Kinds of Elasticity of Demand

Classification of Elasticity

The Elasticity of Demand could be of 3 types based on the factor which affects the change in the demand for a commodity.

1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand

Measurement of the Elasticity

1. Total Outlay Method
2. Proportionate or Percentage Method
3. Point Method or Geometrical Method

Price Elasticity of Demand

Price Elasticity tells us about the changes in the demand for a commodity based on the change in the price of that commodity. In short, only those changes in demand are considered in the Price Elasticity of demand, which are affected due to changes in price.

It is also important to note that the effect of change in price is not always spread equally to every commodity. Some commodities are much affected due to changes in price, some are less affected and some have no effect at all.

It can be calculated using the following formula

Price Elasticity of Demand = ΔM / ΔK

ΔM = Percentage change in the demand for the commodity
ΔK = Percentage change in the price of the commodity

To know the degrees of demand we can divide the Price Elasticity of Demand into the following five parts

1. Elastic Demand
2. Highly Elastic Demand
3. Inelastic Demand
4. Perfectly Elastic Demand
5. Perfectly Inelastic Demand

Income Elasticity of Demand

Change in demand for a commodity does not come only due to the price change, but an increase or decrease in the income of the consumer also brings the expansion and reduction in demand. Thus, the proportionate change, which comes in the demand for a commodity, due to the proportionate change in the income of the consumer, this type of change, is called Income of Elasticity of Demand.

Keeping other things remain the same, the degree of change in the demand is due to the change in income.

It can be calculated using the following formula

Price Elasticity of Demand = ΔM / ΔI

ΔM = Percentage change in the demand for the commodity
ΔI = Percentage change in the income of the comsumer

Cross Elasticity of Demand

When a change in the price of a commodity affects the demand for another commodity, this type of elasticity is called Cross Elasticity of Demand. If the price changes of commodity Y, the effect takes place in commodity X.

It can be calculated if we divide the proportionate change in the demand for commodity X by the proportionate change in the price of commodity Y.

It can be calculated using the following formula

Price Elasticity of Demand = ΔX / ΔY

ΔX = Percentage change in the demand of the X commodity
ΔY = Percentage change in the demand of the Y commodity