Under law of demand, price falls and demand rises, vice versa. Moreover the law of demand does not determines how much the quantity rise or fall for a given change in price. So the concept of elasticity of demand is derived to know how much quantity demanded changes for a change in the price of goods.
“The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price”. – Dr. Marshall.
Therefore, elasticity means sensitivity of demand to the change in price.
EP = proportional changes in quantity demanded/proportional changes in price
Price elasticity of demand
Firstly, the price of elasticity demand refers to change in the quantity demanded to the price of the commodity
“Price elasticity is a ratio of proportionate changes in the quantity demanded of a commodity to a given proportionate change in its price.”
Thus, it is responsiveness of change in demand due to a change in price only. Other factors such as income, population, tastes, habits, fashions, prices of substitute and complementary goods assume to be constant.
Ep = percentage change in quantity demanded/percentage change in price
Income elasticity of demand
Secondly, the income elasticity measures the sensitivity of quantity demanded for a goods to a change in consumer’s income.
Formula – Percentage change in the quantity demanded / Percentage change in the consumer’s income
Cross elasticity of demand
“The cross elasticity refers to the proportional change in the quantity of X good demanded resulting from a given relative change in the price of a related good Y”
Similarly, it measures the percentage change in the quantity demanded of commodity X to the percentage change in the price of its substitute/complement Y
Formula – proportionate change in quantity demanded of X / Proportionate change in the price of Y
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