Types of Elasticity of Demand Explained with Diagrams and Formulas
Elasticity of demand is a central concept in economics that explains how consumers change their purchasing behavior when prices, incomes, or the prices of related goods change. This topic is crucial for school board exams, competitive tests, and real-world business decisions.
| Type of Elasticity of Demand | What It Measures | Key Formula |
|---|---|---|
| Price Elasticity of Demand (PED) | Responsiveness of quantity demanded to price changes | PED = (% Change in Quantity Demanded) / (% Change in Price) |
| Income Elasticity of Demand (YED) | Responsiveness of demand to change in consumer income | YED = (% Change in Quantity Demanded) / (% Change in Income) |
| Cross Elasticity of Demand (XED) | Change in demand for one good when price of another changes | XED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B) |
| Advertising Elasticity of Demand | Effect of advertising expenditure changes on demand | Advertising Elasticity = (% Change in Quantity Demanded) / (% Change in Advertising Spend) |
What is Elasticity of Demand?
Elasticity of demand means the degree to which the quantity demanded for a good or service responds when one of its influencing factors (like price or income) changes. It tells us how sensitive buyers are to these changes. At Vedantu, we simplify the concept so you can apply it confidently in exams and business contexts.
Types of Elasticity of Demand
Economists classify elasticity of demand into many types to analyze specific consumer responses. The three most common types are:
- Price Elasticity of Demand (PED): Shows how much demand changes for a product when its price changes.
- Income Elasticity of Demand (YED): Indicates how demand changes as consumer income changes.
- Cross Elasticity of Demand (XED): Measures how demand for one product shifts if the price of a related product changes (substitute or complement).
- Advertising Elasticity: Captures how demand reacts to changes in advertising spend.
| Elasticity Type | Examples |
|---|---|
| Price Elasticity | Soft drinks, luxury items vs. essential goods |
| Income Elasticity | Organic foods (high YED), basic grains (low or negative YED) |
| Cross Elasticity | Tea and coffee (substitutes); cars and petrol (complements) |
Measurement of Elasticity of Demand
Several methods help measure elasticity of demand for exams and business analysis. Each method uses a specific formula or approach to capture consumer responsiveness.
Common Measurement Methods
- Percentage Method: Calculates elasticity using percentage changes in demand and price.
- Total Expenditure/Outlay Method: Checks how total revenue changes as price changes.
- Point Method: Measures elasticity at a specific point on the demand curve.
- Arc Method: Uses average values between two points for larger changes.
The main formula for price elasticity is:
Price Elasticity of Demand (PED) = (% Change in Quantity Demanded) / (% Change in Price)
If PED > 1, demand is elastic; if PED < 1, inelastic; if PED = 1, unitary elastic.
Factors Affecting Elasticity of Demand
Multiple factors influence the elasticity for any product or service. Understanding these helps students write stronger answers and apply the concept practically.
- Availability of substitutes (more substitutes = higher elasticity)
- Proportion of income spent on the good
- Nature of the commodity (necessity vs. luxury)
- Time period considered (longer period = more elastic)
- Addiction/habit (habit-forming goods are less elastic)
Examples of Elasticity of Demand
Practical examples help you master this concept for exams and real-world discussions. For instance, if the price of smartphones rises sharply, many consumers may delay their purchase or switch to less expensive models, showing elastic demand. In contrast, medicines like insulin are inelastic—demand doesn't drop much even if prices rise.
Another example: When petrol prices increase, people may use public transport more, but overall demand remains relatively steady, indicating inelastic demand.
Key Points and Revision Notes
- Elasticity of demand shows how quantity demanded changes with price, income, or related goods' price.
- Main types: price, income, and cross elasticity.
- Elastic demand: Small price change causes big demand change (PED > 1).
- Inelastic demand: Price change causes little demand change (PED < 1).
- Factors: Substitutes, income share, nature of commodity, time, and habits.
- Remember formulae and measurement methods for board and competitive exams.
- Use diagrams to revise and answer MCQs.
Read more about related Commerce topics for a deeper understanding: Elasticity of Demand, Price Elasticity of Demand, and Income Elasticity of Demand. Explore business applications at Demand Forecasting or theory details at Law of Demand.
At Vedantu, we offer detailed Commerce materials designed for effective revision and deeper conceptual clarity. Mastering elasticity of demand supports your exam goals and sharpens real-world economics reasoning for business and policy decisions.
In summary, elasticity of demand is essential in economics to predict consumer reactions to price or income changes. Knowing its types, key factors, measurement methods, and real-life examples enables success in school, competition, and business decision-making.
FAQs on Concept of Elasticity of Demand in Economics
1. What is the concept of elasticity of demand in economics?
The concept of elasticity of demand refers to the degree of responsiveness in the quantity demanded of a good or service to a change in one of its determinants, such as price, consumer income, or the price of related goods. In simple terms, it measures how sensitive consumers are to these changes.
2. What are the three main types of elasticity of demand?
The three primary types of elasticity of demand studied in economics are:
- Price Elasticity of Demand (PED): Measures how the quantity demanded of a good responds to a change in its own price.
- Income Elasticity of Demand (YED): Measures how the quantity demanded of a good responds to a change in consumer income.
- Cross Elasticity of Demand (XED): Measures how the quantity demanded of one good responds to a change in the price of another related good (a substitute or a complement).
3. How is price elasticity of demand calculated using the percentage method?
According to the CBSE syllabus, the percentage method is a standard way to measure price elasticity of demand. The formula is:
Price Elasticity of Demand (PED) = (% Change in Quantity Demanded) / (% Change in Price)
A result greater than 1 indicates elastic demand, less than 1 indicates inelastic demand, and equal to 1 indicates unitary elastic demand.
4. What are the key factors that influence the price elasticity of demand for a good?
Several factors determine whether the demand for a good is elastic or inelastic. The main ones are:
- Availability of Substitutes: Goods with many close substitutes have more elastic demand.
- Nature of the Commodity: Necessities (like food and medicine) tend to have inelastic demand, while luxuries (like sports cars) have elastic demand.
- Proportion of Income Spent: Goods that take up a small portion of a consumer's income (like salt) are typically inelastic.
- Time Period: Demand tends to become more elastic over a longer period as consumers have more time to adjust their behaviour and find alternatives.
- Consumer Habits: Habit-forming goods, such as cigarettes, usually have inelastic demand.
5. Can you provide some real-world examples of elastic and inelastic demand?
Certainly. A classic example of inelastic demand is salt or essential medicines; a significant price change will cause little to no change in the quantity demanded. In contrast, an example of elastic demand is a specific brand of coffee or a particular model of smartphone. If the price increases, consumers can easily switch to other brands or models, causing a large drop in demand.
6. Why is understanding the elasticity of demand crucial for a firm's pricing strategy?
Understanding elasticity is vital for business success because it directly impacts total revenue. If a firm knows its product has inelastic demand, it can increase the price to increase total revenue, as the drop in quantity sold will be proportionally smaller than the price hike. Conversely, if the product has elastic demand, a price cut will lead to a proportionally larger increase in quantity sold, thus increasing total revenue.
7. What is the difference between perfectly elastic, perfectly inelastic, and unitary elastic demand?
These terms describe the different degrees of price elasticity:
- Perfectly Inelastic Demand (PED = 0): The quantity demanded does not change at all, regardless of the price change. The demand curve is a vertical line.
- Perfectly Elastic Demand (PED = ∞): Any small increase in price causes the quantity demanded to drop to zero. The demand curve is a horizontal line.
- Unitary Elastic Demand (PED = 1): The percentage change in quantity demanded is exactly equal to the percentage change in price. Total expenditure remains constant when the price changes.
8. How does the slope of a demand curve relate to its elasticity? Are they the same thing?
No, they are not the same thing, which is a common point of confusion. The slope of a demand curve measures the absolute change in price versus quantity (ΔP/ΔQ) and is constant for a linear demand curve. Elasticity, however, measures the relative (percentage) change. Therefore, even on a straight-line demand curve with a constant slope, elasticity changes at every point—it is elastic at higher prices and inelastic at lower prices.
9. How does cross elasticity of demand help businesses understand their competition?
Cross elasticity of demand is a powerful tool for competitive analysis. A positive cross elasticity value indicates that two products are substitutes (e.g., Coke and Pepsi). If a competitor raises its price, a business can expect its own demand to rise. A negative cross elasticity value indicates the products are complements (e.g., smartphones and apps). If the price of a complementary good rises, a firm can expect demand for its own product to fall.
10. Why does the elasticity of demand for a product, like petrol, change over different time periods?
The time horizon is a key determinant of elasticity. In the short run, the demand for petrol is highly inelastic because consumers have few immediate alternatives to driving their cars. However, in the long run, demand becomes much more elastic. Over several years, consumers can switch to more fuel-efficient cars, use public transport, move closer to work, or even purchase electric vehicles, all of which significantly reduce their consumption in response to higher prices.
