Types of Demand Elasticity

What is the meaning of elasticity of Demand ?

The elasticity of Demand means a change in demand of the commodity as a result of changing determinants of the demand. If not, the responsiveness of quantity demanded of the product since when changing price, income, prices of subsidiaries or anyone. To see what is demand, kindly click here. There are three main types of demand elasticity.

The elasticity of Demand is a very critical area in the demand subject of economics since it helps to make decisions about the demand quantity of the product and the price of the product.

Main types of demand elasticity

There are three main types of demand elasticity. They are,

1. Price elasticity of demand
2. Cross price elasticity of demand
3. Income elasticity of demand

Let’s separately talk about the three main types of demand elasticity.

1. Price elasticity of demand

Price elasticity means that responsiveness of quantity demanded of the product when changing the price of the considered commodity while all other factors are constant.  In other words, the sensitivity of changes in the quantity of demand as the result of changes in the price of a particular good is measured by the price elasticity of demand.

Price Elasticity of Demand can be calculated as follows.

Price elasticity of demand is different in different products.

• If a product has a zero value of elasticity of demand, that product has a perfect (zero) inelastic demand (ed = 0).
• If the elasticity of demand is less than one, that product has an inelastic demand (ed < 1).
• If a product has a value of one in the elasticity of demand, that product has a unitary demand (ed = 1).
• If the elasticity of demand is greater than one, that product has an elastic demand (ed > 1).
• If a product has an infinity, that product has a perfect (infinite) elastic demand (ed = ∞).

Example

The government commissioned a research firm, Super Consulting, to conduct a study on the market demand for cigarettes in Malaysia. The firm reported that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?    The government commissioned a research firm, Super Consulting, to conduct a study on the market demand for cigarettes in Malaysia. The firm reported that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?   

According to the Question,

A company has conducted a study on the market demand for cigarettes in Malaysia. According to the report of the firm, the price elasticity of demand for cigarettes is 0.4. And they expect to reduce smoking by 20 percent. look at the change in the price of cigarettes using the price elasticity of demand.

In the current situation, the price of the cigarette pack is $2. After reducing by 20% quantity demanded of the cigarettes, the price will increase by 50%. Then, the new price of cigarettes is $3.

The price elasticity of demand for cigarettes is 0.4. It means that this product has an inelasticity of demand since 0.4 is less than one (0.4 < 1).

We can state some factors that determine the price elasticity of demand as follows.

Factors that determine the price elasticity of demand

• Nature of the commodity

If the commodity is a necessity good (such as vegetables, medicines and so on), there is an inelastic price elasticity of demand. Because people are less price sensitive for these types of goods. But if the commodity is a comfort good, there is an elastic price elasticity of demand and if the commodity is a luxury good, there is a higher elastic price elasticity of demand (Chand, 2013).

• Time period

If long time period has been passed after the price changes, there is an elastic price elasticity of demand than in the short run.

2. Cross price elasticity of demand

Cross price elasticity of demand is a measure that can be used to measure how quantity of demand of a good is affected by changes in the price of another good. (Prateek Agarwal, 2019).

Cross price elasticity of demand can be defined as the percentage of the quantity of demand change of a good is divided by the percentage of the price change of another good when the other factors remain unchanged.

According to sign of the cross-price elasticity of demand, we can identify two major types goods. They are substitute goods and complementary goods. If the cross-price elasticity of demand is positive, goods are substitute to each other and if the cross-price elasticity of demand is negative, goods are complement to each other. According to this exercise, model “A” is a substitute good for the model “B” and “C” tennis rackets.

There are two major types of the cross-price elasticity of demand. They are,

1. Point cross price elasticity of demand

2. Arc cross price elasticity of demand.

The sensitivity of changes in quantity of demand as the results of changes in prices of related goods is measured by the cross price elasticity of demand. We can state some factors that determine the cross price elasticity of demand as follows.

Factors that determine the cross price elasticity of demand

• Availability of the substitutes

When there are large number of substitutes are available, increasing price of the particular good, tend to move fast consumers to substitute goods. So, if there are more substitutes are available for a particular good, we can see higher cross price elasticity of demand and vice versa.

3. Income elasticity of demand

The sensitivity of changes in quantity of demand as the results of changes in income of the consumers is measured by the income elasticity of demand.

We can state some factors that determine the income elasticity of demand as follows.

Factors that determine the income elasticity of demand

• Income level

People who earn higher income are less influential than the people who earn lower income by the price changes. So, there is lower income elasticity for high-income people to buy a particular good and there is higher income elasticity for lower-income people.

• Share in total expenditure

When the consumer pays a greater share of the income to buy a good, there is higher income elasticity and vice versa.