ELASTICITY OF DEMAND

CONTENT

1. Definition of Elasticity of Demand
2. Types of Elasticity of Demand
3. Degrees of Elasticity
4. Abnormal Elasticity of Demand
5. Worked Examples
6. Factors Determining Elasticity of Demand
7. Importance of Elasticity of Demand

Definition of Elasticity of Demand

This measures the degree of responsiveness of quantity of a commodity demanded to changes in the price of the commodity or to changes in income or taste of the consumer or to changes in prices of other commodities. This definition breaks down the various segments in which elasticity of demand will be examined:

Types of Elasticity of Demand

A. Price Elasticity of Demand

B. Income Elasticity of demand

C. Cross Elasticity of Demand

(A) Price Elasticity of Demand

This measures the degree of responsiveness of demand for a particular commodity to a small change in the price of such commodity. Price elasticity of demand is often called the Elasticity of Demand

The formula for Price Elasticity of Demand is:

Where: ∆φd = Change in Quantity Demanded

∆ρ = Change in Price

φd = Quantity Demanded

ρ = Price of the Commodity

∆φd = φ₂ – φ₁

∆ρ = ρ₂ – ρ₁

Where: φ₁ = Initial Quantity Demanded

φ₂ = New Quantity Demanded

ρ₁ = Initial Price

ρ₂ = New Price

(B) Income Elasticity of Demand

This measures the degree of responsiveness of quantity demanded to changes in income.