elasticity of demand

ELASTICITY OF DEMAND

MEANING

Elasticity of Demand measures the extent to which quantity demanded of a commodity increases or decreases in response to increase or decrease in its price, the price of related goods or a change in the income of consumer.

ACCORDING TO PROF. DOOLEY

“The elasticity of demand measures the responsiveness of quantity demanded of a good to change in its price, price of other goods and change in consumer’s income.”

Thus, the measure of the proportion of change in demand due to given change in factors affecting demand is known as Elasticities of demand.

Demand is that specific quantity of a commodity which the consumer purchases at a specific price during a specified time period.

ACCORDING TO FERGUSON

“Demand refers to the quantities of commodity that the consumers are able and willing to purchase at each possible price during a period of time, other things being equal.”

TYPES OF ELASTICITY OF DEMAND

There are basically three types of Elasticites of Demand:

  • Price Elasticity of Demand
  • Income Elasticity of Demand
  • Cross Elasticity of Demand

PRICE ELASTICITY OF DEMAND

It is the rate at which quantity purchased changes with the change in price. It is the ratio of percentage change in quantity demanded to percentage change in the price of the commodity, other factors remaining the same.

Ed= (-) (% change in quantity demanded)/ (% change in price)

ACCORDING TO BOULDING

“It measures the responsiveness of the quantity demanded of a good to the change in its price.”

INCOME ELASTICITY OF DEMAND

It is the degree of responsiveness or sensitiveness of change in quantity demanded to the change in the income of the consumer. It can also be defined as the ratio of proportionate change in the quantity demanded of a good to the proportionate change in income of the consumer.

Ey=  (Proportionate change in quantity demanded)/ (Proportionate change in the income of consumer)

Income Elasticity is

  • Positive in case of normal goods
  • Negative in case of inferior or giffen goods
  • Zero in case of neutral goods like air, water and sunshine etc.

CROSS ELASTICITY OF DEMAND

It is the degree of responsiveness of change in quantity demanded of ‘A’ commodity to change in price of related commodity ‘B’. This type of elasticity is generally found in case of substitute goods.

It can be defined as ratio of proportionate change in the quantity demanded of one good to the proportionate change in the price of another good.

Ec=  (Proportionate change in the quantity demanded of ‘A’ good)/ (Proportionate change in price of ‘B’ good)

Cross Elasticity is:

  • Positive in case of substitute goods
  • Negative in case of Complementary Goods
  • Zero in case of Independent goods.
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