Elasticity of Demand

The elasticity of demand (PED or Ed), or elasticity, is the degree to which the demand for goods/services changes with change in
(a) Price of the goods/Service
(b) The income of the buyer
(c) Change in price of substitutes of goods/services.

Examples:

  • If the price of apples rises, people will buy fewer apples, and hence its demand will fall.
  • If the income of a person rises, he will buy more, and hence demand increases.
  • If the price of coffee decreases, people will buy more coffee and less tea. So, with the rise in the price of coffee, the demand for tea decreases.

The elasticity of demand is of three types:

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

Price Elasticity: 

  • Price Elasticity is defined as the percentage change in the demand for an item with a unit percentage change in the price of that item. Price elasticity is represented by EP.

Income Elasticity: 

  • Income Elasticity is defined as the percentage change in demand for an item with a unit percentage change in income.

Cross Elasticity: 

  • Cross Elasticity is defined as the percentage change in the demand for an item(X) with the unit percentage change in the price of its substitute/complement(Y).
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