Types of Elasticity Demand in Economics

What is Elasticity in Economics?

Before studying types of elasticity demand, you must know what is elasticity?

In economics elasticity is also defined as the measure of percentage change of one economics value in reaction to percentage change in the other. Demand and supply models also clarify that different variables like demand, income and price are usually related. Consequently, it may offer vital information about the strength and weakness of such relationships.

 

Types of Elasticity Demand

There are three types of elasticity demand in economics, as follow:

Price Elasticity

The price elasticity of demand is the reaction of the quantity demanded to change in the price of a commodity. It is supposed that the consumer’s income, prices and tastes of all other goods are stable.

It is computed as a percentage change in the quantity demanded divided by the percentage change in price. Therefore,

E(p)= dQ/Q ÷ dP/P

Whereas,

E(p) = price elasticity

Q      = Quantity of Demanded good

p       = Price of the demanded good

 

Income Elasticity

This concept of income elasticity assist economist to find out whether a good is a necessity (need) or luxury (want). The income elasticity of demand is the degree of reaction of the quantity demanded to a change in the consumer’s income.  Whenever the real income of the consumers is changed, keeping all the other variables constant.

The formula for computing income elasticity of demand is the percent change in quantity demanded divided by the percent change in income.  Symbolically,

Income Elasticity of Demand = ( (Q1 – Q2) / (Q1 + Q2) ) ÷ ( (P1– P2) / (P1 + P2) )

OR

 = Percentage Change in Quantity Demanded  / Percentage Change in Consumers Real Income 

 

Cross Elasticity

The cross elasticity of demand of a product A for another product B, is the change in demand of product A due to a change in the price of product B.

This measurement is computed by taking the percentage change in the demanded of one good and dividing it by the percentage change in the price of another good.

Formula for Cross Elasticity of Demand

Formula for Cross Elasticity of Demand

 

These three are the types of elasticity of demand in economics with their calculation formulas.

 

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