The elasticity of Demand:-
Demand depends on a number of factors like price, the income of the consumers, and prices of other goods (substitutes and complements). The elasticity of demand refers to the percentage change in demand for a commodity with the response to the percentage change in any of the affecting factors of demand. The concept of Elasticity of Demand is proposed and developed by Dr. Alfred Marshall in his famous book “Principles of Economics”.
Factors Affecting Elasticity of Demand:-
- Nature of the commodity: Elasticity of demand depends on the nature of the commodity, whether the commodity is necessity, comfort, or luxury. Demand for necessities is inelastic while the demand for comfort and luxuries is more or less elastic.
- Existence of Substitutes: The presence or absence of substitutes is also responsible for the difference in the elasticity of demand. Example- The demand for soaps and toothpaste is more elastic because of the existence of many substitutes.
- A number of uses of commodity: If the commodity has a single-use then its demand will be less elastic. While if the commodity has more use then its demand is more elastic.
- Nature of Uses: If the uses of the commodity are more important then its demand will be more inelastic. And if its use is less important then its demand is more elastic.
- Amount of money spent: The proportion of money spent on a particular commodity also determines its elasticity of demand. The demand for those commodities upon which a consumer spends a very less portion of his income, the elasticity of demand will be inelastic.
- Possibility of Postponement: If there is the possibility of postponement for any commodity, the elasticity of demand will be more and vice versa.
- Very low price: The demand for goods, which are very cheap (Matchboxes, Newspapers, etc), will be inelastic. And if there is a little change in price then demand doesn’t change much.
- Very high price: The demand for goods, which are very costly (mainly consumed by very rich people) like Diamond, Gold, Costly clothes, etc. A slight change in its price doesn’t affect the demand.
Price Elasticity of Demand:
Price elasticity of demand is a measure of how much the quantity demanded of commodity changes when its price changes.
According to Dr.Marshall, the study of the concept of Elasticity of Demand is divided into five degrees which are:-
- Perfectly Elastic
- Perfectly Inelastic
- Unitary Elastic
- Relatively Elastic Demand
- Relatively Inelastic Demand
i) Perfectly Elastic Demand:-
Perfectly elastic demand is a situation when a little change in price leads to an infinite change in quantity demanded. A slight rise in the price of a commodity on the part of the seller reduces the demand to zero. In such a case, the shape of the demand curve will be a horizontal straight line.
ii) Perfectly Inelastic Demand:-
Perfectly Inelastic Demand is the opposite of perfectly elastic demand. Under the perfectly inelastic demand, irrespective of any rise or fall in the price of a commodity, the quantity demanded remains the same. The elasticity of demand in this situation will be zero.
iii) Unitary Elastic Demand:-
The demand is said to be unitary elastic when a given proportionate change in the price level brings about an equal proportionate value of unitary elastic demand is exactly one i.e. Marshall calls unit elastic.
iv) Relatively Elastic Demand:-
Relatively elastic demand is a situation when a small change in price leads to a huge change in quantity demanded. In such a case elasticity of demand is more than one.
v) Relatively Inelastic Demand:-
Relatively inelastic demand is a situation when a given percentage change in price produces a relatively less percentage change in quantity demanded. In such a case elasticity of demand is less than one.
Income Elasticity of Demand:
Other things, such as the price of the given commodity, prices of related goods, etc, remaining constant, the percentage change in the quantity demanded of a thing caused by a given percentage change in income of the consumer is called income elasticity of demand.
- Watson said, “Income elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in income”.
Degrees of Income Elasticity of Demand:-
i) Negative Income Elasticity of demand:
When the demand for a product decreases as income increases and vice-versa, The income elasticity of demand is Negative.
ii) Zero Income Elasticity of Demand:
It means when a change in income has no effect upon the quantity demanded of a product. The income elasticity of demand could be zero.
For example- Demand for salt.
iii) Unitary Income Elasticity of Demand:
When demand for a product increases in the same proportion in which the income increases. The income elasticity of demand will be equal to unity.
Note - More income means more demand and vice versa.
iv) Positive Income Elasticity of Demand:
The income elasticity of demand for a product is positive when an increase in income of a consumer, his demand for the product also increases and vice versa.
The elasticity of demand is positive in the case of normal goods.
Cross Elasticity of Demand:
There is an interchangeable relationship between change in price and quantity demanded of two related goods. A change in the price of one good can cause a change in demand for the related good. For example - a change in the price of tea causes a change in demand for coffee.
Likewise, a change in the price of cars causes a change in demand for petrol.
The mutual relationship between quantity demanded of a good due to change in the price of another good can be measured by cross elasticity of demand.
This is a measure of the change in quantity demanded of good-Y, as a result of a change in the price of good-X.
Degrees of Cross Elasticity of Demand:-
i) Positive Cross Elasticity of Demand:
It is positive in the case of substitute goods. A rise in the price of coffee will lead to an increase in demand for tea.
ii) Negative Cross Elasticity of Demand:
It is negative in the case of complementary goods. A rise in the price of Bread will bring the demand down for butter.
iii) Zero Cross Elasticity of Demand:
In this situation, the Cross elasticity of demand is zero as two goods are not related to each other.
For example - A rise in the price of wheat will have no effect on demand for shoes.