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  • Elasticity of Demand and its Types

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Relatively Elastic Demand

Demand that is relatively elastic suggests that a change in the price of a good or service will have an effect on the quantity required of that good or service. A product or service is typically said to have significant price elasticity when there are several replacements available.

Example : You might see salt and a variety of salt alternatives when you browse the aisle at the grocery store. Would you be willing to pay an extra $2 for a bag of salt if there were salt replacements instead if the price of salt increased by $2 per bag tomorrow? Most people would switch from preferring salt to one that contains sugar substitutes, which would lower their demand for pure salt. Since most economists concur, salt is viewed as a good with a high degree of elasticity. 

Relatively Elastic demand

Relatively Elastic demand

Relatively Inelastic Demand 

Petrol is one product whose price is thought to be relatively inelastic. Both consumers and businesses need gas to prosper in our market. Despite the march toward alternative fuels, there are still a lot of individuals who depend on petrol for everyday needs and are unable or unlikely to switch to alternative fuels as a workable replacement.

Would you still report to work tomorrow if petrol prices rose by 30%? Most individuals will pay more because they have to. There are, of course, exceptions. Prices rose to a national average peak of almost $4.10 per petrol  during the oil and gas bubble in 2008, and customers adjusted their behaviour by requesting less gas. Some analysts believed that the sharp recession that occurred in late 2008 and 2009 was caused by this shift in demand.An excellent example of a relatively inelastic demand is found in luxury items like TVs and designer labels.

Example: A well-known slipper company sells 2,000 pairs of their flagship model, which retails for $100, each month. The company chooses to cut the cost of the slipper by 20%, from $100 to $80. At the current price, which represents a 25% increase, it starts selling 2,500 pairs per month. Given that the 25 % rise in demand exceeds the 20 percent variation in cost, slippers are considered to be relatively elastic.

Relatively inelastic demand

Relatively Inelastic Demand

Types of Elasticity of Demand

Elasticity of demand is classified into three types based on the many elements that influence the quantity desired for a product: price elasticity of demand (PED), cross elasticity of demand (XED), and income elasticity of demand (IED) (YED).

1)Price Elasticity of Demand (PED)

The quantity requested for a product is affected by any change in the price of a commodity, whether it be a drop or an increase. For example, as the price of ceiling fans rises, the quantity requested decreases.

The Price Elasticity of Demand is a measure of the responsiveness of quantity sought when prices vary (PED).

The mathematical formula for calculating Price Elasticity of Demand is as follows:

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

The formula's output determines the magnitude of the influence of a price adjustment on the amount required for a commodity.

2). Income Elasticity of Demand (YED)

Consumer income levels have a significant impact on the amount requested for a product. This may be seen in the contrast between commodities sold in rural marketplaces and those sold in urban markets.

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

The formula for calculating the Income Elasticity of Demand is as follows:

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

The formula's output may be used to assess if a product is a need or a luxury item.

3. Cross Elasticity of Demand (XED)

In an oligopolistic market, numerous companies compete. Thus, the amount desired for a commodity is affected not only by its own price, but also by the prices of other items.

Cross Elasticity of Demand (XED) is an economic term that assesses the sensitivity of quantity requested of one good (X) when the price of another item (Y) changes, and is also known as Cross-Price Elasticity of Demand.

The formula for calculating the Cross Elasticity of Demand is as follows:

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

The result for a substitute good would always be positive since anytime the price of an item rises, so does the demand for its alternative. In the case of a complementary good, however, the outcome will be negative.

Relatively Elastic Demand Example

The majority of necessities tend to be very inelastic.

Example : A youtube business with 50,000 subscribers offers a service for $100 a year. The corporation increases the subscription service's cost by 30%, from $100 per year to $130. The company now has 52,000 users, a 4 % increase after the price rise. The service is comparatively inelastic because the price increased by 30% while the demand increased by only 4%.

Economists attempt to quantify the degree to which demand is sensitive to changes in price for a particular good using the concept of price elasticity of demand. This assessment can be helpful in predicting consumer behaviour as well as big occurrences like an economic recession or recovery. Every day, as customers, we make choices that economists track. We may consume less of a good or none at all if its price rises and we can survive without it, there are many replacements, or both. Despite price hikes, we will continue to demand large amounts of water, medicine, and gasoline as needed.

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FAQs on Elasticity of Demand and its Types

1. Illustrate any three factors that affect the price elasticity of demand for commodities?

The three factors are:

A number of substitutes of goods: In this, the goods which are close substitutes are relatively more elastic. As we see if the price of such goods rises, the consumers have an alternative of shifting to its substitutes. Goods that have fewer substitutes such as cigarettes have less elastic and inelastic demand. 

The proportion of income spent on goods: In this, the consumers who spend their small portion of the income will have an inelastic demand. The goods on which the consumer spends a large portion of their income tend to have more elastic demand.

Nature of the commodity: Ordinary items like salt, matchbox, etc. have less elastic demand whereas luxuries like an air conditioner, cost furniture have more elasticity of demand.

2. Explain any two types of elasticity of demand.

Any two types of elasticity are:

Income Elasticity of Demand: Income is one of the factors that influence the demand for a product. The degree of responsiveness of a change in demand for the product of the change in demand for a product due to a change in income is known as income of elasticity. More income means more demand and vice versa.

Cross Elasticity of Demand:  It is defined as a change in the quantity of demand for one commodity to the change in the quantity of demand to other commodities is called cross elasticity of demand. Usually, these types of demand arise with the involvement of interrelated goods such as substitutes and complementary goods.

3. Does relatively elastic demand exceed 1?

When the proportionate change in demand exceeds the proportionate change in the good's price, the demand is said to be relatively elastic. The range of moderately elastic demand's numerical value is from one to infinity.In a market with relatively elastic demand, if a thing's price goes up by 25%, demand for that good must correspondingly decline by more than 25%.

4. What is an example of a relatively inelastic product?

The price elasticity table contains commodities such as salt, medical care, nicotine products, and fuel. The majority of requirements are highly inelastic. A software company with 50,000 customers that provides a service for $100 per year is an example. The firm increased the cost of the membership service by 30%, increasing the yearly fee to $130. Following the price hike, the corporation's subscribers increased by 4%, or by 52,000. The service is rather inelastic since demand increased by 4% while prices increased by 30%.

5. What does the economic term "relatively inelastic" mean?

According to the definition of relatively inelastic, relatively big increases in price result in relatively little changes in quantity. To put it another way, quantity does not respond very well to price. More specifically, the quantity change as a percentage is smaller than the price change as a %. When consumers have a limited number of imperfect alternatives to select from, the demand for a good or service is relatively inelastic. Similar to this, relatively inelastic supply happens when producers can only manufacture items by dividing their resources among a limited number of subpar alternatives.

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8.19: Assignment- Elasticity and Tuition

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Part 1 : Imagine that tuition for your schooling has increased by 20%. How do you think this will affect demand and consumer behavior? Why? How would you describe the elasticity of your tuition? Explain.

Part 2 : Imagine that there are currently 10,000 students enrolled at your institution. The school decides to increase tuition, and enrollment falls to 9,000. Tuition started at $4,000 per semester but has since gone up to $4,800. What is the elasticity of demand?

Part 3:  How will this impact total revenue for your institution? What inferences can you make from this information?

  • Assignment: Elasticity and Tuition. Provided by : Lumen Learning. License : CC BY: Attribution

Elasticity of Demand (With Example and Diagram)

assignment on elasticity of demand

In this article we will discuss about Elasticity of Demand:- 1. Concept of Elasticity of Demand 2. Types of Elasticity of Demand.

Concept of Elasticity of Demand:

In reality we often come across one or two sur­prising facts. For example, we observe that an in­crease in supply of an agricultural commodity, be­cause of a bumper crop or import of cheap corn from abroad, is likely to reduce its price. This fall in price is unlikely to raise demand because consump­tion of stable agricultural crops remain more or less unchanged in all situations.

So large output of any agricultural crop tends to be associated with low revenue (= P x Q) of the farmers. To understand this peculiar phenomenon we must learn an important economic concept, viz., ‘elasticity of demand’. Busi­ness firms, desirous of reducing prices in order to sell more of goods and services, and making more profit by doing so, must also be interested in the concept of elasticity.

And when a government department al­lows a public utility concern like the Calcutta Cor­poration to raise its price of water, or the Calcutta Electric Supply Corporation to raise the electricity tariff in order to wipe out its losses, the elasticity concept is very much involved.

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The de­mand for a commodity depends on a number of vari­ables like the price of the commodity, the income of the buyers, prices of related goods and son on.

Consumers do respond to a change in one of the vari­ables affecting demand, other variables remaining unchanged. The elasticity of demand measures the responsiveness of the market demand for a commod­ity to a change in one of the variables affecting de­mand.

The concept of elasticity is extremely useful in any business situation. It is often made use of by marketing managers to set prices of various prod­ucts and services.

It is also used by a discriminating monopolist like the Calcutta Electric Supply Cor­poration to set different prices for the same com­modity in two different markets. The Finance Min­ister also makes use of the concept to explore the possibility of raising revenue by imposing sales tax or excise duty on a wide variety of goods.

There are two other concepts of elasticity, viz., market share elasticity and promotional elasticity (or advertisement elasticity of sales). The former measures the responsiveness of the percentage share one firm has of the market, to changes in the ratio of its prices to industry prices. The latter measures the responsiveness of sales to change in advertising or any other sales promotion outlay.

In other words, it is a measure of market sen­sitivity of demand. And there are three types of demand elasticity’s, viz., price elasticity, income elasticity and cross elasticity.

Types of Elasticity of Demand:

I. price elasticity of demand :.

Price elasticity is “a concept for measuring how much the quantity demanded responds to changing price”. In other words, “it is a relative measure of the responsiveness of changes in quantity demand­ed, the dependent variable, to changes in price, the independent variable”. In fact, various commodi­ties differ in the degree to which the quantity de­manded will respond to changes in their respective prices.

If the price of salt falls by 1% the quantity of salt demanded may go up by less than 1%. But the sales of colour TV sets may rise more than 1% for every 1% price cut. We can also think of an in­termediate situation where 1% cut in price may lead to exactly 1% increase in sales when per­centage change in price balances percentage chang­es in quantity.

The first case is one of weak percentage response of Q to changes in P and if this is the case demand is said to be inelastic. The second case is of strong percentage response of Q to changes in P and falls in the category of elastic demand. The intermediate (borderline) case is one of ‘unitary elasticity of de­mand.

The Total Revenue Test :

The conventional way of measuring elasticity is to look at the effect of price changes on the total revenue of business firm (or total expenditure of consumers). Total revenue is P x Q. If consumers buy 10 litre of petrol at Rs. 8 per litre, the total revenue is Rs. 80.

It is possible to see whether demand is elastic, unitary elastic or inelastic by examining the effect on total revenue of a price cut along the same de­mand curve:

Price elasticity is a measure of the degree of re­sponsiveness of quantity demanded of a commodity to changes in its market price. We can think of the following three alternative categories of price elasticity.

1. When percentage cut in P results in such a large change in Q that TR = (P x Q) rises, de­mand is said to be elastic (i.e., P 1 Q 1 > P 0 Q 0 .)

2. When a percentage cut in P results in exactly the same percentage increase in Q so that TR remains unchanged (i.e., P 1 Q 1 = P 0 Q 0 ), demand is said to be unitary elastic.

3. When a percentage cut in P results in such a small percentage increase in Q that TR falls (i.e., P 1 Q 1 < F 0 Q 0 ) demand is said to be inelas­tic. The three figures below illustrate the three situations.

Three categories of demand elasticity

See also the following table which is self- explanatory.

Demand Schedules with Different Elasticities

The concept of elasticity has practical rele­vance. By using the concept in the business world, or in the labour market or in the Ministry of Finance (Government of India) it is possible to determine the sensitivity of changes in quantity demanded to changes in price. However, application of the con­cept is possible only after calculation of an elastici­ty coefficient.

Calculation of Price Elasticity :

Elasticity can be calculated in two ways. Firstly it as an average value over some range of the de­mand function, in which case it is called arc elas­ticity.

The arc price elasticity can be calculated us­ing the following mid-point formula:

Arc price elasticity of demand

Arc price elasticity of demand

The formula for calculating arc elasticity may be expressed as:

Formula for calculating arc elasticity

in which E p is arc elasticity of quantity demanded with respect to price,

P 1 and Q 1 are the original price and quantity,

P 2 and Q 2 are the final price and quantity,

∆P is the absolute change in price and

∆Q is the absolute change in quantity.

Note that E p is always a pure number like 1, 1/2, 1/ 4 etc.. because it is the ratio of two percentage changes.

Since the demand curve is downward sloping, either ∆P or ∆Q will be negative. Therefore, the calculated value for elasticity has negative sign.

On the basis of mid-point formula we may com­pute arc price elasticity. If E p > 1 demand is said to be elastic; if E p = 1 demand is unitary elastic and it E p < 1 demand is inelastic. Consider the following example.

Suppose income is constant at Rs. 3,000 per year, present price of a good is Rs. 10 and present quantity demanded is 125 units per month. Now the price falls to Rs. 9 and a large quantity of 150 units per month is likely to be demanded. What is the arc price elasticity over this range of the demand curve?

Substituting values into the arc elasticity for­mula, we get:

assignment on elasticity of demand

You have the sole authority to sell sandwiches in Eden Gardens during a test Match. Each costs 50 p. (including all relevant costs such as that of your labour).

From previous experience your best esti­mate of the demand is the following:

Estimate of demand

Calculate the elasticity of demand on this de­mand schedule around the price of Re. 1. Explain precisely the concept of elasticity you use.

Elasticity of demand around a price of Re. 1:

Elasticity of demand =

Proportionate change in quantity demanded/Proportionate change in price

When price increases from Re. 1 to Rs. 1.05, propor­tionate increase is 5%. At Rs. 1.05 proportionate decrease in quantity demanded, i.e., from 2000 to 1800 is of 10%.

Elasticity of demand:

Conversely if price decreased from Re. 1 to 95 p., there is a decrease of 5%. At 95 p. quantity de­manded increases from 2000 to 2200, an increase of 10%.

. . . Elasticity of demand = 10%/5% = 2

Since we get the same result for price increase and price fall, we need not use the mid-point formula.

Consider the following equation relating the number of passengers (road users) per year on a rap­id transit system to the fare charges:

Q = 2207 – 52.4P (10.2)

in which Q = number of passenger per year

P = fare in paise

The partial derivative of the function with respect to price is:

assignment on elasticity of demand

It may be noted that the demand for a particu­lar commodity may be price elastic but income ine­lastic. For example, the demand for V.C.R. or T.V. sets or cars may be price inelastic but income elas­tic. If this is true, a marginal drop in the price of these items is unlikely cause a fall in the quantity demanded of those items, whereas an increase in income would lead to an increase in the number of V.C.R. T.V., or cars demanded.

In general price elasticity of demand for cars in developing coun­tries like India is found to be very high, whereas the income elasticity of demand is unitary. The im­plication is that a fall in the price of cars will lead to a sharp rise in the number of cars demanded. This will occur whether the economy is in the ex­pansionary or contractionary phase of the business cycle.

The numerical value of the co-efficient of in­come elasticity may be zero, positive, or negative. There may be a particular commodity like salt the quantity demanded of which may not respond to a small change in the income of the buyers. It is posi­tive in case of normal goods and negative in case of inferior goods.

If the quantity demanded of a commodity rises (falls) with an increase in income, the commodity is called a normal (inferior) good. Even in case of the same commodity – the coefficient of income elasticity may vary at different levels of income. See Figure 10.12.

Here Y d is the income de­mand curve showing the relationship between Y d (disposable income) and Q. At low levels of income (for income range OY 0 ) demand is elastic. Subse­quently it becomes completely inelastic (for income range Y 0 – Y 1 ). Finally, at higher levels of income Y 1 and above) demand is inelastic again.

Income demand curve

Practical Relevance :

The concept of income elasticity has practical relevance. In fact, in order to determine the effect of changes in business activity, the business econo­mist must have a knowledge of income elasticities. On the basis of forecast of national or disposable personal income it is possible to apply income elas­ticities in estimating the changes in the purchases of consumer goods (especially durables).

However, such forecasts have limited value for two reasons:

(1) Sales are influenced by various other factors not included in the elasticity measure and

(2) The past pattern of purchase of a commodity is not an accu­rate indicator of the future.

III. Cross-Elasticity of Demand :

Cross elasticity of demand measures the inter­relationship of demand. In reality, the quantity demanded of a commodity, say motor cars, depends not only on its own price but also on the prices of fuel, tyres, mopeds, scooters, etc. Cross-elasticity measures the responsiveness of the quantity de­manded of a commodity to a change in the market price of another commodity.

The following formula is used to find out the numerical value of the elas­ticity coefficient:

Numerical value of the elasticity coefficient

in which P 1 and P 2 represent the new and old prices of the other commodity.

Likewise point cross-elasticity is measured by the formula:

Cross-elasticity

The coefficient of cross elasticity can be zero, posi­tive or negative. It is zero in case of unrelated goods like tractors and motor cars. It is positive if the two commodities are substitutes.

For instance, an in­crease in the price of a substitute (say coffee) in­creases the quantity of the original commodity (say tea) demanded. Finally, it is negative if the two goods are complimentary. An increase in the price of petrol, for example, reduces the number of cars demanded. 

Related Articles:

  • Elasticity of Demand: Meaning and Types of Elasticity (explained with diagram)
  • Cross Elasticity of Demand: Measurement, Types and Significance
  • Income Elasticity of Demand: Concept and Its Values
  • 5 Degrees of Price Elasticity of Demand

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  • Prof. Jonathan Gruber

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Principles of microeconomics.

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Session Overview

Keywords : Elasticity; revenue; empirical economics; demand elasticity; supply elasticity.

Session Activities

Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:

  • [R&T] Chapter 5, “Elasticity: A Measure of Response.”
  • [ Perloff ] Chapter 3, “Applying the Supply-and-Demand Model.” (optional)

Lecture Videos

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  • Graphs and Figures (PDF)

Further Study

A vertical demand curve means that if the supply curve shifts, only the price changes; there is no change in quantity demanded.

When a good has a perfect substitute (for example, hamburgers at different fast food chains), then if there is a price increase at one store, consumers will simply switch to purchasing from another store. This results in a perfectly elastic demand curve. A good that has no substitutes will have perfectly inelastic demand. The existence of complementary goods and the nature of the supply curve do not affect the elasticity of demand.

Being in the hospital is correlated with being ill, because primarily ill patients are admitted to the hospital, but this is not the cause of the illness. The primary challenge of empirical economics is to distinguish correlation and causation.

The elasticity of demand does not change when price changes, and we have not discussed any change on the supply side. If revenue is declining that means that consumers are shifting away from this firms good (now that is newly expensive) and purchasing goods made by other firms, not vice versa.

Any shock to the supply of a good caused by weather or government policy will shift the supply curve, and this will allow us to use the resulting changes in price and quantity sold to estimate the elasticity of demand.

These optional resources are provided for students that wish to explore this topic more fully.

Textbook Study Materials

See the [Perloff] chapter for the topics covered, as well as quizzes, applications, and other related resources.

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Price Elasticity of Demand: Meaning, Types, and Factors That Impact It

assignment on elasticity of demand

What Is Price Elasticity of Demand?

Price elasticity of demand is a measurement of the change in the demand for a product in relation to a change in its price. Elastic demand is when the change in demand is large when there is a change in price. Inelastic demand is when the change in demand is small when there is a change in price.

Key Takeaways

  • Price elasticity of demand is a measurement of the change in consumption of a product in relation to a change in its price.
  • A good is perfectly elastic if the price elasticity is infinite (if demand changes substantially even with minimal price change).
  • If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic.
  • If a good’s price elasticity is 0 (no amount of price change produces a change in demand), it is perfectly inelastic.
  • If price elasticity is exactly 1 (price change leads to an equal percentage change in demand), it is known as unitary elasticity.
  • The availability of a substitute for a product affects its elasticity. If there are no good substitutes and the product is necessary, demand won’t change when the price goes up, making it inelastic.

Theresa Chiechi / Investopedia

Understanding Price Elasticity of Demand

Economists have found that the prices of some goods are very inelastic . That is, a reduction in price does not increase demand much, and an increase in price does not hurt demand, either. For example, gasoline has little price elasticity of demand. Drivers will continue to buy as much as they have to, as will airlines, the trucking industry, and nearly every other buyer.

Other goods are much more elastic , so price changes for these goods cause substantial changes in their demand or their supply.

Not surprisingly, this concept is of great interest to marketing professionals. It could even be said that their purpose is to create inelastic demand for the products that they market. They achieve that by identifying a meaningful difference in their products from any others that are available.

If the quantity demanded of a product changes greatly in response to changes in its price, it is elastic. That is, the demand point for the product is stretched far from its prior point. If the quantity purchased shows a small change after a change in its price, it is inelastic. The quantity didn’t stretch much from its prior point. 

Price elasticity of demand expressed mathematically is as follows:

Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in Price

Factors That Affect Price Elasticity of Demand

Availability of substitutes.

The more easily a shopper can substitute one product for another, the more the price will fall. For example, in a world in which people like coffee and tea equally, if the price of coffee goes up, people will have no problem switching to tea, and the demand for coffee will fall. This is because coffee and tea are considered good substitutes for each other.

The more discretionary a purchase is, the more its quantity of demand will fall in response to price increases. That is, the product demand has greater elasticity.

Say you are considering buying a new washing machine, but the current one still works; it’s just old and outdated. If the price of a new washing machine goes up, you’re likely to forgo that immediate purchase and wait until prices go down or the current machine breaks down.

The less discretionary a product is, the less its quantity demanded will fall. Inelastic examples include luxury items that people buy for their brand names. Addictive products are quite inelastic, as are required add-on products, such as inkjet printer cartridges.

One thing all these products have in common is that they lack good substitutes. If you really want an Apple iPad, then a Kindle Fire won’t do. Addicts are not dissuaded by higher prices, and only HP ink will work in HP printers (unless you disable HP cartridge protection).

Duration of Price Change

The length of time that the price change lasts also matters. Demand response to price fluctuations is different for a one-day sale than for a price change that lasts for a season or a year.

Clarity of time sensitivity is vital to understanding the price elasticity of demand and for comparing it with different products. Consumers may accept a seasonal price fluctuation rather than change their habits.

Types of Price Elasticity of Demand

Price elasticity of demand can be categorized according to the number calculated by dividing the percentage change in quantity demanded by the percentage change in price. These categories include the following:

Example of Price Elasticity of Demand

As a rule of thumb, if the quantity of a product demanded or purchased changes more than the price changes, then the product is considered to be elastic (for example, the price goes up by 5%, but the demand falls by 10%).

If the change in quantity purchased is the same as the price change (say, 10% ÷ 10% = 1), then the product is said to have unit (or unitary) price elasticity .

Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10% change in price), then the product is deemed inelastic.

To calculate the elasticity of demand, consider this example: Suppose that the price of apples falls by 6% from $1.99 a bushel to $1.87 a bushel. In response, grocery shoppers increase their apple purchases by 20%. The elasticity of apples is thus: 0.20 ÷ 0.06 = 3.33. The demand for apples is quite elastic.

What Makes a Product Elastic?

If a price change for a product causes a substantial change in either its supply or its demand, it is considered elastic. Generally, it means that there are acceptable substitutes for the product. Examples would be cookies, luxury automobiles, and coffee.

What Makes a Product Inelastic?

If a price change for a product doesn’t lead to much, if any, change in its supply or demand, it is considered inelastic. Generally, it means that the product is considered to be a necessity or a luxury item for addictive constituents. Examples would be gasoline, milk, and iPhones.

What Is the Importance of Price Elasticity of Demand?

Knowing the price elasticity of demand for goods allows someone selling that good to make informed decisions about pricing strategies . This metric provides sellers with information about consumer pricing sensitivity. It is also key for makers of goods to determine manufacturing plans, as well as for governments to assess how to impose taxes on goods.

Price elasticity of demand is the ratio of the percentage change in quantity demanded of a product to the percentage change in price. Economists employ it to understand how supply and demand change when a product’s price changes.

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  • Is Demand or Supply More Important to the Economy? 11 of 39
  • Demand: How It Works Plus Economic Determinants and the Demand Curve 12 of 39
  • What Is the Law of Demand in Economics, and How Does It Work? 13 of 39
  • Demand Curves: What Are They, Types, and Example 14 of 39
  • Supply 15 of 39
  • The Law of Supply Explained, With the Curve, Types, and Examples 16 of 39
  • Supply Curve Definition: How It Works With Example 17 of 39
  • Elasticity: What It Means in Economics, Formula, and Examples 18 of 39
  • Price Elasticity of Demand: Meaning, Types, and Factors That Impact It 19 of 39
  • Elasticity vs. Inelasticity of Demand: What's the Difference? 20 of 39
  • What Is Inelastic? Definition, Calculation, and Examples of Goods 21 of 39
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  • What Is the Law of Diminishing Marginal Utility? With Example 29 of 39
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assignment on elasticity of demand

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Unit 3: Elasticity

About this unit, price elasticity of demand.

  • Introduction to price elasticity of demand (Opens a modal)
  • Price elasticity of demand using the midpoint method (Opens a modal)
  • More on elasticity of demand (Opens a modal)
  • Determinants of price elasticity of demand (Opens a modal)
  • Determinants of elasticity example (Opens a modal)
  • Perfect inelasticity and perfect elasticity of demand (Opens a modal)
  • Constant unit elasticity (Opens a modal)
  • Total revenue and elasticity (Opens a modal)
  • More on total revenue and elasticity (Opens a modal)
  • Elasticity and strange percent changes (Opens a modal)
  • Price elasticity of demand and price elasticity of supply (Opens a modal)
  • Elasticity in the long run and short run (Opens a modal)
  • Elasticity and tax revenue (Opens a modal)
  • Price Elasticity of Demand and its Determinants 4 questions Practice
  • Determinants of price elasticity and the total revenue rule 4 questions Practice

Price elasticity of supply

  • Introduction to price elasticity of supply (Opens a modal)
  • Elasticity of supply using a different method (Opens a modal)
  • Price elasticity of supply determinants (Opens a modal)
  • Price Elasticity of Supply and its Determinants 4 questions Practice

Income elasticity of demand and cross-price elasticity of demand

  • Income elasticity of demand (Opens a modal)
  • Elasticity in areas other than price (Opens a modal)
  • Cross-price elasticity of demand (Opens a modal)
  • Lesson Overview - Cross Price Elasticity and Income Elasticity of Demand (Opens a modal)
  • Income Elasticity of Demand 4 questions Practice
  • Cross-Price Elasticity of Demand 4 questions Practice

assignment on elasticity of demand

Elastic Inelastic Demand

Elasticity of Demand Assignment Help

Elasticity & inelasticity demand.

Elasticity of Demand refers to the degree or the extent of the change in demand in response to a given change in price. The change in demand, however, is not always proportionate to the change in price. A slight change in price may lead to a considerable change in demand. In such a case we say that demand is elastic. Sometimes and in some cases, on the other hand, a considerable change in price may be followed by a slight change or practically no change in the quantity demanded. We shall then say that the commodity has an inelastic demand. Demand, however, cannot be entirely insensitive is changes in price. As such there are few commodities for which the demand is inelastic. Elasticity is all question of degree. Instead of saying, therefore, that the demand for a commodity is elastic, we should say it is more elastic; and instead of saying that demand for a commodity is inelastic, we should say it is less elastic.

We can have a better understanding of demand elasticity by comparing the response of demand to a given change in price in the following two diagrams representing price – quantity relationship for two goods A and B respectively.

elasticity and inelasticity of demand

Demand cuvre for good A and demand curve for good B. for a given price OP0, the quantity demanded of good A for the same price OP0, the quantity demanded of good B is OM0. Now, if the price goes up to OP1, for both goods A and B, the quantity demanded of good A declines to OQ1 by an amount Q0Q1. With the same fall in price, the quantity of B decreases to OM1, i.e. by an amount M0M1. Clearly change in demand for good A has reacted sharply to given change in price. The same is true when the price for both goods falls to OP2. Where quantity demanded increases from OQ 0 to OQ2 for good A and from OM0 to OM2 for good B. clearly the increases Q0 Q2 is much bigger than M0M2. Thus, other things beings the same, a flatter demand curve shows greater response of quantity demanded to change in price and a steeper demand curve shows low response.

The demand for a good may change due to change in many variables such as changes in the price of a good, changes in consumer’s incomes, changes in the prices of other goods, etc. but here we assume all other things as being given and constant and study the responsiveness of demand to changes in the price of a good only. Being the degree of change in the demand to a given change in price, this is more appropriately called the Price- elasticity of demand. But to make the term shorter, usually we call it elasticity of demand.

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Elasticity Of Demand

Previously we discussed that the demand for a good depends on the price of the good, the price of other goods, income and tastes and quantity demanded changes with the change in these factors. The concept elasticity can be applied to determine how responsive the quantity demanded is to changes in each of these factors

Meaning of price elasticity of demand

Price elasticity of demand can be defined as responsiveness or sensitivity of the quantity demanded to price changes. Most goods have a downward-sloping demand curve and therefore have a negative price elasticity of demand. However there can be exception to this and demand curve of goods (Giffen goods) can have a positive price elasticity of demand. Demand for goods for which a change in price causes a more than proportionate change in the quantity demanded are said to elastic, in cases where the change in prices causes exactly proportionate change in quantity demanded the demand is said to be unit elastic and lastly the demand is said to be inelastic when a change in price causes a less than proportionate change in the quantity demanded

Kinds of price elasticity of demand

microeconomics

The elasticity of demand changes along the length of a demand curve. As we move along the demand curve from left to right, the percentage change in quantity demanded (calculated as change in quantity divided by original quantity) falls and the percentage change in price (calculated as the percentage change in price divided by original price) rises. Therefore elasticity decreases as we move from left to right. The figure above shows how elasticity changes along a straight-line demand curve. We can infer the following from the figure:

  • elasticity falls as we move from left to right i.e. elasticity decreases as the price falls and the quantity demanded increases
  • at the mid point of the demand curve the demand is unit elastic
  • the demand is elastic above the midpoint
  • the demand is inelastic below the midpoint
  • demand is perfectly elastic where the quantity demanded is zero
  • demand is perfectly inelastic where the price is zero

Measurement methods

Total outlay method or revenue method.

Total outlay method of measuring elasticity of demand was developed by Marshall. This method tries to measure change in total expenditure of the consumer or revenue of a firm due to change in the price of a good. Total outlay or total revenue is calculated as the multiplication of price and quantity demanded. This method expresses elasticity in three ways:

  • Unitary elastic (E=1) : Total revenue (outlay) remains unchanged as a result of price change
  • Elastic (E>1) : Total revenue (outlay) increases with fall in price and vice versa
  • Inelastic (E<1) : Total revenue (outlay) increases with rise in price and vice versa

microeconomic help

Point method

Point method of elasticity refers to price elasticity of demand for a good / service at a point on the demand curve. This method is used to measure small change in quantity demanded due to small change in price. It is given as the ratio of the percentage change in quantity demanded of a good to its percentage change in the price. Thus Elasticity of demand = % change in Quantity demanded / % change in price

elasticity of demand

Income elasticity of demand

inelastic

Normal goods can be categorised as follows:

  • Income Inelastic normal good is also know as necessity. A necessity is a good for which the income elasticity of demand is less than 1. So a smaller proportion of a person’s income is spent on the good as income rises.

aggregate demand

  • Income Elastic normal good also known as luxury goods. A luxury is a good for which the income elasticity of demand is greater than 1. So a greater proportion of a person’s income is spent on the good as income rises.

law of demand

  • Income Unit elastic normal good . The demand for these goods increase in the same proportion of the increase in the income level i.e. X% increase in the income leads to X% rise in the quantity demanded

elasticity of demand

An inferior good is a good for which the income elasticity of demand is negative. So the quantity demanded falls as income increases.

elasticity of demand

Cross elasticity of demand

Cross elasticity of demand measures the sensitivity of the price change of a good to the quantity demanded of the other good (complement or substitute) all other things remaining same i.e. it tries to measure that if the price of a good increase (decreases) what is the percentage change in the quantity demanded of the other good Goods can be classified as follows

  • Complementary goods : These goods are jointly consumed, like petrol and car. These goods have negative cross elasticity of demand. For instance if the price of petrol increases the demand of cars will come down
  • Substitute goods : These goods are alternatives to each other and the consumer can choose in between them. For instance a Toyota car and a Honda car. They tend to have positive cross price elasticity of demand. So if price of a Toyota car increases the demand for a Honda car would increase and vice versa.

Determinants of price elasticity of Demand

As discussed earlier price elasticity measures the responsiveness of the quantity demanded to a change in price of a product/good The factors influencing the magnitude of the elasticity of demand are:

  • Closeness of substitutes : The closer the substitute/alternative for the product, the higher elasticity of the demand will be for it
  • Broadness of the product definition : It is easier to find substitutes for the product which is narrowly defined. For instance the demand for food is inelastic as there is virtually no substitute for food but Bread can be a substitute for meat
  • Time elapsed since price change / length of the time considered : the longer the time has passed since the price change, the more elastic will be the demand. It is easier to find and make use of a substitute in the long run than in the short run. For example, if the price of domestic gas increases, the quantity demanded may fall a little as people try to use less gas for cooking and heating, but it may only be after a number of years, when people have had a chance to switch to electric cookers and, say, oil-fired central heating, that the full fall in the quantity demanded will occur
  • The degree of brand loyalty / addiction : Some products have very strong brand loyalty, for example tickets to see an India – Pakistan cricket tie. Watching Australia-England match is not much of a substitute for an India/Pakistan fan! Some people are addicted to tobacco and are unlikely to reduce their demand for cigarettes very much if the price increases
  • Proportion of the Income spent on the good : Other things remaining same, the greater the income spent on the good the more elastic is the demand for it. For instance if the price of a soap increase from $1 to $1.2 there will be hardy any fall in the demand of the same while if the price of a car increase from $5,000 to $6,000 there will be a significant fall in the price of that car
  • The degree of necessity/luxury of the good : If the price of a necessity item such as milk or toothpaste increases there would be very little change in quantity demanded because consumers cannot do without these products and there is no real alternative. Some products are bought as treats such as bubble bath or boxes of chocolates and consumers would be inclined to go without or reduce their demand for this sort of product if the price increases and to treat themselves in some other way.

Microeconomics | Microeconomics Help | Elasticity Of Demand | Microeconomics Theories | Aggregate Demand | Law Of Demand | Elasticity Of Demand | Price Elasticity Of Demand | Elasticity Demand | Price Of Elasticity Of Demand | Price Elasticity | Inelastic | Online tutoring

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7.10: Assignment- Elasticity and Tuition

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Part 1 : Imagine that tuition for your schooling has increased by 20%. How do you think this will affect demand and consumer behavior? Why? How would you describe the elasticity of your tuition? Explain.

Part 2 : Imagine that there are currently 10,000 students enrolled at your institution. The school decides to increase tuition, and enrollment falls to 9,000. Tuition started at $4,000 per semester but has since gone up to $4,800. What is the elasticity of demand?

Part 3:  How will this impact total revenue for your institution? What inferences can you make from this information?

Contributors and Attributions

  • Assignment: Elasticity and Tuition. Provided by : Lumen Learning. License : CC BY: Attribution

Module 2: Economic Environment

Assignment: price inelasticity of demand, preparation.

This is a written assignment: In order to complete this assignment you will need to take the following steps:

  • Review the written assignment guidelines.
  • Refer to the provided grading rubric. This is how your submission will be evaluated.

Write the DRAFT of Your Paper

The assignment is as follows:

  • Select a product, good, or service for which you believe there is, if not perfect, close to perfect price inelasticity of demand. Refer back to course materials for clarification of what price inelasticity means.
  • Research the product, good, or service so that you have a general understanding of the market, customers, suppliers, and competition. Consult at least one reliable, credible source and be sure to include a citation so we can see where you got your information.
  • Describe in 50 words or less the product, good, or service that you chose.
  • Why did you choose this product, good, or service?
  • Why do you believe the demand is inelastic with regard to price? What factors are at work here? (Hint: Think back to the external factors you read about in module 1.)
  • What, if anything, could change and make the product, good, or service price elastic ?

Last Steps to Completion

  • Proofread your papers for spelling and grammar errors.Spell check thinks that  eBook  is a misspelling of  Ebola (TRUE—it happened to me last week!), so don’t rely on software to catch all mistakes.
  • Verify that you have consulted one source for research besides text materials and that proper APA citation is included in your document.
  • PUT YOUR NAME ON THE PAPER so I don’t raffle it off to the highest bidder and you end up with a zero!
  • Submit your assignment on or before the due date.
  • Assignment: Price Inelasticity of Demand. Authored by : Linda Williams and Lumen Learning. License : CC BY: Attribution

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Concept of Elasticity of Demand

The concept of elasticity of demand was first introduced by the classical economists Cournot and J.S Mill. Later on, new classical economist Alfred marshal developed it in the scientific way.

Demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables, such as the prices and consumer income. Demand elasticity is calculated by taking the percent change in quantity of a good demanded and dividing it by a percent change in another economic variable. The elasticity of demand is the measurement of responsiveness of demand for a commodity to the change in any of its determinants. viz. price of the commodity, price of the related commodity, consumer’s income, taste and preferences etc. A higher demand elasticity for a particular economic variable means that consumers are more responsive to changes in this variable, such as price or income.

The law of demand tells us that when the price of a good or service rises, consumers tend to buy less of it. Likewise, when the price of a good or service falls, consumers tend to buy more of it. However, the law of demand does not tell us how much more or less consumers tend to buy. For some goods, the quantity demanded stretches a lot when the price changes: for others, not so much.

Types of Elasticity of Demand

There are several kinds of elasticity of demand. The most important elasticity of demands are as follows:

  • Price elasticity of demand
  • Income elasticity of demand
  • Cross elasticity of demand

Other Types

There are two other types of demand elasticity, which measures how much the quantity purchased changes when the price does.

  • Inelastic demand, which is when the quantity demanded changes less than the price does.
  • Unit elastic demand, which is when the quantity demanded changes the same percent that the price does.

A good example of elastic demand is housing. That’s because there are so many different housing choices.  People could live in a townhouse, condo, apartment or even with friends or family. Because there are so many options, it’s easy for people to not pay more than they want to.

Clothing also has elastic demand. True, people have to wear clothes, but there are many choices of what kind of clothing and how much to spend. When some stores offer sales, other stores have to lower their clothing prices to maintain demand. Small stores that can’t offer huge discounts go out of business. During the Great Recession, many clothing stores were replaced by second-hand stores that offered quality used clothing at steeply discounted prices.

Information Source:

  • www.thebalance.com
  • accountlearning.blogspot.com

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    Suppose that a store decreases the price of laundry detergent from $4.10 to $3.50. As a result, quantity demanded increases from 210 to 230. Using the mid-point approach, calculate the percentage change in price. Using the mid-point elasticity approach, calculate price elasticity of demand. Your answer should be expressed in absolute value terms.

  3. Price elasticity of demand and price elasticity of supply

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  4. Elasticity of Demand and its Types

    The Price Elasticity of Demand is a measure of the responsiveness of quantity sought when prices vary (PED). The mathematical formula for calculating Price Elasticity of Demand is as follows: PED = %Change in Quantity Demanded % / Change in Price. The formula's output determines the magnitude of the influence of a price adjustment on the amount ...

  5. 8.19: Assignment- Elasticity and Tuition

    Describe the elasticity of tuition. Explain how an increase in tuition will impact demand and consumer behavior. 8.19: Assignment- Elasticity and Tuition is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.

  6. Elasticity of Demand (With Example and Diagram)

    The elasticity of demand measures the responsiveness of the market demand for a commod­ity to a change in one of the variables affecting de­mand. The concept of elasticity is extremely useful in any business situation. It is often made use of by marketing managers to set prices of various prod­ucts and services.

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  10. PDF Elasticity of Demand

    The formula used here for computing elasticity of demand is: (Q1 - Q2) / (Q1 + Q2) (P1 - P2) / (P1 + P2) If the formula creates an absolute value greater than 1, the demand is elastic. In other words, quantity changes faster than price. If the value is less than 1, demand is inelastic. In other words, quantity changes slower than price.

  11. Elasticity of Demand Assignment Help

    Elasticity of Demand refers to the degree or the extent of the change in demand in response to a given change in price. The change in demand, however, is not always proportionate to the change in price. A slight change in price may lead to a considerable change in demand. In such a case we say that demand is elastic.

  12. Elasticity (economics)

    Definition [ edit] Elasticity is the measure of the sensitivity of one variable to another. [10] A highly elastic variable will respond more dramatically to changes in the variable it is dependent on. The x-elasticity of y measures the fractional response of y to a fraction change in x, which can be written as.

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    Assignment on elacticity of demand EHSAN KHAN Lawyer at EHSAN KHAN May 25, 2016 • 0 likes • 3,290 views Law its all about elasticity of demand 1 of 9 Download Now What's hot (20) ELASTICITY OF DEMAND Elasticity of demand Demand elasticity and measurement of price elasticity. Marginal Utility 1. demand Price Elasticity of Demand

  14. Elasticity Of Demand

    Point method Point method of elasticity refers to price elasticity of demand for a good / service at a point on the demand curve. This method is used to measure small change in quantity demanded due to small change in price. It is given as the ratio of the percentage change in quantity demanded of a good to its percentage change in the price.

  15. Understanding Elasticity of Demand in Economics: Impact on

    Elasticity of demand is a concept in economics that quantifies how sensitive consumers are to fluctuations in price and how these price changes affect the quantity of the product they are willing to purchase.

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  17. 7.10: Assignment- Elasticity and Tuition

    Describe the elasticity of tuition. Explain how an increase in tuition will impact demand and consumer behavior. 7.10: Assignment- Elasticity and Tuition is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.

  18. Assignment: Price Inelasticity of Demand

    The assignment is as follows: Select a product, good, or service for which you believe there is, if not perfect, close to perfect price inelasticity of demand. Refer back to course materials for clarification of what price inelasticity means. Research the product, good, or service so that you have a general understanding of the market ...

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    Article The degree to which demand responds to a change in an economic factor is referred to as demand elasticity. A good's demand moves in the opposite direction of its price. However, the impact of a price change is never the same. Even minor price changes can cause significant changes in demand for a product.

  20. Concept of Elasticity of Demand

    The elasticity of demand is the measurement of responsiveness of demand for a commodity to the change in any of its determinants. viz. price of the commodity, price of the related commodity, consumer's income, taste and preferences etc. A higher demand elasticity for a particular economic variable means that consumers are more responsive to ...