Six Types Of Elasticity Of Demand In An Economy

Price elasticity is used by economists to understand how supply and demand for a product fluctuate as its price varies. Supply, like demand, has an elasticity known as price elasticity of supply. The relationship between change in supply and change in price is referred to as price elasticity of supply. It is computed by dividing the percentage change in amount supplied by the price change. The two elasticities work together to determine what goods are produced at what prices.

 

The price of a commodity influences its demand. By comparing the percentage price changes with the quantities demanded, we can determine the elasticity of demand, or the degree of responsiveness of demand. In this post, we will look at the idea of demand elasticity and briefly discuss its many varieties.

 

What is Elasticity of Demand?

 

With a decrease or increase in price, demand expands or contracts. Elasticity of Demand refers to the quality of demand that changes (increases or lowers) when prices vary (decreases or increases).

 

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

 

This shift in sensitivity or responsiveness might be subtle or dramatic. Consider the case of salt. Even a significant decrease in its price may not result in a significant increase in its demand. On the other hand, a minor decrease in the price of oranges may result in a significant increase in their demand. That is why we say demand is 'inelastic' in the first situation and 'elastic' in the second.

 

When a minor change in price causes a large change in demand, the demand is elastic; when even a large change in price causes only a slight change in demand, the demand is inelastic or less elastic. According to Dr Marshall, "the elasticity (or responsiveness) of demand in a market is great or small according to how much or little the amount demanded increases for a given fall in price, and diminishes for a given rise in price."However, demand cannot be completely 'elastic' or 'inelastic'.

 

It is the movement of a commodity's demand in the opposite direction of its price. However, the impact of price changes is not always consistent. Even minor price changes might cause significant changes in commodity demand. On the other side, there are some commodities whose price fluctuations have little effect on demand.

 

Demand for some commodities is responsive to price fluctuations, but demand for others is less responsive. The price elasticity of demand is the quantity of a commodity's receptiveness to a change in its price.

 

Factors affecting Elasticity of Demand

 

Other factors influence the Elasticity of Demand . Some things are more sensitive or elastic than others. The known elements that influence demand are discussed  below:

 

1. Suggestions for Substitutes:

 

The greater the ease with which a customer can substitute one product for another, the lower the price. For example, in a society where people like both coffee and tea equally, if the price of coffee rises, people will easily move to tea, and demand for coffee will plummet. This is due to the fact that coffee and tea are regarded as suitable alternatives for one another.

 

2. Urgency:

 

The more discretionary a purchase, the lower the quantity of demand in reaction to price rises. In other words, the product demand is more elastic. Assume you're thinking about getting a new washing machine, but your existing one still works; it's just old and obsolete. If the price of a new washing machine rises, you're more inclined to postpone the purchase until prices fall or your present machine breaks down. 

 

The less discretionary a product is, the lower the quantity demanded. Luxury things purchased for their brand names are instances of inelastic examples. Addictive products, as well as necessary add-on products such as inkjet printer cartridges, are quite inelastic. 

 

3. Time Period:

 

The price elasticity of demand fluctuates in direct proportion to time. The time range specified can be as short as a day or as long as several years.  Demand price elasticity is directly proportional to time period. This means that the elasticity over a shorter time period is always low, if not inelastic. 

 

The explanation given is that it is human nature to change habits. We generally stay with a commodity and react to price fluctuations extremely late. However, demand elasticity is high over a longer time period since human habits change with time. If the price of the original product changes in the long run, we can substitute it. 

 

4. Income Ranges:

 

Our society is separated into classes depending on income and way of life. Upper-class people typically have a greater income and live a more luxurious lifestyle, whereas lower-class people cannot purchase luxury products due to their poor income. Income levels have a significant impact on demand elasticity. 

 

Demand Elasticity for a commodity is often quite low for higher income groups. People in such categories are unconcerned about the price change.  In contrast, the price elasticity of demand for a commodity is very high for persons in low-income groups. Changes in commodity prices have a significant impact on the poor. 

 

5. Price Point:

 

The price level of items has a significant impact on the price elasticity of demand. Goods at higher price ranges are more likely to have high elasticity. A price increase will push them farther into the pricier category, while a price decrease will put them in the inexpensive segment. Mobile phones and laptop computers are examples of this. 

 

A person with a budget of $15,000 will not purchase a phone that is 20% more expensive. Low-cost commodities, on the other hand, are often inelastic or have a lower degree of elasticity. A packet of matchboxes is an example. Even a significant increase in its price will not push it into the high-priced category.  

 

Also Read | 5 Factors Affecting the Price Elasticity of Demand (PED)

 

 

Types of Elasticity of Demand

 

Price elasticity, income elasticity, and cross elasticity can all be distinguished. Price elasticity refers to the responsiveness of demand to changes in price; income elasticity refers to a change in demand in reaction to a change in consumer income; and cross elasticity refers to a change in demand for one item as a result of a change in the price of another. Some of the types of elasticity of demand are:

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Types of Elasticity of Demand

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1. Price Elasticity of Demand (PED):

 

Any change in the price of a commodity, whether a drop or an increase, affects the quantity required for a product. For example, when the price of ceiling fans climbs, so does the number requested.The Price Elasticity of Demand (PED) is a measure of how responsive the amount desired is when prices change. The following is the mathematical formula for estimating Price Elasticity of Demand:

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

 

2. Cross Elasticity  of demand: 

 

The cross elasticity of demand is defined as the proportional change in quantity demanded in relation to the proportional change in price of another good.

 

Price elasticity of demand = % of change in quantity demanded / % of change in price of another good = Q1/Q1 / P2/P2

 

Looking at the graph, a change in the price of another good causes the demand curve to shift to the left or right. The cross elasticity of demand is positive if the two commodities are substitutes. The cross elasticity of demand is negative if the two goods are complementary.

 

3. Income Elasticity of Demand (YED):

 

The quantity sought for a product is heavily influenced by consumer income levels. This can be seen in the difference between commodities sold in rural and urban marketplaces.

 

The Income Elasticity of Demand (YED) refers to the sensitivity of the quantity requested for a specific commodity to changes in real income (income generated by a person after accounting for inflation) of the consumers who buy this good, while all other variables remain constant.

 

4. Advertising Elasticity of Demand: 

 

Advertising Elasticity of Demand: Advertising elasticity of demand refers to the responsiveness of a change in demand to a change in advertising or promotional expenses. In other words, advertising elasticity of demand refers to the change in demand caused by changes in advertising and other promotional expenses.

 

Also Read | Elasticity of Demand and its Types

 

Conclusion

 

Using the notion of price elasticity of demand, economists seek to quantify the degree to which demand is sensitive to changes in price for a certain good. This assessment can assist forecast consumer behaviors as well as major events such as an economic recession or recovery. As clients, we make decisions that economists monitor on a daily basis. If the price of a good rises and we can live without it, there are many substitutes, or both, we may consume less of it or none at all. Regardless of price increases, we will continue to consume big amounts of water, medicine, and petrol as needed.

 

The notion of demand elasticity is used to justify whether devaluing a currency is a good way to solve a country's balance of payment concerns. If the sum of the elasticities of demand for export and import exceeds unity, devaluation is expected to repair the balance of payments imbalance. Within the boundaries set by comparative costs, the terms of trade also depend on international trade theory on the elasticity of demand of each country for the goods of other countries.

 

In summary, demand elasticity is a notion that has a wide range of applications in business decision-making and is thus very important in modern economics. In reality, most businesspeople should aim to have as precise a notion of elasticity as possible.