Elasticity

1. ELASTICITY OF DEMAND
PREPARED BY
K.DHEERAJ REDDY

2. INTRODUCTION:
Elasticity of demand is a measure of the responsiveness of quantity demanded to changes in a
certain factor such as price, income, or the price of related goods.
It is an important concept in economics because it helps businesses and policymakers to
understand how consumers react to changes in market conditions.
The formula for elasticity of demand is the percentage change in quantity demanded divided
by the percentage change in the factor affecting demand. If the resulting value is greater than
one, it indicates that the demand is elastic, which means that a small change in the factor
affecting demand results in a large change in the quantity demanded
If the value is less than one, it indicates that the demand is inelastic, which means that a
change in the factor affecting demand results in a proportionately smaller change in the
quantity demanded.

3. Types of Elasticity of demand:
We have majorly six types of Elasticity of demands namely:
1. Price Elasticity of demand
2. Income Elasticity of demand
3. Cross Price Elasticity of demand
4. Advertising Elasticity of demand
5. Price Elasticity of Supply
6. Time Elasticity of demand

4. 1. Price Elasticity of demand:
Price elasticity of demand is a measure of the responsiveness of quantity demanded to
changes in the price of a good or service.
The formula for price elasticity of demand is:
Price Elasticity of Demand = Percentage Change in Quantity Demanded /
Percentage Change in Price
 If the result of this calculation is greater than one, it indicates that the demand is elastic,
which means that consumers are very responsive to changes in price..
A small change in price results in a large change in the quantity demanded.
f the result of the calculation is less than one, it indicates that the demand is inelastic, which
means that consumers are not very responsive to changes in price.

5. 2.Income Elasticity of demand:
Income elasticity of demand is a measure of the responsiveness of quantity demanded to
changes in income. It tells us how much the quantity demanded of a product changes when
consumers' income changes.
The formula for income elasticity of demand is:
Income Elasticity of Demand = Percentage Change in Quantity
Demanded / Percentage Change in Income
If the result of this calculation is positive, it indicates that the good is a normal good, which
means that as consumers' income increases, the quantity demanded of the good also increases.
If the income elasticity of demand is greater than one, it indicates that the good is a luxury
good, which means that as consumers' income increases, the quantity demanded of the good
increases at a faster rate than income.
Conversely, if the income elasticity of demand is less than one, it indicates that the good is a
necessity good, which means that as consumers' income increases, the quantity demanded of
the good increases, but at a slower rate than income.

6. 3.Cross Price Elasticity of demand:
Cross-price elasticity of demand is a measure of the responsiveness of quantity demanded of
one good to changes in the price of another related good. It tells us how much the quantity
demanded of one good changes when the price of another related good changes.
The formula for cross-price elasticity of demand is:
Cross-Price Elasticity of Demand = Percentage Change in Quantity
Demanded of Good A / Percentage Change in Price of Good B
If the result of this calculation is positive, it indicates that the two goods are substitutes,
which means that as the price of one good increases, the quantity demanded of the other good
also increases.
If the cross-price elasticity of demand is negative, it indicates that the two goods are
complements, which means that as the price of one good increases, the quantity demanded of
the other good decreases.

7. 4.Advertising Elasticity of demand:
Advertising elasticity of demand is a measure of the responsiveness of quantity demanded to
changes in advertising expenditure.
It tells us how much the quantity demanded of a product changes when the amount of money
spent on advertising changes.
The formula for advertising elasticity of demand is:
Advertising Elasticity of Demand = Percentage Change in Quantity
Demanded / Percentage Change in Advertising Expenditure
If the result of this calculation is positive, it indicates that an increase in advertising
expenditure results in an increase in the quantity demanded of the product.
If the advertising elasticity of demand is greater than one, it indicates that advertising has a
significant impact on the demand for the product.
Conversely, if the advertising elasticity of demand is less than one, it indicates that
advertising has a less significant impact on the demand for the product.

8. 5.Price Elasticity of Supply:
Price elasticity of supply is a measure of the responsiveness of the quantity supplied of a
product to changes in its price.
It tells us how much the quantity supplied of a product changes when the price of the product
changes.
The formula for price elasticity of supply is:
Price Elasticity of Supply = Percentage Change in Quantity Supplied /
Percentage Change in Price
If the result of this calculation is greater than one, it indicates that the supply of the product is
elastic, which means that the quantity supplied of the product changes significantly in
response to changes in its price.
If the price elasticity of supply is less than one, it indicates that the supply of the product is
inelastic, which means that the quantity supplied of the product changes only slightly in
response to changes in its price.

9. 6.Time Elasticity of demand:
Time elasticity of demand is a measure of the responsiveness of the quantity demanded of a
product to changes in time.
It tells us how much the quantity demanded of a product changes over time.
The formula for time elasticity of demand is:
Time Elasticity of Demand = Percentage Change in Quantity Demanded
/ Percentage Change in Time
If the result of this calculation is greater than one, it indicates that the demand for the product
is highly time elastic, which means that the quantity demanded of the product changes
significantly over time.
If the time elasticity of demand is less than one, it indicates that the demand for the product is
less time elastic, which means that the quantity demanded of the product changes only
slightly over time.