• Category
  • >Financial Analytics

Elasticity of Demand and its Types

  • Ritesh Pathak
  • Jan 16, 2021
Elasticity of Demand and its Types title banner

Elasticity is a concept in economics that talks about the effect of change in one economic variable on the other.  

 

Elasticity of Demand, on the other hand, specifically measures the effect of change in an economic variable on the quantity demanded of a product. There are several factors that affect the quantity demanded for a product such as the income levels of people, price of the product, price of other products in the segment, and various others. 

 

Let’s begin our blog with a definition of Elasticity of Demand and then we will explore the different types of Elasticity of Demand. 

 

Also, read our blog on 4 types of Elasticity in economics

 

 

Elasticity of Demand

 

Elasticity of Demand, or Demand Elasticity, is the measure of change in quantity demanded of a product in response to a change in any of the market variables, like price, income etc. It measures the shift in demand when other economic factors change. 

 

In other words, the elasticity of demand is the percentage change in quantity demanded divided by the percentage change in another economic variable

 

The demand for a commodity is affected by different economic variables: 

 

  1. Price of the commodity

  2. Price of related commodities 

  3. Income level of consumers

 

We will read about these in detail, later in the blog. 


 

“The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price”. 

Alfred Marshall, British Economist

 

 

3 Types of Elasticity of Demand

 

On the basis of different factors affecting the quantity demanded for a product, elasticity of demand is categorized into mainly three categories: Price Elasticity of Demand (PED), Cross Elasticity of Demand (XED), and Income Elasticity of Demand (YED)

 

Let us look at them in detail and their examples.

 

 

1. Price Elasticity of Demand (PED)

 

Any change in the price of a commodity, whether it’s a decrease or increase, affects the quantity demanded for a product. For example, when there is a rise in the prices of ceiling fans, the quantity demanded goes down.  

 

This measure of responsiveness of quantity demanded when there is a change in price is termed as the Price Elasticity of Demand (PED).

 

The mathematical formula given to calculate the Price Elasticity of Demand is: 


 

  PED = % Change in Quantity Demanded % / Change in Price

 

The result obtained from this formula determines the intensity of the effect of price change on the quantity demanded for a commodity. 

 

 

2. Income Elasticity of Demand (YED)

 

The income levels of consumers play an important role in the quantity demanded for a product. This can be understood by looking at the difference in goods sold in the rural markets versus the goods sold in metro cities. 

 

The Income Elasticity of Demand, also represented by YED, refers to the sensitivity of quantity demanded for a certain good to a change in real income (the income earned by an individual after accounting for inflation) of the consumers who buy this good, keeping all other things constant. 

 

Speaking of inflation, you can also take a look at our blog on what is inflation.

 

The formula given to calculate the Income Elasticity of Demand is given as:

 

YED = % Change in Quantity Demanded% / Change in Income 

 

The result obtained from this formula helps to determine whether a good is a necessity good or a luxury good. 

 

 

3. Cross Elasticity of Demand (XED)

 

In a market where there is an oligopoly, multiple players compete. Thus, the quantity demanded for a product does not only depend on itself but rather, there is an effect even when prices of other goods change. 

 

Cross Elasticity of Demand, also represented as XED, is an economic concept that measures the sensitiveness of quantity demanded of one good (X) when there is a change in the price of another good (Y), and that’s why it is also referred to as Cross-Price Elasticity of Demand. 

 

The formula given to calculate the Cross Elasticity of Demand is given as: 

 

XED = (% Change in Quantity Demanded for one good (X)%) / (Change in Price of another Good (Y))

 

The result obtained for a substitute good would always come out to be positive as whenever there is a rise in the price of a good, the demand for its substitute rises. Whereas, the result will be negative for a complementary good. 

 

These three types of Elasticity of Demand measure the sensitivity of quantity demanded to a change in the price of the good, income of consumers buying the good, and the price of another good. 

 

Apart from these three types, we have some other types of Elasticity of Demand which we would look at now. 

 

Also, take a sneak peek at our blog on 5 key elements of financial analysis

 

 

5 other types of Elasticity of Demand

 

The effect of change in economic variables is not always the same on the quantity demanded for a product. 

 

The demand for a product can be elastic, inelastic, or unitary, depending on the rate of change in the demand with respect to the change in the price of a product. 

 

On the basis of the amount of fluctuation shown in the quantity demanded of a good, it is termed as ‘elastic’, ‘inelastic’, and ‘unitary’.

 

  • 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. 

 

  • An inelastic demand is one that shows a very little fluctuation in the quantity demanded with respect to a change in another economic variable. An example of this can be petrol or diesel. 

 

  • Unitary elasticity is one in which the fluctuation in one variable and quantity demanded is equal.


 

We can further classify these elastic and inelastic types of demand into five categories.


Demand curves for perfectly elastic, perfectly inelastic, and unitary elastic demand.

Demand Curves


 

 

1. Perfectly Elastic Demand

 

When there is a sharp rise or fall due to a change in the price of the commodity, it is said to be perfectly elastic demand. 

 

In perfectly elastic demand, even a small rise in price can result in a fall in demand of the good to zero, whereas a small decline in the price can increase the demand to infinity. 

 

However, perfectly elastic demand is a total theoretical concept and doesn’t find a real application, unless the market is perfectly competitive and the product is homogenous. 

 

The degree of elasticity of demand helps to define the slope and shape of the demand curve. Therefore, we can determine the elasticity of demand by looking at the slope of the demand curve. 

 

A Flatter curve will represent a higher elastic demand. Thus, the slope of the demand curve for a perfectly elastic demand is horizontal.

 

 

2. Perfectly Inelastic Demand

 

A perfectly inelastic demand is the one in which there is no change measured against a price change. 

 

Like perfectly elastic demand, the concept of perfectly inelastic is also a theoretical concept and doesn’t find a practical application. However, the demand for necessity goods can be the closest example of perfectly inelastic demand. 

 

The numerical value obtained from the PED formula comes out as zero for a perfectly inelastic demand. 

 

The demand curve for a perfectly inelastic demand is a vertical line i.e. the slope of the curve is zero. 


 

 

3. Relatively Elastic Demand

 

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. 

 

In relatively elastic demand, if the price of a good increases by 25% then the demand for the product will necessarily fall by more than 25%.

 

Unlike the aforementioned types of demand, relatively elastic demand has a practical application as many goods respond in the same manner when there is a price change. 

 

The demand curve of relatively elastic demand is gradually sloping. 


The image shows the demand curves for relatively elastic demand and relatively inelastic demand.

Demand Curves


4. Relatively Inelastic Demand

 

In a relatively inelastic demand, the proportionate change in the quantity demanded for a product is always less than the proportionate change in the price. 

 

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. 

 

The numerical value of relatively inelastic demand always comes out as less than 1 and the demand curve is rapidly sloping for such type of demand. 

 

Recommended Read: Microeconomics vs Macroeconomics

 

 

5. Unitary Elastic Demand

 

When the proportionate change in the quantity demanded for a product is equal to the proportionate change in the price of the commodity, it is said to be unitary elastic demand. 

 

The numerical value for unitary elastic demand is equal to 1. The demand curve for unitary elastic demand is represented as a rectangular hyperbola. 


 

 

Conclusion

 

We can conclude the blog by stating the fact that the demand for a commodity is affected by several factors and the three main types of elasticity of demand explains the effect of those factors. 

 

To explain the extent of the effect of the economic variables on the quantity demanded, we have 5 other types of elasticity of demand which are perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic, and unitary elastic.  

Latest Comments

  • thomasgibson802

    Dec 06, 2022

    I want to use this opportunity to tell the whole world on how I become rich and famous. I’m 93 years old. I was passing through difficulty in business and there was no hope of me coming out of my debt. I borrow money in my bank to do my business and I run at lost on the business I got frustrated and decided to be playing lottery to see if I can win and make my business grow and I have played for years now nothing good is coming my way on till I meet someone online talking about Dr Ayoola on the internet. He was taking about how this Dr Ayoola help him to win mega million lottery game. I said to myself if this is true and decide to contact him and told him to help me as well I later read more about this man and see how he has been helping people all over the world. I have faith in him and choose to work with him. After working with him he told me what I need to do for the number to be given to me which I did after he finish working he said I will have a dream and the number will be review to me in the dream. That night has I was sleeping I dream a number immediately he call me and gave me the same number I dream of and ask me to go and play the number. Today I’m here testifying of the good work he did for me I played the number and I won the sum of 1, 000,000 million dollars in a lotto max. You can contact Dr Ayoola for help if you want to win big in lottery game he has the gift of giving right number contact him today and thank me email him today Via email: drayoolasolutionhome@gmail. com or https://www.facebook.com/Dr-Ayoola-105640401516053/ text or call +14809032128

  • melissa levy

    Dec 06, 2022

    i stumbled across your site by accident (i think following a link trail from someone else's site) and i wanted to let you know how much joy and nostalgia this gave me, I just want to say Bitcoin has bounced back and is currently trading slightly above $17,000 support zone against the US Dollar and the bulls are so much in charge to see BTC to $50,,000 and ahead. Its still a great time to day trade with the little you hold and its not still late to buy little BTC and grow your portfolio as i have been doing with Mr Bernie Doran for the past 6 weeks now and i came to understand that you can make profit from the market at anytime and its even profitable when BTC is bullishing so your portfolio can grow too. His signals are so accurate and yields lots of profits, using his signals has made me 5.34 BTC with my initial 0.7 BTC which you all traders/investors will see is profitable. This is the most beneficial means of trading as experienced, you can reach out to Mr Bernie through Gmail : bernie.doranfx01@gmail.com or telegram : bernie_fx for more inquiries

  • melissa levy

    Dec 06, 2022

    i stumbled across your site by accident (i think following a link trail from someone else's site) and i wanted to let you know how much joy and nostalgia this gave me, I just want to say Bitcoin has bounced back and is currently trading slightly above $17,000 support zone against the US Dollar and the bulls are so much in charge to see BTC to $50,,000 and ahead. Its still a great time to day trade with the little you hold and its not still late to buy little BTC and grow your portfolio as i have been doing with Mr Bernie Doran for the past 6 weeks now and i came to understand that you can make profit from the market at anytime and its even profitable when BTC is bullishing so your portfolio can grow too. His signals are so accurate and yields lots of profits, using his signals has made me 5.34 BTC with my initial 0.7 BTC which you all traders/investors will see is profitable. This is the most beneficial means of trading as experienced, you can reach out to Mr Bernie through Gmail : bernie.doranfx01@gmail.com or telegram : bernie_fx for more inquiries

  • melissa levy

    Dec 06, 2022

    i stumbled across your site by accident (i think following a link trail from someone else's site) and i wanted to let you know how much joy and nostalgia this gave me, I just want to say Bitcoin has bounced back and is currently trading slightly above $17,000 support zone against the US Dollar and the bulls are so much in charge to see BTC to $50,,000 and ahead. Its still a great time to day trade with the little you hold and its not still late to buy little BTC and grow your portfolio as i have been doing with Mr Bernie Doran for the past 6 weeks now and i came to understand that you can make profit from the market at anytime and its even profitable when BTC is bullishing so your portfolio can grow too. His signals are so accurate and yields lots of profits, using his signals has made me 5.34 BTC with my initial 0.7 BTC which you all traders/investors will see is profitable. This is the most beneficial means of trading as experienced, you can reach out to Mr Bernie through Gmail : bernie.doranfx01@gmail.com or telegram : bernie_fx for more inquiries

  • evelynryan2022

    Dec 06, 2022

    GET RICH WITH BLANK ATM CARD, Whatsapp: +18033921735 I want to testify about Dark Web blank atm cards which can withdraw money from any atm machines around the world. I was very poor before and have no job. I saw so many testimony about how Dark Web Cyber hackers send them the atm blank card and use it to collect money in any atm machine and become rich. {DARKWEBONLINEHACKERS@GMAIL.COM} I email them also and they sent me the blank atm card. I have use it to get 500,000 dollars. withdraw the maximum of 5,000 USD daily. Dark Web is giving out the card just to help the poor. Hack and take money directly from any atm machine vault with the use of atm programmed card which runs in automatic mode. You can also contact them for the service below * Western Union/MoneyGram Transfer * Bank Transfer * PayPal / Skrill Transfer * Crypto Mining * CashApp Transfer * Bitcoin Loans * Recover Stolen/Missing Crypto/Funds/Assets Email: darkwebonlinehackers@gmail.com Text & Call or WhatsApp: +18033921735 Website: https://darkwebonlinehackers.com

  • evelynryan2022

    Dec 06, 2022

    GET RICH WITH BLANK ATM CARD, Whatsapp: +18033921735 I want to testify about Dark Web blank atm cards which can withdraw money from any atm machines around the world. I was very poor before and have no job. I saw so many testimony about how Dark Web Cyber hackers send them the atm blank card and use it to collect money in any atm machine and become rich. {DARKWEBONLINEHACKERS@GMAIL.COM} I email them also and they sent me the blank atm card. I have use it to get 500,000 dollars. withdraw the maximum of 5,000 USD daily. Dark Web is giving out the card just to help the poor. Hack and take money directly from any atm machine vault with the use of atm programmed card which runs in automatic mode. You can also contact them for the service below * Western Union/MoneyGram Transfer * Bank Transfer * PayPal / Skrill Transfer * Crypto Mining * CashApp Transfer * Bitcoin Loans * Recover Stolen/Missing Crypto/Funds/Assets Email: darkwebonlinehackers@gmail.com Text & Call or WhatsApp: +18033921735 Website: https://darkwebonlinehackers.com

  • melissa levy

    Dec 06, 2022

    i stumbled across your site by accident (i think following a link trail from someone else's site) and i wanted to let you know how much joy and nostalgia this gave me, I just want to say Bitcoin has bounced back and is currently trading slightly above $17,000 support zone against the US Dollar and the bulls are so much in charge to see BTC to $50,,000 and ahead. Its still a great time to day trade with the little you hold and its not still late to buy little BTC and grow your portfolio as i have been doing with Mr Bernie Doran for the past 6 weeks now and i came to understand that you can make profit from the market at anytime and its even profitable when BTC is bullishing so your portfolio can grow too. His signals are so accurate and yields lots of profits, using his signals has made me 5.34 BTC with my initial 0.7 BTC which you all traders/investors will see is profitable. This is the most beneficial means of trading as experienced, you can reach out to Mr Bernie through Gmail : bernie.doranfx01@gmail.com or telegram : bernie_fx for more inquiries

  • alima22jane

    Dec 07, 2022

    I have hard read many testimonies about DR WINNER spell caster how he has help many people of relationships issues, power-ball, Mega millions and I contacted him and it doesn't take much time that he help me cast his spell and gave me the winning numbers to play and assure me that I will win the powerball jackpot and all that he said came to pass and today I'm rich through his spell he used to help me win the jackpot. If you have ever spent money on any spell caster and couldn't see any results.... EMAIL him now: (Winnersspellcast@gmail.com) this is the only way to win the lottery and the best way via his website:https://winnersspellcast.blogspot.com Call or text him: +2348138289852 or via his Facebook Page 👇👇 https://www.facebook.com/drwinnerspelltemple/

  • Evelyn Dawson

    Dec 07, 2022

    I was reading through Facebook when I saw a post about the legit spell caster called Dr Kachi who has helped people in winning the lottery ticket. I'm a woman who’s addicted playing the lottery and always put all my faith in buying the ticket I lost all my money of all time and my effort trying to win my game, until I met my old friend who told me the Secret of her wealth that Dr Kachi who cast lottery spell winning number for her to play the Powerball ticket that change her life, it was she that directed me to Dr Kachi. i explained to him i want to win the Mega millions, Dr Kachi instructed me on what to do which i did and he told me to wait 24hours for him to cast the winning numbers, i went to buy my ticket and play the numbers which Dr Kachi gave to me and it was surprise when i find out i won the sum of ($109.9 Million Dollars Cash Value) for Friday night's drawing Mega Million Jackpot and than the whole thing looks wonderful, That's the most amazing thing i have ever experience with winning the lottery spell. i believed him and today i am glad to let you all know that this spell caster have the power to help you win big amount in lottery game, because i am now happy with my life. words Ain't enough to say thank you Sir. and from the deepest part of my heart, i will show my gratitude by sharing this testimony all over the world let people seek for your help to win the Lotto Game, and be happy like me today: Text Number and Call: +1 (209) 893-8075 Email: drkachispellcast@gmail.com his Website: https://drkachispellcast.wixsite.com/my-site

  • Evelyn Dawson

    Dec 07, 2022

    I was reading through Facebook when I saw a post about the legit spell caster called Dr Kachi who has helped people in winning the lottery ticket. I'm a woman who’s addicted playing the lottery and always put all my faith in buying the ticket I lost all my money of all time and my effort trying to win my game, until I met my old friend who told me the Secret of her wealth that Dr Kachi who cast lottery spell winning number for her to play the Powerball ticket that change her life, it was she that directed me to Dr Kachi. i explained to him i want to win the Mega millions, Dr Kachi instructed me on what to do which i did and he told me to wait 24hours for him to cast the winning numbers, i went to buy my ticket and play the numbers which Dr Kachi gave to me and it was surprise when i find out i won the sum of ($109.9 Million Dollars Cash Value) for Friday night's drawing Mega Million Jackpot and than the whole thing looks wonderful, That's the most amazing thing i have ever experience with winning the lottery spell. i believed him and today i am glad to let you all know that this spell caster have the power to help you win big amount in lottery game, because i am now happy with my life. words Ain't enough to say thank you Sir. and from the deepest part of my heart, i will show my gratitude by sharing this testimony all over the world let people seek for your help to win the Lotto Game, and be happy like me today: Text Number and Call: +1 (209) 893-8075 Email: drkachispellcast@gmail.com his Website: https://drkachispellcast.wixsite.com/my-site