Explain Price Elasticity of Demand, Income Elasticity of Demand and Cross Elasticity of Demand.
Explain Price Elasticity of Demand, Income Elasticity of Demand and Cross Elasticity of Demand.
Ans.
Price Elasticity of Demand
Price elasticity of demand shows the response of the quantity demanded of goods, to a change in its price. It is a measure of the relationship between changes in the quantity demanded of a particular good and a change in its price.
Price Elasticity (Ep) = Proportionate change in quantity demanded/Proportionate change in price
Price elasticity of demand is classified into five categories:
(1) Perfectly Elastic Demand: In case of perfectly elastic demand, the demand for a commodity changes even if there is no change in the price. Here, price elasticity is ∞.
(2) Perfectly Inelastic Demand: In this case, the quantity demanded for a product does not change even if there is a change in price. Here, price elasticity is 0.
(3) Unitary Elastic Demand: Price elasticity of demand is unitary if the proportionate change in quantity demanded is exactly the same as the proportionate change in price. Here, price elasticity is 1.
(4) Elastic Demand: If the percentage change in quantity demanded is greater than the percentage change in price, it is elastic demand. In this case, price elasticity of demand is more than 1.
(5) Inelastic Demand: If the percentage change in quantity demanded is less than percentage change in price, it is inelastic demand. Here, price elasticity is less than 1.
Income Elasticity of Demand
Income elasticity of demand is defined as, “the percentage change in quantity demanded of a good divided by the percentage change in income of the consumer”. It measures the changes in the quantity demanded of a commodity in relation to a change in the income of the consumer.
Price Elasticity (Ep)= Proportionate change in quantity demanded/Proportionate change in income
Different types of Income Elasticity of Demand are:
(1) High Income Elasticity: When quantity demanded for goods increases by a larger proportion as compared with the income of the consumer, income elasticity of demand is high.
(2) Unitary Income Elasticity: When percentage change in quantity demanded for goods is equal to the percentage change in income, income elasticity is unitary.
(3) Low Income Elasticity: When quantity demanded for goods increases by a smaller proportion as compared with the income of the consumer, income elasticity of demand is low.
(4) Zero Income Elasticity: When quantity demanded for goods remains unchanged upon change of income, income elasticity is zero.
(5) Negative Income Elasticity: When quantity demanded for goods falls in response to a rise in income, income elasticity of demand is negative.
Cross Elasticity of Demand
A change in the quantity demanded for one good due to change in price of another good is called cross elasticity of demand.
Price Elasticity (E)= Proportionate change in quantity demanded of good A/Proportionate change in Price of good B
