Question

Explain the types of elasticity of demand

Explain the following:

Cross Elasticity of Demand

Answer 1

Elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in its price (or any other factor). The following are the types of elasticity of demand:

1. Price Elasticity:
   1. Definition or Meaning: According to Prof. Marshall, price elasticity of demand is a ratio of proportionate change in the quantity demanded of a commodity to a given proportionate change in its price.
   2. Main Factor: In simple words, price elasticity is responsiveness of demand to a change in price only. Other factors are assumed to remain constant.
   3. Values: Price elasticity of demand may be infinite, zero, unit (1), greater than one or less than one.
2. Income Elasticity:
   1. Definition or Meaning: Income elasticity of demand is a ratio of proportionate change in quantity demanded of a commodity to a proportionate change in income of individual.
   2. Main Factor: In simple words, income elasticity is the responsiveness of demand to a change in income only. Other factors affecting demand are assumed to remain constant.
   3. Values:
      1. Income elasticity of demand may be positive, negative, or zero.
      2. Income elasticity is positive when quantity demanded increases with an increase in income. This happens in the case of normal goods.
      3. Income elasticity is negative when quantity demanded decreases with an increase in income. This happens in the case of inferior goods or Giffen goods.
      4. Income elasticity is zero when quantity demanded remains the same in spite of an increase or decrease in income. This happens in case of necessary goods like salt, basic food items, etc.
3. Cross Elasticity: Cross elasticity of demand is a ratio of proportionate change in quantity demanded of one commodity to a proportionate change in the price of another commodity (complementary or substitute goods).
   1. Main Factor: In simple words, cross elasticity is the responsiveness of demand to a change in the price of related goods. Other factors affecting demand are assumed to remain constant.
   2. Values:
      1. Cross elasticity of demand may be positive, negative, or zero.
      2. Cross elasticity is positive in the case of substitute goods. (E.g.: tea and coffee)
      3. Cross elasticity is negative in the case of complementary goods. (E.g.: tea and sugar)
      4. Cross elasticity is zero in the case of non-related goods. (E.g.: tea and books)