There are 2 Types of Elasticity

1. Elasticity of Demand - Price Elasticity of Demand, Income Elasticity of Demand and Cross Elasticity of Demand
2. Elasticity of Supply - Price Elasticity of Supply

What is 'Elasticity'

This is a measure of the degree of responsiveness of the change in one variable to changes in another variable.

(i) Price Elasticity of Demand (PED)

Price elasticity of demand is a measure of the degree of responsiveness of quantity demanded to the price of that commodity, assuming ceteris paribus.

Formula: $$ P.E.D. = \cfrac{Percentage \space change \space in \space Quantity \space Demanded}{Percentage \space change \space in \space Price} $$

Symbolically:

$$ \text{P.E.D.} = \frac{\text{%}\Delta Q_d}{\text{%}\Delta P} \times 100 $$

Categories of Price Elasticity of Demand

Elastic Demand

• When demand is elastic, the demand curve is flat or gentle sloping.
• Elastic Demand is where the percentage change in quantity demanded is greater than the percentage change in price.
• When demand is elastic, demand is very responsive to a price change.
• $1< PED < \infty$

Inelastic Demand

• When demand is inelastic, the demand curve is steeply sloping.
• Inelastic demand is where the percentage change in price is greater than the percentage change in quantity demanded.
• When demand is inelastic, demand is not very responsive to a price change.
• $ 0<PED<1 $

Unitary Demand

• When demand is Unitary, the demand curve is a rectangular hyperbola.
• When demand is unitary, the percentage change in quantity demanded is equal to the percentage change in price.
• $ PED = 1 $

Perfectly Elastic Demand

• When demand is perfectly elastic, the percentage change in quantity demanded is unaccompanies by a change in price.
• When demand is perfectly elastic, the demand curve is a horizontal line, parallel to the x-axis and perpendicular to the y-axis.
• $ PED = \infty $

Perfectly Inelastic Demand

• When demand is perfectly inelastic, the percentage change in price is unaccompanied by any change in quantity demanded.
• When demand is perfectly inelastic, the demand curve is a vertical line, parallel to the y-axis but perpendicular to the x-axis.
• $ PED = 0 $

Determinants of PED

1. Number of Substitutes - The greater the number of substitutes available for a commodity, the greater will be the PED, i.e. demand will be more elastic. The converse holds true.

2. Proportion of Income Spend on the Product - The greater the proportion of income spent on a commodity, the greater the PED i.e. demand is elastic. The converse holds true. Example; a house will have a greater PED than a doubles.

3. Addiction / Habit-forming Goods - Habit forming foods or addictive goods such as alcohol and cigarettes are more inelastic in demand or not very responsive to a price change. Since persons will still buy if the price goes up.

4. Luxuries / Necessities - Luxuries such as watches are more elastic in demand as compared to necessities such as food which is inelastic.

5. Number of uses - The greater the number of uses to which a commodity can be put, the greater will be the PED i.e. elastic demand. The converse holds true.

6. Durability - The greater the durability of a product, the higher will be the PED i.e. demand is more elastic.

7. Time Period - In the short run, demand is inelastic. In the long run, demand is more elastic.

Range of PED along a straight demand curve

Implications of PED for Total Spending and Total Revenue

(ii) Income Elasticity of Demand

• Income Elasticity of Demand is a measure of the degree of responsiveness of the quantity demanded for a commodity to a change in the income of a household.

Formula: $$ Y.E.D. = \cfrac{Percentage \space change \space in \space Quantity \space Demanded}{Percentage \space change \space in \space Income} $$

Symbolically:

$$ \text{Y.E.D.} = \frac{\text{%}\Delta Q_d}{\text{%}\Delta Y} $$

When worked arithmetically, this simplifies into: $$ \text{Y.E.D.} = \frac{\Delta Q_d}{Q_d} \times \cfrac{Y}{\Delta Y} $$

Types of Goods

(i) Normal Goods

• As income increases, quantity demanded increases.
• As income decreases, quantity demanded decreases.

Normal Goods have a positive income elasticity of demand.

(ii) Inferior Goods

• As income increases, quantity demanded decreases.
• As income decreases, quantity demanded inccreases.

Inferior Goods have a negative income elasticity of demand.

(iii) Cross Elasticity of Demand

• Cross elasticity of demand is a measure of the degree of responsiveness of the demand for commodity X due to a chnwge in the price of another commodity Y.

Formula $$ X.E.D. = \cfrac{Percentage \space Change \space in \space Quantity \space Demanded \space for \space CommodityX}{Percentage \space Change \space in \space Price \space for \space CommodityY} $$

Symbolically, $$ \text{X.E.D.} = \frac{\text{%}\Delta Q_{d x}}{\text{%}\Delta P_y} $$

When worked arithmetically, this simplifies into: $$ \text{X.E.D.} = \frac{\Delta Q_{d x}}{Q_{dx}} \times \cfrac{P_y}{\Delta P_y} $$

Types of Goods

(i) Substitute Goods

Substitute Goods have a positive cross elasticity of demand.

Lets look at Butter and Margarine:

$ Butter \space Price \space \uparrow, Margarine \space Quantity Demanded \uparrow \Rightarrow POSITIVE \space XED $

$ Butter \space Price \space \downarrow, Margarine \space Quantity Demanded \downarrow \Rightarrow POSITIVE \space XED $

(ii) Complementary Goods

Complementary Goods have a negative cross elasticity of demand.

Lets look at Camera and Film:

$ Camera \space Price \space \uparrow, Film \space Quantity Demanded \downarrow \Rightarrow NEGATIVE \space XED $

$ Camera \space Price \space \downarrow, Film \space Quantity Demanded \uparrow \Rightarrow NEGATIVE \space XED $