Types of Elasticity of Demand Explained with Diagrams and Formulas
Elasticity of demand is a central concept in economics that explains how consumers change their purchasing behavior when prices, incomes, or the prices of related goods change. This topic is crucial for school board exams, competitive tests, and real-world business decisions.
| Type of Elasticity of Demand | What It Measures | Key Formula |
|---|---|---|
| Price Elasticity of Demand (PED) | Responsiveness of quantity demanded to price changes | PED = (% Change in Quantity Demanded) / (% Change in Price) |
| Income Elasticity of Demand (YED) | Responsiveness of demand to change in consumer income | YED = (% Change in Quantity Demanded) / (% Change in Income) |
| Cross Elasticity of Demand (XED) | Change in demand for one good when price of another changes | XED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B) |
| Advertising Elasticity of Demand | Effect of advertising expenditure changes on demand | Advertising Elasticity = (% Change in Quantity Demanded) / (% Change in Advertising Spend) |
What is Elasticity of Demand?
Elasticity of demand means the degree to which the quantity demanded for a good or service responds when one of its influencing factors (like price or income) changes. It tells us how sensitive buyers are to these changes. At Vedantu, we simplify the concept so you can apply it confidently in exams and business contexts.
Types of Elasticity of Demand
Economists classify elasticity of demand into many types to analyze specific consumer responses. The three most common types are:
- Price Elasticity of Demand (PED): Shows how much demand changes for a product when its price changes.
- Income Elasticity of Demand (YED): Indicates how demand changes as consumer income changes.
- Cross Elasticity of Demand (XED): Measures how demand for one product shifts if the price of a related product changes (substitute or complement).
- Advertising Elasticity: Captures how demand reacts to changes in advertising spend.
| Elasticity Type | Examples |
|---|---|
| Price Elasticity | Soft drinks, luxury items vs. essential goods |
| Income Elasticity | Organic foods (high YED), basic grains (low or negative YED) |
| Cross Elasticity | Tea and coffee (substitutes); cars and petrol (complements) |
Measurement of Elasticity of Demand
Several methods help measure elasticity of demand for exams and business analysis. Each method uses a specific formula or approach to capture consumer responsiveness.
Common Measurement Methods
- Percentage Method: Calculates elasticity using percentage changes in demand and price.
- Total Expenditure/Outlay Method: Checks how total revenue changes as price changes.
- Point Method: Measures elasticity at a specific point on the demand curve.
- Arc Method: Uses average values between two points for larger changes.
The main formula for price elasticity is:
Price Elasticity of Demand (PED) = (% Change in Quantity Demanded) / (% Change in Price)
If PED > 1, demand is elastic; if PED < 1, inelastic; if PED = 1, unitary elastic.
Factors Affecting Elasticity of Demand
Multiple factors influence the elasticity for any product or service. Understanding these helps students write stronger answers and apply the concept practically.
- Availability of substitutes (more substitutes = higher elasticity)
- Proportion of income spent on the good
- Nature of the commodity (necessity vs. luxury)
- Time period considered (longer period = more elastic)
- Addiction/habit (habit-forming goods are less elastic)
Examples of Elasticity of Demand
Practical examples help you master this concept for exams and real-world discussions. For instance, if the price of smartphones rises sharply, many consumers may delay their purchase or switch to less expensive models, showing elastic demand. In contrast, medicines like insulin are inelastic—demand doesn't drop much even if prices rise.
Another example: When petrol prices increase, people may use public transport more, but overall demand remains relatively steady, indicating inelastic demand.
Key Points and Revision Notes
- Elasticity of demand shows how quantity demanded changes with price, income, or related goods' price.
- Main types: price, income, and cross elasticity.
- Elastic demand: Small price change causes big demand change (PED > 1).
- Inelastic demand: Price change causes little demand change (PED < 1).
- Factors: Substitutes, income share, nature of commodity, time, and habits.
- Remember formulae and measurement methods for board and competitive exams.
- Use diagrams to revise and answer MCQs.
Read more about related Commerce topics for a deeper understanding: Elasticity of Demand, Price Elasticity of Demand, and Income Elasticity of Demand. Explore business applications at Demand Forecasting or theory details at Law of Demand.
At Vedantu, we offer detailed Commerce materials designed for effective revision and deeper conceptual clarity. Mastering elasticity of demand supports your exam goals and sharpens real-world economics reasoning for business and policy decisions.
In summary, elasticity of demand is essential in economics to predict consumer reactions to price or income changes. Knowing its types, key factors, measurement methods, and real-life examples enables success in school, competition, and business decision-making.
FAQs on Concept of Elasticity of Demand in Economics
1. What is the concept of elasticity of demand in economics?
Elasticity of demand measures how much the quantity demanded of a product changes when its price or another factor changes. This concept helps economists understand consumer sensitivity and is a key idea in elasticity of demand economics study materials.
2. What is the formula for calculating price elasticity?
The formula for price elasticity of demand is: $E_d = \frac{\%\,\text{change in quantity demanded}}{\%\,\text{change in price}}$. This equation in elasticity of demand shows how quantity responds to price changes, a topic often covered in economics study materials.
3. What are the 5 points of elasticity of demand?
The 5 points describe demand responsiveness:
- Perfectly elastic
- Perfectly inelastic
- Unitary elastic
- Relatively elastic
- Relatively inelastic
4. What are the 4 types of elasticity of demand?
The four types of elasticity of demand are:
- Price elasticity
- Income elasticity
- Cross elasticity
- Advertising elasticity
5. Why is elasticity of demand important for businesses?
Understanding elasticity of demand helps businesses predict how prices affect sales. With this knowledge from economics study materials, firms can make better decisions on setting prices and revenue strategies, considering how consumers react to changes.
6. How does income elasticity of demand differ from price elasticity?
Income elasticity of demand measures how demand responds to income changes, while price elasticity focuses on price changes. Both are major concepts in elasticity of demand economics, but income elasticity reveals whether a good is normal or inferior.
7. What does it mean if demand is unitary elastic?
If demand is unitary elastic, the percent change in quantity demanded equals the percent change in price ($|E_d| = 1$). In this case, a price change leaves total revenue unchanged, an important topic in economics study materials.
8. How can cross elasticity of demand affect competing products?
The cross elasticity of demand shows how the quantity demanded for one product changes when the price of a related product changes. If the products are substitutes or complements, this concept in elasticity of demand economics reveals the strength of their relationship.
9. Can a good have perfectly inelastic demand?
Yes, a good is perfectly inelastic if its quantity demanded never changes, even when price changes ($E_d = 0$). Examples include life-saving medicines, which are often highlighted in elasticity of demand economics study materials due to their necessity.
10. What factors influence the elasticity of demand for a product?
Several factors influence elasticity of demand:
- Availability of substitutes
- Nature of the product
- Time period
- Share of income spent
11. How do economists use elasticity of demand in policy making?
Economists use elasticity of demand to estimate how taxes, subsidies, or price controls will impact markets. A good understanding, often learned in economics study materials, helps predict consumer reactions and adjust policies for desired results.
