These three types of Elasticity of Demand measure the sensitivity of quantity demanded to a change in the price of the good, income of consumers buying the good, and the price of another good.Īpart from these three types, we have some other types of Elasticity of Demand which we would look at now.Īlso, take a sneak peek at our blog on 5 key elements of financial analysis
Whereas, the result will be negative for a complementary good.
The result obtained for a substitute good would always come out to be positive as whenever there is a rise in the price of a good, the demand for its substitute rises. XED = (% Change in Quantity Demanded for one good (X)%) / (Change in Price of another Good (Y)) The formula given to calculate the Cross Elasticity of Demand is given as: Thus, the quantity demanded for a product does not only depend on itself but rather, there is an effect even when prices of other goods change.Ĭross Elasticity of Demand, also represented as XED, is an economic concept that measures the sensitiveness of quantity demanded of one good (X) when there is a change in the price of another good (Y), and that’s why it is also referred to as Cross-Price Elasticity of Demand. In a market where there is an oligopoly, multiple players compete. The result obtained from this formula helps to determine whether a good is a necessity good or a luxury good. YED = % Change in Quantity Demanded% / Change in Income The formula given to calculate the Income Elasticity of Demand is given as: Speaking of inflation, you can also take a look at our blog on what is inflation. The Income Elasticity of Demand, also represented by YED, refers to the sensitivity of quantity demanded for a certain good to a change in real income (the income earned by an individual after accounting for inflation) of the consumers who buy this good, keeping all other things constant. This can be understood by looking at the difference in goods sold in the rural markets versus the goods sold in metro cities. The income levels of consumers play an important role in the quantity demanded for a product. The result obtained from this formula determines the intensity of the effect of price change on the quantity demanded for a commodity. PED = % Change in Quantity Demanded % / Change in Price The mathematical formula given to calculate the Price Elasticity of Demand is: This measure of responsiveness of quantity demanded when there is a change in price is termed as the Price Elasticity of Demand (PED). For example, when there is a rise in the prices of ceiling fans, the quantity demanded goes down. Let us look at them in detail and their examples.Īny change in the price of a commodity, whether it’s a decrease or increase, affects the quantity demanded for a product. On the basis of different factors affecting the quantity demanded for a product, elasticity of demand is categorized into mainly three categories: Price Elasticity of Demand (PED), Cross Elasticity of Demand (XED), and Income Elasticity of Demand (YED). “The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price”. We will read about these in detail, later in the blog.
The demand for a commodity is affected by different economic variables: In other words, the elasticity of demand is the percentage change in quantity demanded divided by the percentage change in another economic variable. It measures the shift in demand when other economic factors change. Let’s begin our blog with a definition of Elasticity of Demand and then we will explore the different types of Elasticity of Demand.Īlso, read our blog on 4 types of Elasticity in economicsĮlasticity of Demand, or Demand Elasticity, is the measure of change in quantity demanded of a product in response to a change in any of the market variables, like price, income etc. There are several factors that affect the quantity demanded for a product such as the income levels of people, price of the product, price of other products in the segment, and various others. Elasticity is a concept in economics that talks about the effect of change in one economic variable on the other.Įlasticity of Demand, on the other hand, specifically measures the effect of change in an economic variable on the quantity demanded of a product.
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