Elasticity of Demand

Elasticity

 --> Elasticity is a measure of the responsiveness of a variable (quantity demanded or supplied) to a change in one of its determinants (e.g. price or income).

There are four types of elasticity:

A.                  Price elasticity of demand

B.                  Income elasticity of demand

C.                  Cross elasticity of demand

D.                 Price elasticity of supply  

A.     Price elasticity of demand (ε_p)

Definition

Price elasticity of demand measures the responsiveness of the quantity demanded due to a change in its price.           

            Example;

Question: Price increase from RM2.00 to RM4.00 and quantity demanded falls from 60 units to 40 units, find the value of price elasticity of demand.

Answer: Q₀ = 60, Q₁ = 40, P₀ = RM2, P₁ = RM4

Types of elasticity

B. Income elasticity of demand (ε_y)

Definition

-->>Income elasticity of demand measures the responsiveness of change in the quantity demand for a product due to a change in income. Income elasticity are used to determine typed of the product either luxuries goods, necessity goods or giffen/ inferior goods.

Example;

Question: If income increases from RM2500 to RM3500 and the quantity demanded for the product increases by 40 to 60 units, calculate the income elasticity of demand.

Answer: Q₁ = 60, Q₀ = 40, Y₁ = RM3500, Y₀ = RM2500

    interpreted the value of income elasticity

Elasticity for normal goods is a condition in which the quantity demand for a product increase as income increases although the income increases faster than quantity demand.

Elasticity for luxuries goods is a condition in which as the income increases, the quantity demand for a product increases and vice versa.

Elasticity for giffen goods or inferior goods is a condition in which the quantity demand for a product decreases as income increases.

Elasticity for necessity goods is a condition in which the quantity demanded for a product does not change even though income increases.

  C. Cross-price elasticity of demand (ε_AB)

Definition

Cross-price elasticity of demand measures can be defines as the degree of responsiveness of quantity demanded of goods A to change in price of goods B.

Cross elasticity used to determine relationship of the goods either substitute’s goods, complements goods or independents goods.

Example;

Question: If the quantities demand for chicken increases from 120 to 160 units when the price of beef increase from RM15 to RM18, calculate the cross elasticity of demand between chicken and beef.

Answer:  Q_1A = 160, Q_0A = 120, P_1B = 18, P_0B = 15

interpreted the value of elasticity