Types Of Elasticity Of Demand

There are four types of elasticity of demand:

1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Advertisement elasticity of demand

I. Price Elasticity Of Demand

Marshall was the first economist to define price elasticity of demand. Price elasticity of demand measures the change in quantity demanded in response to a change in price. It is the ratio of the percentage change in quantity demanded to the percentage change in price.

Q₁ = Old demand

Q₂ = New demand

P₁ = Old price

P₂ = New price

There are five cases of price elasticity of demand

A. Perfectly Elastic Demand:
When a small change in price leads to an infinitely large change in quantity demanded, it is called perfectly or infinitely elastic demand. In this case, E=∞. Sometimes, even when there is no change in the price, the demand changes in huge quantities. This elasticity is very rarely found in practice. We can see a straight-line demand curve parallel to the X-axis.

The demand curve is a horizontal straight line. It shows that at Rs. 10, any quantity is demanded, and if the price increases, the consumer will not purchase the commodity.

B. Perfectly Inelastic Demand:
A commodity is said to have perfectly inelastic demand when even a large change in the price of the commodity causes no change in the quantity demanded. The elasticity coefficient of perfectly inelastic demand is Ep = 0. The shape of the demand curve for perfectly inelastic demand is vertical as shown below.

When the price increases from Rs. 10 to Rs. 20, the quantity demanded remains the same. In this case, E=0.

C. Relatively Elastic Demand:
When demand changes more than proportionately to a change in price, it is called relatively elastic demand. A small change in price leads to a very big change in the quantity demanded. In this case, E > 1. This demand curve will be flatter.

when the price increases from Rs. 10 to Rs. 15, the quantity demanded decreases from 300 units to 100 units, which is larger than the change in price.

D. Relatively Inelastic Demand:
When the quantity demanded changes less than proportionately to a change in price, it is called relatively inelastic demand. A large change in price leads to a small change in quantity demanded. In this case, E < 1. The demand curve will be steeper.

when the price increases from Rs. 10 to Rs. 15, the quantity demanded decreases from 100 units to 80 units, which is smaller than the change in price.

E. Unitary Elasticity of Demand:
The change in demand is exactly equal to the change in price. When both are equal, E=1 and elasticity is said to be unitary.

when the price increases from Rs. 10 to Rs. 15, the quantity demanded decreases from 200 units to 100 units. Thus, a change in price has resulted in an equal change in quantity demanded, so the price elasticity of demand is equal to unity.

II. Income Elasticity of Demand

Income elasticity of demand shows the change in quantity demanded as a result of a change in income. Income elasticity of demand may be stated in the form of a formula.

Q₁ = Old demand

Q₂ = New demand

I₁ = Old income

I₂ = New income

Income elasticity of demand can be classified into five types.

A. High Income Elasticity of Demand:
In this case, an increase in income brings about a more than proportionate increase in quantity demanded. Symbolically it can be written as EI > 1. This elasticity can be observed in the case of non-necessary goods such as TV, AC, etc.

It shows high-income elasticity of demand. When income increases from Rs. 1000 to Rs. 2000, quantity demanded increases from 1 unit to 3 units.

B. Low Income Elasticity of Demand:
When income increases, quantity demanded also increases but less than proportionately. In this case, EI < 1. Necessary goods such as rice, vegetables, etc., have this type of elasticity.

An increase in income from Rs. 1000 to Rs. 3000 brings an increase in quantity demanded from 1 unit to 2 units. However, the increase in quantity demanded is smaller than the increase in income. Hence, income elasticity of demand is less than one.

C. Unitary Income Elasticity of Demand:
A commodity is said to possess unitary income elasticity of demand when the percentage change in the quantity demanded of a commodity and the percentage change in the consumer’s income are equal. The elasticity coefficient is equal to one, EI = 1.1 and its demand curve is at an angle of 45 degree as shown below.

When income increases from Rs. 1000 to Rs. 2000, quantity demanded also increases from 1 unit to 2 units.

D. Zero Income Elasticity of Demand:
Quantity demanded remains the same, even though money income increases. Symbolically, it can be expressed as EI = 0. For example, even if our income increases, we don’t purchase medicines in larger quantities. It can be depicted in the following way:

As income increases from OY to OY1, quantity demanded never changes.

E. Negative Income Elasticity of Demand:
When an increase in the consumer’s income causes a decrease in the quantity demanded of a commodity and vice-versa, the commodity is said to have negative income elasticity of demand. For example, inferior goods or low-quality goods have negative income elasticity because consumers want to buy higher-quality goods as income increases. In this case, income elasticity of demand is negative, EI < 0.

When income increases from Rs. 1000 to Rs. 2000, demand falls from 2 units to 1 unit.

III. Cross Elasticity of Demand:

A change in the price of one commodity leads to a change in the quantity demanded of another commodity. This is called cross elasticity of demand. The formula for cross elasticity of demand is:

A. In case of substitutes, cross elasticity of demand is positive. Eg: Coffee and Tea
When the price of coffee increases, quantity demanded of tea increases. Both are substitutes.

B. In case of complements, cross elasticity is negative. If an increase in the price of one commodity leads to a decrease in the quantity demanded of another and vice versa.
When the price of cars goes up, the quantity demanded of petrol decreases. The cross-demanded curve has a negative slope.

IV. Advertisement Elasticity of Demand:

Advertisement elasticity of demand refers to the increase in sales revenue due to changes in advertising expenditure. In other words, there is a direct relationship between the amount of money spent on advertising and its impact on sales. Advertising elasticity is always positive.

Let:

• Q₀ = Initial quantity demanded
• Q₁ = New quantity demanded after a change in advertising spending
• A₀ = Initial advertising expenditure
• A₁ = New advertising expenditure