ELASTICITY OF DEMANDThe law of demand explains that demand will change due to a change in the price of the commodity. But it does not explain the rate at which demand changes to a change in price. The concept of elasticity of demand measures the rate of change in demand. The concept of elasticity of demand was introduced by Alfred Marshall.DEFINITION OF PRICE ELASTICITY OF DEMAND: According to him the elasticity (or responsiveness) of demand in a maret is great orsmall according as the amount demanded increases much or little for a given fall in price! anddiminishes much or little for a given rise in price".Types of Elasticity of DemandThere are three types of elasticity of demand#$. %rice elasticity of demand#&. 'ncome elasticity of demand# and(. )ross*elasticity of demand! P"ice elasticity of demandThe degree of responsiveness of +uantity demanded to a change in price is called price elasticity of demand"%rice elasticity of demand , %ercentage change in +uantity demanded%ercentage change in priceThere are five types of price elasticity of demand. (-egree of elasticity of demand) .uch asperfectlyelasticdemand! perfectlyinelasticdemand! relativelyelasticdemand! relativelyinelastic demand and unitary elastic demand Pe"fectly elastic demand #infinitely elastic$ :/henasmallchangeinpriceleadstoinfinitechangein+uantitydemanded! itiscalled perfectly elastic demand. 'n this case the demand curve is a hori0ontal straightline as given below. (1ere ep% &) Pe"fectly inelastic demand :'nthis case! evenalargechangeinpricefails tobringabout achangein+uantitydemanded. '.e. the change in price will not affect the +uantity demanded and +uantity remainsthe same whatever the change in price. 1ere demand curve will be vertical line as followsand ep% '! Relati(ely elastic demand Here a small change in price leads to very big change in quantity demanded.In this case demand curve will be fatter one and ep=>1. Relati(ely inelastic demand 1ere +uantity demanded changes less than proportionate to changes in price. A largechange in price leads to small change in demand. 'n this case demand curve will besteeper and e p%) *nit elasticity of demand # +nita"y elastic$ 1ere the change in demand is exactly e+ual to the change in price. /hen both aree+ual! ep% , the elasticity is said to be unitary.-$ Income elasticity of demand'ncome elasticity of demand is the degree of responsiveness of demand to the change in income.e y , %ercentage change in +uantity demanded%ercentage change in income .e"o income elasticity:'n this case! +uantity demandedremain the same! even though money income increases.ie! changes in the income doesn2t influence the +uantity demanded. (3g. salt!sugar etc). Ey / (income elasticity) , ' Ne0ati(e income elasticity :'n this case! when income increases! +uantity demanded falls. 3g4 inferior goods. Ey % ) '! Positi(e income Elasticity :'n this case! an increase in income may led to an increase in the +uantity demanded. i.e.! whenincome rises! demand also rises. (Ey %1') This can be further classified in to three types4 a) 5nit income elasticity# -emand changes in same proportion to change in income.i.e! Ey % b) 'ncome elasticity greater than unity4 An increase in income brings about a more than proportionate increase in +uantity demanded. i.e! Ey %1 c) 'ncome elasticity less than unity4 when income increases +uantity demanded is also increases but less than proportionately. '.e.! Ey % ) 2$ C"oss/elasticity of demandThe responsiveness of demand to changes in prices of related goods is called cross*elasticity of demand (related goods may be substitutes or complementary goods). 'n other words! it is the responsiveness of demand for commodity x to the change in the price of commodity y.ec, %ercentage change in the +uantity demanded of commodity 6%ercentage change in the price of commodity yThe relationship between x and y commodities may be substitutive as in the case of tea and coffee (or) complementary as in the case of pen and in.Meas+"es of c"oss/elasticity of demand 'nfinity * )ommodity x is nearly a perfect substitute for commodity y 7ero * )ommodities x and y are not related. 8egative * )ommodities x and y are complementary.Meas+"ement of Elasticity There are various methods for the measurement of elasticity of demand. 9ollowing are the important methods4 $. P"opo"tional o" Pe"centa0e Met3od4 5nder this method the elasticity of demand is measured by the ratio between the proportionate or percentage change in +uantity demanded and proportionate change in price. 't is also nown as formula method. 't can be computed as follows4 ed ,%roportionate change in +uantity demanded %roportionate change in price. :; -$ E4pendit+"e o" O+tlay Met3od4 This method was developed by Marshall. 5nder this method! the elasticity is measured by estimating the changes in total expenditure as a result of changes in price and +uantity demanded.This has three components 'f the price changes! but total expenditure remains constant! unit elasticity exists. 'f the price changes! but total expenditure moves in the opposite directions! demand is elastic (