Answer to Question #20732 in Microeconomics for dinesh

Question

what is elasticity of demand?what are its various types?

Answer 1

Elasticity of Demand refers to the degree of responsiveness of quantity demanded to the changes in the determinants of demand.
& There are mainly three quantifiable determinants of demand:
1. Price of the Good
2. Income of the Consumer
3. Price of the Related Goods
Price Elasticity of demand is the degree of responsiveness of demand to a change in its price. In technical terms it is the ratio of the percentage change in demand to the percentage change in price.
& Ep = Percentage change in quantity demanded/Percentage change in price
In mathematical terms it can be represented as: Ep =(∆q/∆p) (p/q)
The concept of price elasticity can be used in comparing the sensitivity of the different types of goods (e.g., luxuries and necessaries) to change in their prices. The elasticity of demand is always negative, although by convention it is taken to be positive. It is negative because change in quantity demanded is in opposite direction to the change in price.
Income Elasticity is a measure of responsiveness of potential buyers to change in income. It shows how the quantity demanded will change when the income of the purchaser changes, the price of the commodity remaining the same. It may be defined thus: The Income Elasticity of demand for a good is the ratio of the percentage change in the amount spent on the commodity to a percentage change in the consumer’s income, price of commodity remaining constant.
Income Elasticity = Proportionate change in the quantity purchased/Proportionate change in Income.
CROSS ELASTICITY
CROSS ELASTICITY appears 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= Proportionate change in purchases of commodity X/Proportionate change in the price of commodity Y. This type of elasticity arises in the case of inter-related goods such as substitutes and complementary goods. The cross elasticity of complementary goods is positive and that between substitutes, it is negative.