# ELASTICITY OF DEMAND

__Elasticity of Demand__

**Elasticity** means responsiveness of one variable to change in another. It shows the degree of a change in a variable due to the change in quantity of another variable.

In Elasticity of Demand we will discuss three types;

**Price Elasticity of Demand****Income Elasticity of Demand****Cross Elasticity of Demand**

__Price Elasticity of Demand (P.E.D)__

This is shows the degree of responsiveness of a change in quantity demanded due to a change in price of a product.

**Types** of Price Elasticity of Demand are;

- Point Price Elasticity of Demand (PPE)
- Arc Price Elasticity of Demand (APE)

__Point Price Elasticity of Demand (PPE)__

This is the elasticity in which change in price is infinitesnally small. Point Price elasticity is the price elasticity of demand at a specific point on the demand curve instead of over a range of it.

*Where,*

*E _{p} is the Point Price Elasticity of Demand*

*P is the Specific price,*

*Q is the quantity demanded.*

__Arc Price Elasticity of Demand (APE)__

This is the elasticity in which change in price is noticeable. Arc Price Elasticity of Demand (arc PED) is the value of PED over a range of prices, and can be calculated using the standard formula:

*Where,*

*E _{p} is the Arc Price Elasticity of Demand*

*P _{1} is the initial/Old price,*

*P _{2} is the New price,*

*Q _{1} is the initial/Old quantity demanded,*

*Q _{2} is the New quantity demanded.*

* Example *

__Income elasticity of demand__

*Income elasticity of demand* measures the responsiveness of the quantity demanded for a good or service to a change in the *income* of the people demanding the good.

**Types** of Income Elasticity of Demand are;

- Point Income Elasticity of Demand (PYE)
- Arc Income Elasticity of Demand (AYE)

**Point Income Elasticity of Demand(PYE)**

This is the elasticity in which change in income is infinitesnally small. Point Income elasticity is the Income elasticity of demand at a specific point on the demand curve instead of over a range of it.

*Where,*

*E _{y} is the Point Income Elasticity of Demand*

*y is the Specific income,*

*Q is the quantity demanded.*

__Arc Price Elasticity of Demand (APE)__

This is the elasticity in which change in income is noticeable. Arc Income Elasticity of Demand (arc YED) is the value of YED over a range of income, and can be calculated using the standard formula:

*Where,*

*E _{y} is the Arc Income Elasticity of Demand*

*y _{1} is the initial/Old income,*

*y _{2} is the New Income,*

*Q _{1} is the initial/Old quantity demanded,*

*Q _{2} is the New quantity demanded.*

* Example *

__Cross Elasticity of Demand__

The **Cross Elasticity of Demand** or **Cross-price Elasticity of Demand** measures the responsiveness of the quantity demanded for a good to a change in the price of another good. It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. *For example,* *if, in response to a 15% increase in the price of fuel, the demand for new cars that are fuel inefficient decreased by 30%, the cross elasticity of demand would be:cross body* . A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products. Assume products A and B are *complements*, meaning that an increase in the price for A accompanies a decrease in the quantity demanded for B. Therefore, if the price of product B decreases, the demand curve for product A shifts to the right reflecting an increase in A's demand, resulting in a *negative* value for the cross elasticity of demand. The exact opposite reasoning holds for substitutes. It is the degree of responsiveness of demand for good A with respect to change in price of goods B. *For Example: if the price of mike goes up, the Qty demanded for Bournvita increases. If on calculation, the answer is positive, it shows such goods are competitive*.

**Types** of Cross Elasticity of Demand are;

- Point Cross Elasticity of Demand (PCE)
- Arc Cross Elasticity of Demand (ACE)

**Point Cross Elasticity of Demand(PCE)**

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