Elastic means flexible demand and Inelastic means Fixed demand.
· Availability of substitutes
· Postponement of consumption
· Proportion of expenditure (needles: inelastic; TV: elastic)
· Nature of the commodity (necessity vs. luxury)
· Different uses of the commodity (paper vs. ink)
· Time period (elastic in the long term)
· Change in income (necessaries: inelastic)
· Habits
· Joint demand
· Distribution of income
· Price level (very costly & very cheap goods: inelastic)
Income Elasticity
Income Elasticity of Demand: Is the degree of
responsiveness of quantity demanded of a good to a small change in the income
of the consumer.
Income elasticity can be represented as-
YED = proportional change in the quantity demanded/proportional change in
the income
If the proportion of income spent on a good remains the same as income
increases, then income elasticity for the good is equal to one.
If the proportion spent on a good increases, then the income elasticity for the
good is greater than one.
If the proportion decreases as income rises, then income elasticity for the
good is less than one.
Cross Elasticity
Cross Elasticity: A change in the demand for one good in response to a change
in the price of another good represents cross elasticity of demand of the
former good for the latter good.
Cross elasticity can be expressed as
The cross price elasticity of product A with product B
=(ΔQA/QA)/(ΔPB/PB)
where QA is the quantity sold of A
ΔQA is the change in the quantity of A sold
PB is the price of B
ΔPB is the change in the price of B.
Example - Coke and Pepsi are substitutes of each other. Now, suppose the price
of coke increases and with the increase in price of coke, some of the customers
would stop buying coke and would shift to pepsi. So. demand of pepsi would
increase.
i,e. Increase in demand of pepsi due to increase in price of Coke is the
example of cross elastisity
If two goods are perfect substitutes for each other cross elasticity is
infinite and if the two goods are totally unrelated, cross elasticity between
them is zero.
Goods between which cross elasticity is positive can be called Substitutes,
the good between which the cross elasticity is negative are not always
complementary as this is found when the income effect on the price change is
very strong.
Elasticity & Revenue
The value of Demand elasticity
determines the change in revenue that has occured as a result of change in
prices.
Value of elasticity and revenue
1. E > 1
In this case, the quantity demanded is relatively elastic, meaning that a price
change will cause an even larger change in quantity demanded. The case of Ed =
infinity is referred to as perfectly elastic. In this theoretical case, the
demand curve would be horizontal. For products having a high price elasticity
of demand, a price increase will result in a revenue decrease since the revenue
lost from the resulting decrease in quantity sold is more than the revenue
gained from the price increase.
2. E < 1
In this case, the quantity demanded is relatively inelastic, meaning that a
price change will cause less of a change in quantity demanded. The case of Ed =
0 is referred to as perfectly inelastic. In this theoretical case, the demand
curve would be vertical. For products whose quantity demanded is inelastic, a
price increase will result in a revenue increase since the revenue lost by the
relatively small decrease in quantity is less than the revenue gained from the
higher price.
3. E = 1
In this case, the product is said to have unitary elasticity; small changes in
price do not affect the total revenue.