In my previous blog I wrote about demand and law of demand. The law of Demand simply states the inverse relationship between price and quantity demanded. It tells us only the direction of change in price and quantity demanded of a commodity. But it doesn't specify about any quantitative changes or rate of changes in price and demand i.e., it does not specify how much more is purchased when price falls or how much less is purchased when price rises. Therefore to study quantitative changes in price and demand we study the concept of Elasticity of Demand.
▪Elasticity Of Demand :
What is Elasticity ?
Elasticity refers to a ratio of the relative changes in two quantities. It measures the responsiveness of one variable to the changes in another variable.
So Elasticity of Demand refers to the responsiveness of quantity demanded to a given change in the price of commodity.
▪Types of Elasticity of Demand :
1. Price Elasticity of Demand :
Price elasticity of demand is described
as the degree of responsiveness of the
demand for a good to a change in its
Price.
2. Income Elasticity Of Demand :
Income elasticity of demand can be
defined as the ratio of change in the
quantity demanded of a commodity
to a given proportionate change in the
income. In simple words , it indicates
the extent to which demand changes
with a variation in consumers income.
3. Cross Elasticity Of Demand :
Cross elasticity of demand refers to
the proportionate change in the
quantity demanded of a commodity
of a particular commodity in response
to a change in the price of another
related commodity.
▪cross elasticity of demand is positive in
case of substitutes.
e.g., coffee and tea.
With the increase in the price of coffee
the quantity demanded of tea would
increase.
▪cross elasticity of demand is zero when
independent of each other.
▪cross elasticity of demand is negative
when goods are complementaries.
e.g., car and petrol
With the increase in the price of petrol
the demand for cars would come
down.
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