PRICE ELASTICITY OF DEMAND

The Degree of Co. relation between demand and price is called elasticity.

Types of elasticity of demand.

  1. Price Elasticity.

  2. Income Elasticity.

  3. Substitution Elasticity.

  4. Cross Elasticity.

1. Price Elasticity.

Price Elasticity Measures responsive of potential buyers to change in price it is the ratio of percentage change in quantity demanded in response to percentage change in priced. Let suppose that the price of particulars brand of a T.V set falls from 15,000 to 14,000 each or 20 % fall. As results of this fall in price further suppose that the demand for the T.V sets has gone up from 14,000 to 16,000 i.e. 50% Elasticity of demand will be 50/20 or 25%.

2. Income Elasticity.

Income elasticity is measure of response increase of potential buyers to change in income. It shows how the quantity demanded will change when the income of a purchaser change the price of the commodity remaining the same.

3. Substitution Elasticity.

If good that have ready substitutes tend to have more elastic demand than those that have substitutes.

4. Cross Elasticity.

When a change in the price of one good causes a change in the demand for another. Cross elasticity of demand for X and Y.

Influence on Elasticity of Demand.

  1. Own Price

  2. Average income.

  3. Population.

  4. Consumer’s habits / Taste.

  5. Possibility of substitution.

  6. Price of related goods.

Calculation Elasticity.

Price elasticity of demand=% Change in quantity demand

% Change in price.