{"id":16125,"date":"2023-09-29T16:59:20","date_gmt":"2023-09-29T16:59:20","guid":{"rendered":"https:\/\/seunkolade.com\/?p=16125"},"modified":"2025-04-03T11:25:13","modified_gmt":"2025-04-03T11:25:13","slug":"understand-elasticity-of-demand-definition","status":"publish","type":"post","link":"https:\/\/seunkolade.com\/?p=16125","title":{"rendered":"Understand Elasticity of Demand Definition, Examples and its Types"},"content":{"rendered":"

The elasticity of demand may be defined as the percentage change in the quantity demanded which would result from one percent change in price. The elasticity of demand formula helps businesses determine whether to raise or lower prices. If demand is inelastic, they can raise prices without losing customers.<\/p>\n

If production is to be profitable, then the total output of goods and services produced must be adjusted determining influence upon the producers total demand for the different factors of production. The concept of elasticity of demand is of great significance in economic analysis. According to this method if the percentage increase in demand is exactly equal to the percentage fall in price, the elasticity is unity or unit.<\/p>\n

This may be seen in the contrast between commodities sold in rural marketplaces and those sold in urban markets.<\/li>\n
Hence, understanding demand elasticity enables organizations to predict and optimize their revenue streams.<\/li>\n
Income elasticity of demand measures how sensitive the demand for a product is to a change in consumer income.<\/li>\n
While price elasticity measures the responsiveness of demand to changes in the price of the same good, cross elasticity measures the effect of price changes of related goods.<\/li>\n<\/ul>\n
The Price Elasticity of Demand (PED) is the quantity requested for a product is affected by any change in the price of a commodity, whether it be a drop or an increase. For example, as the price of ceiling fans rises, the quantity requested decreases. Sustainable business practices often involve additional costs, which, in a highly elastic market, might be challenging to pass onto the consumer through price increases. Nevertheless, tangible efforts towards sustainability can attract a consumer base willing to pay the price difference, thereby allowing the company to still turn a profit while promoting ecological stability.<\/p>\n
Types of elasticity of demand can be categorized based on the specific factor affecting demand, such as price, income, or the prices of related goods. Due to this negative relationship, the price elasticity of demand is a negative number. However, we are usually interested in the magnitude of elasticity which can be estimated by taking the absolute value of elasticity.<\/p>\n
The numerical value of the elasticity here will depend upon the substitutability of the two commodities. In the case of elastic demand, the demand curve flatter, as curve A in the figure ; while in the case of inelastic demand, the demand curve is steeper, as curve B. The demand for luxury goods (like face powder) is usually elastic, while the demand for types of demand elasticity<\/a> necessities (like food-grains) is usually inelastic.<\/p>\n
Measurement of Elasticity of Demand:<\/h2>\n
A further development on these lapses led to the concept of elasticity of demands. Income elasticity shows the responsiveness of the quantity demanded of a commodity with changes in the income of the consumer. It can be calculated as the proportionate rate of change in quantity demanded of a commodity divided by the proportionate rate of change in income of the consumer. It can also be defined as the percentage change in quantity demanded of a good as a result of a one percent increase in the income of consumer. If the quantity demanded increases with increase in income, the income elasticity of demand is positive, and the product is a normal good. However, when the quantity demanded decreases with increase in income, the income elasticity is negative, and the product is an inferior good.<\/p>\n
Price Elasticity of Demand:<\/h2>\n
These enable the concerned firms to determine the pricing strategy, approximate revenue shifts, and measure market response in varying conditions. It means that howsoever great the rise or fall in the price of the commodity in question, its demand remains absolutely unchanged. In the context of inelastic products, firms can increase prices, knowing that the quantity demanded will not significantly decrease and thus total revenue will rise. This approach works best with products or services that consumers deem necessities, or those with few substitutes. In addition to pricing strategies, demand elasticity plays an integral role in forecasting revenues. For instance, if a firm determines that demand for its product is elastic, raising prices can inadvertently lead to a decrease in total revenue.<\/p>\n
Types of Income Elasticity of Demand<\/h2>\n
In contrast, products with inelastic demand, where demand remains constant even after price fluctuations, allow firms the flexibility to increase prices without fear of losing customers. There are a range of factors which affect quantity demanded either directly or indirectly. Quantity demanded increases if the price of the product decreases and vice versa. The extent of this relationship between quantity demanded and price is measured by price elasticity of demand. Other significant demand determinants include income level of the consumers, the prices of substitute goods or complementary goods, etc. The income elasticity of demand measures responsive of demand to changes in income while the cross elasticity of demand tells us how demand changes when the prices of substitutes or complements changes.<\/p>\n
Significance in Economic Decision-Making<\/h2>\n
In a nutshell, price, income, and cross-elasticities of demand contribute to our understanding of how different market forces interplay to drive the demand for goods and services. This understanding is crucial as it helps businesses and policy-makers to make informed decisions based on variations in price, income, and availability of related goods and services. Meanwhile, elasticity of demand has been theoretically defined as the responsiveness of the actual quantity demanded of a product to the change in its actual price. Elasticity of demand could be defined as the measure of the degree of responsiveness of the quantity demanded to any small change in its price. Therefore, in such a case, the demand for a notebook is perfectly inelastic.<\/p>\n
<\/iframe><\/div>\n<p>Elasticity 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. According to this method, if percentage change in quantity demanded in more than the percentage change in price, the demand is said to be more elastic. But if the percentage of change in demand is less than the percentage change in price, the demand is less elastic. If the percentage change in the quantity demanded is exactly in the same percentage change in price it is known as unit elasticity.<\/p>\n<p>Elasticity plays a role in analyzing the impact of taxes and subsidies on consumer surplus and deadweight loss. In elastic markets, taxes may lead to a significant reduction in the quantity demanded, resulting in a larger deadweight loss. Conversely, in inelastic markets, taxes may lead to a smaller reduction in quantity demanded and a smaller deadweight loss.<\/p>\n<h2>Revenue Maximization<\/h2>\n<p>The growing emphasis on sustainability and environmentally friendly products introduces a new dimension to elasticity considerations. Goods and services with eco-friendly attributes may exhibit different elasticity patterns, as consumers increasingly prioritize sustainability in their purchasing decisions. Technological innovations can disrupt markets and alter elasticity dynamics. The introduction of new technologies or products can render existing goods obsolete, leading to shifts in demand elasticity.<\/p>\n<h2>Explain the types of elasticity of demand – Economics<\/h2>\n<p>Alternative energy sources like renewable and alternative fuels affect demand elasticity. When consumers have access to substitutes, they are more likely to adjust their consumption in response to price changes, leading to higher elasticity. In economics, demand elasticity is classified into elastic and inelastic demand. The consumers perceive this firm as contributing positively to societal and environmental concerns, which can offset the impact of enhanced prices due to elasticity in demand. However, if a product is elastic, increasing prices is likely to have a dramatic impact on the quantity demanded, leading to a downturn in total revenue. In these scenarios, firms would be better served by reducing prices and selling more units, thus increasing total revenue.<\/p>\n<ul>\n<li>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.<\/li>\n<li>The Price Elasticity of Demand is a measure of the responsiveness of quantity sought when prices vary (PED).<\/li>\n<li>It brings into perspective how much the quantity demanded might change when the price of the product increases or decreases.<\/li>\n<li>It is easy to apply using Ordinary Least Squares (OLS) by converting the variables into log-from.<\/li>\n<li>A knowledge of the consumer\u2019s demand and also of the elasticity of demand is required by the government in formulating its economic policies.<\/li>\n<\/ul>\n<p>A slight fall in price will increase the demand to OX, whereas a slight rise in price will bring demand to zero. We can conclude the blog by stating the fact that the demand for a commodity is affected by several factors and the three main types of elasticity of demand explains the effect of those factors. The numerical value of relatively inelastic demand always comes out as less than 1 and the demand curve is rapidly sloping for such type of demand.<\/p>\n<div style='text-align:center'><iframe width='561' height='315' src='https:\/\/www.youtube.com\/embed\/5eT7aU833QI' frameborder='0' alt='types of demand elasticity' allowfullscreen><\/iframe><\/div>\n","protected":false},"excerpt":{"rendered":"<p>The elasticity of demand may be defined as the percentage change in the quantity demanded which would result from one percent change in price. The elasticity of demand formula helps businesses determine whether to raise or lower prices. If demand is inelastic, they can raise prices without losing customers. If production is to be profitable, […]<\/p>\n","protected":false},"author":34583,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[70],"tags":[],"class_list":["post-16125","post","type-post","status-publish","format-standard","hentry","category-bookkeeping"],"_links":{"self":[{"href":"https:\/\/seunkolade.com\/index.php?rest_route=\/wp\/v2\/posts\/16125","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/seunkolade.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/seunkolade.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/seunkolade.com\/index.php?rest_route=\/wp\/v2\/users\/34583"}],"replies":[{"embeddable":true,"href":"https:\/\/seunkolade.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=16125"}],"version-history":[{"count":1,"href":"https:\/\/seunkolade.com\/index.php?rest_route=\/wp\/v2\/posts\/16125\/revisions"}],"predecessor-version":[{"id":16126,"href":"https:\/\/seunkolade.com\/index.php?rest_route=\/wp\/v2\/posts\/16125\/revisions\/16126"}],"wp:attachment":[{"href":"https:\/\/seunkolade.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=16125"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/seunkolade.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=16125"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/seunkolade.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=16125"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}