Elasticity of demand for normal goods

Definition and history:
Elasticity of demand can be described as the change in the price of a good with respect to change in its availaibility. The term was coined by adam smith who is known as the father of economics. Suppose you like lemonade, and drink it whenever you feel like. In your situation you are more likely to consume lemonade when summers hit. In winters would would most likely have a hot cuppa. So now the cost of lemonade would be high in summers because you would demand more lemonade.

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Elasticity of Demand

Elasticity of demand was introduced by great

economist Alfred Marshall .

Elasticity of clemand makes a quantitative

statement . Elasticity of demand refers to the degree of responsiveness of quantity demanded of a

commodity like to a Change in any of its determinants the

price of commodity , price of other commodity and income of the consumer.

There are three main types of elasticity of demand .

of demand Elasticity of

1 ) Price elasticity of demand2 ) Income elasticity of demand 3 ) cross elasticity of demand

1. Price elasticity of demand

Price elasticity of demand refers to the ratio of the quantity demanded of

-the percentage change in

a commodity to a in its given percentage change

price .

Eg:Suppose people like both tea and coffee equally , if the price of tea rises then people will have no problem switching to coffee and the demand for tea will fall.

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There are five different kinds of price elasticity

of demand- Inclastic Demand

1 ) Perfectly inelastic Demand

2 ) Perfectly elastic Demand

3 ) Unitary elastic. Demand

4 ) Elastic Demand

5) Inelastic Demand

; 1. Perfectly Inelastic Demand :When quantity demanded of a commodity does not respond to a change in its price then the elasticity of a demand is zero

In this criteria , the , quantity demanded remains the same irrespective of rise or

fall the commodity in the price of the commodity.

Price

О Quantity 2013

Perfectly inclastic ( ep = 0. )

In this diagram demand is constant we can see , demand is

and price moves , D , curve is perfectly inclastic

demand curve .

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2 ) Perfectly Elastic Demand

Perfectly elastic demand is situation in which demand for the product is fully dependent on the price of

the product . Eg : A very small fall in the price of a commodity the demand to increase to infinity.

3 ) Unitory Elastic Demand

Causes

When o

Y

Price D₂

P ,

3 ) Unitary Elastic Demand:

When percentage change in price of a commodity

causes an equivalent percentage change in the

the elasticity of demand

is said to be one- unitary

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4 ) Elastic Demand

When percentage change in the quantity demanded exceeds the percentage change

of a commodity price , the elasticity of demand is greater

in its than

unitary .

5 ) Inelastic Demand

When percentage change in in quantity demanded of a commodity is less than percentage change in its

price .

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2 ) Income Elasticity of Demand

The Income elasticity of demand measures the degreeof responsiveness of the quantity demanded of a

commodity to a change

in the income of the

consumers .

ey = Percentage change in Quantity Demanded change in Income . Side

Percentage elasticity of of t

income elastice.

Eg:Suppose the income of the consumer rose by 10% and the demand for Car rose by 10% then income elasticity of demand would be one.

There are three types of income

demand

1 ) Positive income elasticity

2 ) Negative income elasticity 3 ) Zero income elasticity

.

1. Positive income elasticity:

Income elasticity of demand is said to be positive when with increase in income of the consumer

the amount purchased of a commodity increases ,

and with a decrease in the income of the consumer

the amount purchased of a commodity decreases .

Goods with positive income elasticities is called " normal " goods

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For normal goods , income elasticity is classified into three categories-

* ( i ) Income elastic

Quantity demanded rises more than in proportion to income increase.Eg: luxuries like jewellery, car etc.

( ii ) Income inelastic

Quantity demanded rises less than in proportion to income increase. Eg:necessities like food , cloth etc

. ( iii ) Unitary income elasticity

Quantity demanded rises in same proportion as

rise in income .

* 2 ) Negative Income elasticity

Negative income elasticity is a situation in which quantity demanded decreases as income

increases .

Eg : Inferior goods .

3 ) Zero Income elasticity of demand

Zero income elasticity is a situation in which

quantity demanded remains remains unchanged as income increases.

. Eg : Inexpensive essential goods .

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Cross elasticity of demand

It measures the responsiveness of demand for a commodity in relation to a change in the price of the related goods.

Eg:Suppose the price of tea rises so people prefer coffee to tea.This shows tea and coffee are substitute goods.

There are three types of cross elasticity of

demand -

1 ) Positive cross elasticity of demand:

When increase in price of one commodity , suppose (Y) leads to an increase in the demand for the

other commodity ( X ) .

When two goods are substitutes for each other ,

elasticity cross will be positive .

Eg : Tea and coffee

2 ) Negative cross Elasticity of Demand commodity

When a fall in price of one commodity(Y) leads to an increase in the demand of other commodity ( X ) is called cross elasticity of demand.

Complementary goods have negative cross

elasticities .

Eg : Bread and Butter

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3 ) Zero cross Elasticity of Demand elasticity of demand is said to be

zero when a change in the price of one commodity

does not affect the demand for another commodity.

Eg : A change in price of coffee is not likely to influence the demand

for Cars .