Types of Elasticity of Demand
Elasticity of demand are of four types which are given below -
1- Price Elasticity of demand
2- Income Elasticity of demand
3- Cross Elasticity of demand
4- Advertising Elasticity of demand
1- Price Elasticity of Demand
The price elasticity of demand , commonly known as the elasticity of demand and defined as the ratio of percentage change in quantity demanded to the percentage change in price .
or
Types of Price Elasticity of
Demand
Price elasticity of demand are of five types which are given as -
(ⅰ)- Perfectly Elastic Demand
(ⅰⅰ)- Perfectly Inelastic Demand
(ⅰⅰⅰ)- Relatively Elastic Demand
(ⅰv)- Relatively Inelastic Demand
(v)- Unitary Elastic Demand
1- Perfectly Elastic Demand :- When a small change in price of a product causes a major change in its demand , it is said to be perfectly elastic demand .
In other words , In perfectly elastic demand , the quantity demanded increases infinitely with a small fall in price or quantity demanded falls to Zoro with a small rise in price .
In perfectly elastic demand , the demand curve is a horizontal straight line which is given as -
2- Perfectly Inelastic Demand :- When there is no change produced in the demand of a product with change in its price , then it is known as perfectly inelastic demand .
In perfectly inelastic demand , demand curve is a straight vertical line which is given as -
In case of essential goods , such as salt , the demand does not change with change in price . Hence , the demand for essential commodity is perfectly inelastic .
3- Relatively Elastic Demand :- If the percentage change in demand is greater than the percentage change in price , then it is known as relatively elastic demand . It is also known as highly elastic demand or simply elastic demand .
The demand curve of relatively elastic demand is given as -
Hence , the small change in price produces a larger change in demand of the product .
4- Relatively inelastic demand :- If the percentage change in quantity demanded is less than the percentage change in price is known as relatively inelastic demand . It is also called less elastic or simply inelastic demand .
The demand curve of relatively inelastic demand is rapidly sloping and given as -
Hence , a larger change in price products a small change in demand of the product .
5- Unitary elastic demand :- If the percentage change in quantity demanded is equal to the percentage change in price , then it is called unitary elastic demand .
The demand curve for unitary elastic demand is represented as a rectangular hyperbola given as -
This type of demand is an imaginary one as it is rarely applicable in our practical life .
2- Income Elasticity of Demand
The ratio of percentage change in quantity of demanded to the percentage change in income is known as income elasticity of demand .
Mathematically it is given as -
Income elasticity use in following ways -
1- Income elasticity of demand used to classify normal and inferior goods .
2- Income elasticity of demand used to know about stage of trade cycle .
3- income elasticity of demand used for forecasting demand .
4- Income elasticity of demand used to determine the price of product .
Income elasticity use in following ways -
1- Income elasticity of demand used to classify normal and inferior goods .
2- Income elasticity of demand used to know about stage of trade cycle .
3- income elasticity of demand used for forecasting demand .
4- Income elasticity of demand used to determine the price of product .
3- Cross Elasticity of Demand
The ratio of percentage change in demand for a commodity to the percentage change in the price of its substitutes and complementary goods is known as cross elasticity of demand .
Mathematically it is given as -
Use of Cross Elasticity of Demand -
1- Cross Elasticity of demand helps in managerial decision making for formulating proper price strategy .
2- Cross Elasticity of demand use to measure the effect of change in price of one product on demand of other product in multi product firms .
Types of Cross Elasticity Demand
Cross elasticity of demand are of two types -
1- Positive cross elasticity of demand (E>0)
2- Negative cross elasticity of demand (E<0)
1- Positive Cross elasticity of demand - If the rise the price of one good leases to fall in quantity demanded of its Complementary good and vice versa , then it is called positive cross elasticity of demand .
2- Negative cross elasticity of demand - If rise in price of a good leads to fall in quantity demanded of its complementary good and vice versa , then it is known as negative cross elasticity of demand .
4- Advertising Elasticity of Demand ( AED )
The ratio of percentage change in demand to the percentage change in advertising expenditure is known as advertising elasticity of demand .
Mathematicaly it is given as -
Factors / Determinants of advertising elasticity of demand :-
1- The level of total sales .
2- Advertisement by rivel firms .
3- Cumulative effect of post advertisement.
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