Elasticity of Demand and its Types Price, Income and Cross Elasticity of Demand

If consumers expect rise in the price of a commodity in near future, the current demand for the commodity will increase and vice versa. At a price of ` 3, the market is CLEARED as the quantity demanded and supplied are equal to each other. Inferior goods(E.g.Coarse grain; rough cloth; skimmed milk; etc.). Inferior goods are those goods for which superior substitutes are available Quantity demanded of this group of commodities Have an INVERSE RELATIONSHIP with the income of the consumer. A consumer starts consuming full cream milk in place of toned milk with an increase in income.

As the price increases to P1, the quantity demanded decreases to Q1 by an equal proportion. Suppose, the price of a commodity is Rs. 50 and the quantity demanded in a specific market is 200 units. As the price increases to Rs. 60, its demand declines to 160 units. Perfectly-elastic-DemandIn fig, the x-axis shows the quantity demanded and the y-axis shows the price. When the price is slightly decreased, it leads to an increase in demand by a large amount i.e.

Relatively inelastic demand ( PED

Total revenue increases due to an increase in quantity if the percentage increase in quantity is greater than the percentage decrease in price. Additionally, it suggests that an increase in price will result in a percentage reduction in quantity sought that is proportionately less than the increase in price when demand is inelastic. The result for a substitute good would always be positive since anytime the price of an item rises, so does the demand for its alternative. In the case of a complementary good, however, the outcome will be negative.

The other things that change demand include tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations. In an types of price elasticity of demand oligopolistic market, numerous companies compete. Thus, the amount desired for a commodity is affected not only by its own price, but also by the prices of other items.

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. A Flatter curve will represent a higher elastic demand. Thus, the slope of the demand curve for a perfectly elastic demand is horizontal. Commodities like ice cream, soft drinks, etc. whose demand is not urgent, have highly elastic demand as their consumption can be postponed in case of an increase in their prices. But, poor people are highly affected by increase or decrease in the price of goods.

Relatively Inelastic Demand

Therefore consumers buy more of relatively cheaper goods than costlier one, al other things remaining the same. So the elasticity of demand for both these goods will be higher. Wider the range of substitutes, the greater the elasticity. For instance, soaps , toothpastes, cigarettes etc. are available in different brands each being substitute for the other. Therefore, the price elasticity of demand for each brand is much greater than that for generic commodity.

• W here no reductio n in price is needed to cause an increase in quantity demanded.
• Thus, expansion and contraction of demand means changes in quantity demanded due to change in the price of the commodity other determinants like income, tastes, etc. remaining constant or unchanged.
• Due to the concept of demand elasticity, the function of TR is graphed as a downward opening curve.
• During depression period, demand for such goods decrease rapidly and sellers are adversely affected.

The degree of responsiveness of demand to change in income of consumer is known as income elasticity of demand. When price of a commodity rises, its quantity demanded falls. When price of a commodity falls, its quantity demanded rises. Both individual and market schedules denotes an INVERSE functional relationship between price and quantity demanded. In other words, when price rises demand tends to fall and vice versa.

It is also known as highly elastic demand and more than unitary elastic demand. The demand can be said as unitary elastic when the percentage change in quantity demanded is equal to the percentage change in price. It is an imaginary concept as rarely found in the practical world. The common variables on which the demand of the product or commodity depends are price of the commodity, prices of related commodities, consumer’s income and many more. For example, if the price of a product falls by a significant amount then the demand of the product will rise as a result of the price fall.

Demand for any commodity is inelastic for a shorter period of time whereas elastic for longer period of time. This is so because the tastes, preferences and habits of consumers change in long run. In other words, the rise in the price of a commodity will lead to contraction of demand and Fall in price leads to an extension of demand in long run. Suppose, the price of a commodity is Rs. 40 and the quantity demanded is 20 units.

However, commodities with urgent demand like life saving drugs, have inelastic demand because of their immediate requirement. Higher own price of a good or Costly goods like car, gold etc. have highly elastic demand as their demand is very sensitive to changes in their prices. Hence by convention minus sign before the value of price elasticity of demand is generally ignored in economics. However the custom is to ignore the negative sign and discuss only the absolute level of the price elasticity. In other words price elasticity of demand is expressed as a number eliminating the need to deal with the negative sign.

According to this method, measurement of price elasticity of demand is based on the change in total outlay or total expenditure in respect to a change in the price of the commodity. In case of inelastic demand, percentage change in demand for a commodity is less than the percentage change in price. If the demand for a commodity changes even though there is no change in price then demand is called perfectly elastic. It also indicates that if a very small change is done in price then quantity demanded would changes indefinitely and due to this reason seller would not change the price.

Elasticity of demand: Types | 5 Degrees | Measurement | Factors

If the numerical value of elasticity of demand is less than one or unity, it is called inelastic demand. I.e. percentage change in quantity demanded is lesser than the percentage change in price. Unitary-elastic-DemandIn fig, the X-axis shows the quantity demanded and the Y-axis shows the price.

When there is no change in the demand of the commodity with the change in price is said to be perfectly inelastic demand. The demand curve in perfectly elastic demand represent Vertical straight line. Such goods which exhibit direct price-demand relationship are called ‘Giffen goods’. Generally those goods which are inferior, with no close substitutes easily available and which occupy a substantial place in consumer’s budget are called ‘Giffen goods’.

What is Price Elasticity of Demand?

Elasticity of supply means that the quantity supplied is highly responsive to changes in price, indicating that producers can easily adjust their production levels to meet changes in demand. Understanding time elasticity of demand is important for businesses that may need to adjust their prices over time. ⇒ The demand curve for unitary elastic demand is represented as a rectangular hyperbola. 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.

All Giffen goods are inferior goods; but all inferior goods are not Giffen goods. Examples of Giffen goods are coarse grains like bajra, low quality rice and wheat etc. Even a very small change in price leads to a very large change in quantity demanded it is said to be perfectly elastic.

It means that both price and quantity demanded change in the same proportion. This caselet is meant to understand three types of elasticity of demand – Price, Income and Cross Elasticity of Demand. Presented through a management trainee, Anita’s first three months at her new job, this caselet presents several of her elasticity-related experiences. Each of these episodes can be used to discuss and debate on the concept and contours of each of the three types of elasticity of demand. While each of the three types of elasticity of demand has sub-types, this caselet can also be used to examine the revenue relationships based on the elasticity type.

What is ‘Cross Elasticity of Demand’

The degree of responsiveness of demand to change in the price of related goods is known as cross elasticity of demand. It is quantitative statement, i.e., it tells us the magnitude of the change in quantity demanded as a result of change in price. Demand for those goods is inelastic to which consumers become habituated e.g. cigarette, tea, coffee etc. Despite rise in their prices people demand such goods in more or less the same quantity. This fluctuating tendency for a particular good after price changes is defined as the price elasticity of demand, at least in the economic circles.

Changes in weather conditions also influence household’s demand.E.g. – Extraordinary hot summer push up the demand for ice-creams, cold drinks, coolers etc. Thus, we can conclude that pressure of excess supply reduces the price. The demand for complementary goods have an INVERSE RELATIONSHIP with the price of related goods.

In ordinary speech, the term demand is many times confused with ‘desire’ or ‘want’. Demand for Grants is the form in which estimates of expenditure from the Consolidated Fund are submitted in pursuance of Article 113 of the Constitution. We started our blog “Study Notes Expert” in Oct 2021 with the intention of helping students across India and across borders. The blog provides free study material, notes, and tutorials for students of all boards and subjects. Our vision is to make quality education available to everyone at an affordable price or free of cost. Save taxes with ClearTax by investing in tax saving mutual funds online.

The demand curve of relatively elastic demand is gradually sloping. 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.