The elasticity of demand measure the responsiveness of quantity demanded due to change in any other variable like price, income, etc. There are three main types of elasticity of demand but some economists considered them as four with the inclusion of advertising elasticity of demand.
4 Types of Elasticity of Demand
All the types of elasticity of demand are enlisted hereunder.
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Elasticity of Demand
- Advertising Elasticity of Demand
Now we are going to discuss all types of elasticity of demand in details one by one.
Price Elasticity of Demand
Price is the main factor which directly affects the demand for any product. Price Elasticity of Demand is considered at first in all types of elasticity of demand. Price elasticity of demand measures the change in the quantity demanded because of the change in the price level. Generally, it is noted that with the increase in the price level the quantity demanded by the consumer decreases.
The PED, Price Elasticity of Demand, have 5 further types which are enlisted below.
- Perfectly Elastic Demand
- Relatively Elastic Demand
- Unitory Elastic Demand
- Relatively Inelastic Demand
- Perfectly Inelastic Demand
Formula of Price Elasticity of Demand
Ep= Price Elasticity of Demand
Δq= Change in Quantity Demanded
Q= Initial Quantity Demanded
Δp= Change in Price
p= Initial Price
Schedule of Price Elasticity of Demand
In the table above the price of the particular product is 10 USD at the initial stage and the quantity demanded is 15 units. When the price increases to 20 USD the quantity demanded are 10 units. The increase in the price and decrease in the quantity demanded shows that the price has a direct effect on the quantity demanded.
Example of Price Elasticity of Demand
Let assume that the price of 1 dozen orange is 10 USD then consumer consumes 15 oranges and when the price of 1 dozen oranges increase to 20 USD then the consumer consumes 10 oranges. To check the price elasticity of demand we have to put all the values in the formula.
The value of Ep shows that the price elasticity of demand is relatively inelastic.
Income Elasticity of Demand
Income has also a direct relationship with the demand for any product. Income Elasticity of Demand is considered a second important type of elasticity in types of elasticity of demand. Income elasticity of demand measures the responsiveness of quantity demanded due to change in the income level of the consumer. In most of the cases income increases, the quantity demanded increases.
Formula of Income Elasticity of Demand
Ey=Income elasticity of demand
Δq=Change in Quantity
Δy= Change in Income
Y= Income Level
Schedule of Income Elasticity of Demand
In the table given above the income of the individual or consumer increases from 500 USD to 600 USD then the demand of the consumer for the specific product increases from 20 units to 25 units. This increase in demand shows that the income has a positive and direct relationship with quantity demand.
Example of Income Elasticity of Demand
Let suppose the monthly income of an individual or consumer is 500 USD and with the income, he used 20 socks but with the increase in his monthly income i.e. 600 USD we start using 25 socks. To measure the income elasticity of demand for this individual we have to do calculations.
The value of Ey shows that the income elasticity of demand, in this case, is relatively elastics.
Cross Elasticity of Demand
Sometimes the change in the price or income is not the reason for the change in the demand but the prices of other products i.e. substitutes or complements which affect the demand for any product. In this case, income and the price elasticity of demand fail to measure the change then economist used the concept of cross elasticity of demand.
Cross Elasticity of Demand is ranked at third in types of elasticity of demand. This elasticity of demand is quite different from other types of elasticity of demand because it builds a link between the price of one commodity to the other.
The cross elasticity of demand measures the change in the quantity demanded of product A because of the change in the price of product B. Product A and product B may be the complement or the substitute for each other.
In case both of the products are substitutes to each other then cross elasticity of demand will be positive and when both of the products are complements to each other then the cross elasticity of demand will be negative.
Ec= Cross elasticity of Demand
Δqa= Change in the Quantity Demanded of Product A
Qa= Quantity Demanded of Product A
Δpb= Change in the Price of Product B
pb= Price of Product B
Schedule of Cross Elasticity of Demand
|Product||Price||Qd||Change in Price of Product B||Change in the Qd of Product A|
In this above table, it is mentioned that in the initial phase the price of Product A is 50 and its quantity demanded is 20 while the price of Product B is 150 and its quantity demanded is 10. Now the change occurs and the price of Product increases from 150 to 160, other things are the same. On the other hand, the quantity demanded of Product A increases from 20 to 22.
This phenomenon shows that these two products are substitutes to each other as an increase in the price Product B the quantity demanded of Product A increases.
Example of Cross Elasticity of Demand
Let assume that product A is wheat and product B is rice. In the table given above the price of wheat is 50 and the price of rice is 150 (you can assume any currency here if I assume USD then its high side but you may consider it to understand the concept) in the initial phase. The quantity demanded of wheat is 20 Kg and the rice is 10 Kg.
Now due to any economic or uneconomic factors, the price of rice increased from 150 to 160 and the price quantity demanded of wheat by the consumer increases from 20 to 22. To find out either these two are a substitute or complementary goods to each other we have to calculate the cross elasticity of demand.
Note: If cross elasticity of demand is positive then both products are substituted to each other, otherwise both are complements.
The value of Ec shows that both products are complements to each other.
Advertising Elasticity of Demand
Some economists did not explain it in types of elasticity of demand in their textbooks but new economists consider it as one of the vital type of elasticity of demand by ranking it on fourth.
Advertising is a tool to affect the demand directly or indirectly depends upon the strategy of businessmen. Advertising elasticity of demand measures the responsiveness in quantity demanded due to change in the advertising expense of the firm. Generally, it is expected that with the increase in the advertising expenses of the firm the quantity demanded of the product of that firm will increase but it’s not the case in all situations.
Formula of Advertising Elasticity of Demand
D1 = Original Demand
D2 = New Demand
A1 = Original Advertisement Expense
A2 = New Advertisement Expense
Schedule of Advertising Elasticity of Demand
As given above, the demand for a particular product is 10 units and the advertisement expense of the company is 25 USD. With the decrease in the advertisement expenses i.e. 20 USD, the demand for the commodity or product also decreases to 2 Units.
Example of Advertising Elasticity of Demand
Let suppose that a firm is making 25 USD for its advertisement of product i.e. shampoo and in response, it gets demand of 10 pieces of cotton of shampoo. The firm faces some lending issues or due to any problem firms or board of directors decided to decline the advertisement expenses up to 10 USD, in response demand of the shampoo also declines to 2 pieces of cotton. To measure the advertisement elasticity of the demand for shampoo we are doing calculations hereunder.
The value of Ea shows that the advertising elasticity of demand is relatively elastic.