate change in price.

Mrs. Jone Robinson

The elasticity of demand may be defined as the percentage change in the quantity demanded which would result from one percent change in price.

Prof. Boulding

Types of Elasticity of Demand

Economists have divided the elasticity of demand in three main categories. Three types of elasticity of demand is mentioned below:

  1. Price Elasticity of Demand
  2. Income Elasticity of Demand
  3. Cross-Elasticity of Demand
Types of Elasticity of Demand
Types of Elasticity of Demand

Price Elasticity of Demand

Definition: Price elasticity of demand is a measure of a change in the quantity demanded of a product due to change in the price of the product in the market.

Types of Price Elasticity of Demand

There are basically 5 types of price elasticity of demand:

  1. Perfectly Elastic Demand
  2. Perfectly Inelastic demand
  3. Relatively Elastic Demand
  4. Relatively Inelastic Demand
  5. Unitary Elastic Demand
Types of Price Elasticity of Demand
Types of Price Elasticity of Demand

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Factors Affecting Price Elasticity of Demand

  1. Relative Need for the Product
  2. Availability of Substitute Goods
  3. Impact of Income
  4. Time under Consideration
  5. Perishability of the Product
  6. Addiction
Factors Affecting Price Elasticity of Demand
Factors Affecting Price Elasticity of Demand

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Importance of Price Elasticity of Demand

  1. Price determination under Monopoly
  2. Price discrimination
  3. Formulation of taxation policies
  4. International trade
  5. Formulation of agricultural policies
Importance of Price Elasticity of Demand
Importance of Price Elasticity of Demand

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Income Elasticity of Demand

Definition: In Income elasticity of demand, the responsiveness of demand to change in income.

Types of Income Elasticity of Demand

  1. Positive income elasticity of demand
  2. Negative income elasticity of demand
  3. Zero income elasticity of demand

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Read: Income Elasticity of Demand


Factors Affecting Income Elasticity of Demand

  1. Income of Consumers in a Country
  2. Nature of Products
  3. Consumption Pattern

Read: Types of Demand


Cross Elasticity of Demand

Definition: Cross elasticity of demand can be defined as a measure of a proportionate change in the demand for goods as a result of change in the price of related goods.

Types of Cross Elasticity of Demand

  1. Positive cross elasticity of demand
  2. Negative cross elasticity of demand
  3. Zero cross elasticity of demand

Read: Cross Elasticity of Demand


What is Elasticity of Supply?

Definition: The elasticity of supply is a measure of change in the quantity supplied of a product in response to a change in its price.

Types of Elasticity of Supply

  1. Perfectly elastic supply
  2. Perfectly Inelastic Supply
  3. Relatively Elastic Supply
  4. Relatively Inelastic Supply
  5. Unitary Elastic Supply

Determinants of Elasticity of Supply

  1. Nature of a product
  2. Production techniques
  3. Time period
  4. Agriculture products

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Read: Difference Between Micro and Macro Economics

Reference
  1. D N Dwivedi, Managerial Economics, 8th ed, Vikas Publishing House

  2. Petersen, Lewis & Jain, Managerial Economics, 4e, Pearson Education India

  3. Brigham, & Pappas, (1972). Managerial economics, 13ed. Hinsdale, Ill.: Dryden Press.

  4. Dean, J. (1951). Managerial economics (1st ed.). New York: Prentice-Hall.


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