A measure of the responsiveness of a variable to a change in one of its determinants
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
Price elasticity of demand
- Price elasticity of demand measure the responsiveness of the quantity demand due to change in its
price.
Formula :
Degree of a Price Elasticity of Demand
Income elasticity of demand
-Income elasticity of demand measure the responsiveness of changes in the quantity demand for a product due to a change in income
Interpreted the value of income elasticity
Elasticity for normal goods -is a condition in which the quantity demand for product
increase as income increase.
Elasticity for luxuries goods -is a condition in which as the income increase,the quantity
demand for a product increaseElasticity for giffen goods or inferior -is a condition in which quantity demand for a product
goods decrease as income increase.
Elasticity for necessity goods -is a condition in which the quantity demand for a product does not change
Extra notes :
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Necessity goods →zero income elasticity
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Normal goods → value of elastic < 1
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Cross -price elasticity of demand
- Cross price elasticity of demand measure can be defines as the degree of responsiveness of quantity demanded of goods.
Interpreted the value of cross elasticity
Value
of elasticity
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Relationship
of goods
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>0 (positive)
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Substitutes
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<0 (negative)
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Complementary
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>0, <1
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Independence
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